Emerald | Pacific Accounting Review

The impact of New Zealand's disclosure reform on differential managerial disclosure behaviour for good news versus bad news firms

Alastair Marsden, Russell Poskitt, Yinjian Wang — 2011-11-22 00:00:00.0

Abstract

Purpose – The purpose of this paper is to investigate the impact of the introduction of New Zealand's statutory-backed continuous disclosure regime enacted in December 2002 on the differential disclosure behaviour of New Zealand firms with good and bad earnings news. Design/methodology/approach – This paper examines the level of information disclosure, analyst forecast error and forecast dispersion, abnormal returns and abnormal volumes for firms with good and bad news earnings announcements in a sample period surrounding reforms to New Zealand's continuous disclosure regime. Findings – The authors find evidence that the pre-announcement information flow was poorer prior to the reform for bad news firms compared to good news firms, in terms of greater analysts' forecast dispersion and a larger abnormal price reaction to the actual earnings announcement. Second, the reform reduced the asymmetry of information flow between good and bad news firms, with the differences in analysts' forecast dispersion and abnormal price reaction dissipating after the reform. Research limitations/implications – The findings suggest that the reforms to New Zealand's continuous disclosure regime have reduced managers' propensity to withhold bad news and improved the quality of information provided to investors by firms with bad earnings news. Originality/value – This study improves our understanding of the impact of disclosure reform on the behaviour of managers in a market with relatively low liquidity and less litigation risk in comparison to larger and more developed markets.

Do resource consent announcements provide valuable information?: Evidence from New Zealand

Carolyn Wirth, Jing Chi, Martin Young — 2011-11-22 00:00:00.0

Abstract

Purpose – Investor access to timely, financial resource consent information is problematic, consequently the purpose of this paper is to investigate the economic importance of New Zealand resource consent announcements to the stock exchange. Design/methodology/approach – The authors apply event study methodology and cross-sectional rank regression using a sample of resource consent announcements from 1993 to 2007. Findings – Evidence of excess return volatility is found both on and before resource consent announcement dates. The results show that stock market reactions to resource consent announcements are positive for news of successes and negative for news of setbacks. Uncertainty associated with resource consent announcements appears to contribute to a delayed negative market response. In contrast, price reactions to announcements of resource consent success are immediate and significantly positive only when the news is concurrently disseminated via the media. Research limitations/implications – The findings imply that resource consent announcements are newsworthy and provide valuable information to the stock market regarding future regulatory compliance costs. Media dissemination is suggested to play an important role in the price-adjustment process for news of resource consent successes. Given the increasing prominence of environmental compliance issues, the authors suggest that more informative disclosures regarding the types of consent(s) sought, the dollar value of expected compliance costs, expected time to gain consent, project investment costs and consent conditions imposed, would better assist investors to assess the economic impact of firm capital expenditures. Originality/value – This study adds evidence to the literature on the role of environmental disclosures in disseminating information and reducing information asymmetry and offers suggestions to enhance the informativeness of environmental disseminations.

The impact of regulatory reforms on the earnings forecasting behaviour of IPO firms

Gerry Gallery, Natalie Gallery, Angela Linus — 2011-11-22 00:00:00.0

Abstract

Purpose – The purpose of this paper is to jointly assess the impact of regulatory reform for corporate fundraising in Australia (CLERP Act 1999) and the relaxation of ASX admission rules in 1999, on the accuracy of management earnings forecasts in initial public offer (IPO) prospectuses. The relaxation of ASX listing rules permitted a new category of new economy firms (commitments test entities (CTEs)) to list without a prior history of profitability, while the CLERP Act (introduced in 2000) was accompanied by tighter disclosure obligations and stronger enforcement action by the corporate regulator (ASIC). Design/methodology/approach – All IPO earnings forecasts in prospectuses lodged between 1998 and 2003 are examined to assess the pre- and post-CLERP Act impact. Based on active ASIC enforcement action in the post-reform period, IPO firms are hypothesised to provide more accurate forecasts, particularly CTE firms, which are less likely to have a reasonable basis for forecasting. Research models are developed to empirically test the impact of the reforms on CTE and non-CTE IPO firms. Findings – The new regulatory environment has had a positive impact on management forecasting behaviour. In the post-CLERP Act period, the accuracy of prospectus forecasts and their revisions significantly improved and, as expected, the results are primarily driven by CTE firms. However, the majority of prospectus forecasts continue to be materially inaccurate. Originality/value – The results highlight the need to control for both the changing nature of listed firms and the level of enforcement action when examining responses to regulatory changes to corporate fundraising activities.

Does the change of accounting regulation on employee share options give rise to greater scope for earnings management?

