The Value Of Legitimacy: What Does Comparability Cost?

• In Event: 7.02. Globalization and IFRS

Abstract

Information produced by firms located in code law systems, where the accounting standards are regulated by the government, have lower value relevance (Ball et al., 2000; Joos and Lang, 1994). Companies domiciled in emerging markets, which are characterized by insufficient regulations and market inefficiencies, produce financial information that is less value relevant (Abdel—Khlik , Wong, and Wu, 1999; El-Gazzar and El-Sadek, 2001). To overcome the problems of value relevance associated with local GAAP, countries often seek to increase Foreign Direct Investment (FDI) by adopting IFRS—the value of legitimacy. We examine the impact on comparability between local GAAP [Russian Accounting Standards - RAS] and International Financial Reporting Standards [IFRS] after IFRS adoption. Russia provides a unique setting to explore this issue because publicly traded firms with consolidated financial statements must produce two sets of financial statements – one under each regime. In Russia, RAS is used as a basis for taxation. When we examine measures involving income, we find increasing comparability over time as well as an increase in measures of net income and a decrease in book-to market values, despite the cost of increased income taxes. The quality of earnings, measured by discretionary accruals, exhibits no change under IFRS while it declines under RAS. That trend reverses when we compare public firms reporting RAS and IFRS simultaneously to firms (both public and private) reporting RAS only (never having used IFRS). We attribute our findings to a monitoring effect from IFRS in that publicly traded firms are constrained from reporting RAS numbers that differ significantly from IFRS, even when it results in higher taxes.

Authors

• Dina Clark, Bloomsburg University

• Elizabeth Hendrix Turner, Augusta University

• Clark M Wheatley, Florida International University