Hong Nee Ang, Matthew Pinnuck — 2011-11-22 00:00:00.0

Abstract

Purpose – The purpose of this paper is to address the concern about the impact of accounting regulatory change pertaining to employee share options (ESOs) on earnings management. Following Australia's adoption of International Financial Reporting Standards (IFRS) in 2005, companies are required to recognise the fair value of ESOs as expenses. Due to inherent imprecision in the estimate of ESO's fair value, the regulatory change from disclosure to recognition was widely claimed to potentially give rise to an alternative mechanism to manage earnings. This study provides empirical evidence on whether the regulatory change leads to earnings management problems. Design/methodology/approach – This study uses the regulatory change in accounting for ESOs to provide a direct test of earnings management between disclosed versus recognised regimes for the same sample of firms. The sample consists of Australian firms from S&P/ASX300 for the period from 2003 to 2006. Findings – The results show that, although the accounting regulatory change from disclosure to recognition may provide an alternative earnings management vehicle, there is no evidence of this occurring. There could be several reasons for this finding. First, the statistical tests lack power. Second, there are stricter audit tests on recognised amounts than on disclosed amounts. Third, given the concern of excessive pay and the close scrutiny of compensation, managers may have already understated ESO values in the disclosure regime. Finally, managers have limited time and resources and the effort involved in the adoption of IFRS in 2005 could have restricted the time available to manage earnings via the ESO reporting channel. Originality/value – This study adds to the limited research on whether a change in accounting regulation for employee share options from disclosure to recognition gives rise to greater scope for earnings management. One reason for the lack of empirical evidence in the research is due to the problem of designing a test. Bernard and Schipper suggest that within-firm studies have limitations for comparing the effects of recognition versus disclosure when the change is driven by an estimate becoming more reliable. A cross-sectional study is also problematic due to self-selection bias if firms can choose between disclosure versus recognition. This study circumvents potential design problems raised by Bernard and Schipper by setting a test using regulatory change which allows the test to be compared directly using the same company.

Australasian cash flow reporting regulation: value relevant?

Christopher B. Malone, Udomsak Wongchoti, Alan J. Mitchell — 2011-11-22 00:00:00.0

Abstract

Purpose – This paper provides empirical support for the introduction of cash flow disclosure regulation issued by Australasian accounting bodies, AASB and NZICA (formerly NZSA), between 1987 and 1992. Design/methodology/approach – The empirical analysis uses a long window event study format on a panel of 5,368 firm-year observations between 1996 and 2005. Findings – The cash flow disclosures required in the regulation are associated with significant abnormal return responses. These effects are robust to the inclusion of other factors linked to abnormal returns such as movements in profitability, size and leverage. We also find support for the proposition that the cash flow effects are conditioned on the quality of the firm, as proxied by q. The market is better and more easily informed with the information required under the revised reporting regime. Research limitations/implications – The analysis would have been improved with better access to pre-reform period data. Originality/value – There is no other study on Australasian markets which looks at the value impacts of cash flow information in relation to this regulatory change. Such a study has also never been done on New Zealand companies.

Goodwill impairment testing under IFRS: a false impossible shore?

Tyrone M. Carlin, Nigel Finch — 2011-11-22 00:00:00.0

Abstract

Purpose – The purpose of this paper is to catalogue the practice of goodwill impairment testing in Australia and to provide evidence of the extent of compliance with respect to the disclosure requirements of international financial reporting standards (IFRS). Design/methodology/approach – The research question is addressed using an empirical archival approach with an emphasis on note-form disclosures in the audited financial accounts of 200 goodwill-intensive firms listed on the Australian Securities Exchange at 2006. The disclosures regarding impairment testing methodologies along with key input variables for the estimation of recoverable amounts are catalogued and an assessment is made of the extent to which such disclosures confirm with the requirement of AASB136. Findings – The results provide evidence of systematic non-compliance with the disclosure requirements of the IFRS goodwill impairment testing regime on the part of large listed Australian firms. Insight is gained into the level of difficulty experienced by large, sophisticated and well-resourced organisations in confronting the challenges associated with changing their financial reporting practices at the time of mandatory adoption of IFRS in Australia. Originality/value – While previous goodwill impairment testing studies have examined discount rate selection by reporting entities as one input variable solely under the value in use method, this paper provides empirical insights into all aspects of goodwill impairment testing for value in use, fair value and mixed method firms, cataloguing growth rate and forecast period disclosures. The paper provides a baseline study of compliance quality at the inception of IFRS in Australia.

Financial regulation: market and valuation impacts

2011-11-22 00:00:00.0