This study examines whether the mandatory adoption of International Financial Reporting Standards (IFRS) in the European Union (EU) in 2005 reduces the cost of equity capital. Using a sample of 6,456 firm-year observations of 1,084 EU firms during the 1995 to 2006 period, I find evidence that, on average, the IFRS mandate significantly reduces the cost of equity for mandatory adopters by 47 basis points. I also find that this reduction is present only in countries with strong legal enforcement, and that increased disclosure and enhanced information comparability are two mechanisms behind the cost of equity reduction. Taken together, these findings suggest that while mandatory IFRS adoption significantly lowers firms' cost of equity, the effects depend on the strength of the countries' legal enforcement.
The development of generalized computer-audit programs makes an important contribution to the further advancement of the public accounting profession. as it builds a favorable image of the profession, reduces audit time for clerical operations, reemphasizes the importance of professional judgment, instills self-confidence into auditors, and attracts more well- qualified personnel into the profession. To allow auditors of tomorrow an opportunity to appreciate the potential of generalized computer-audit programs, the author has prepared one such program, dubbed as AUDIT-AID. The use of AUDIT-AID has indicated to students the significance of professional judgment, the importance of review of internal control, and the place of computers in auditing.
Many accountants hold profit maximization as the objective of the corporation. It is argued that this assumption implies equating stockholders' interest to the corporate interest, equating profit generation to corporate self-sufficiency, and equating economic theorems to corporate motivation, On all three points, references are cited from various disciplines to suggest the inadequacies of this assumption. On the other hand, the hypothesis of survival and growth has been defended from logical, biological, and sociological points of view. Although profit as a basic objective is rejected, its role as a subordinate objective in the implementation of survival is recognized. The need for further research in exploring the implications of this hypothesis to accounting is acknowledged.
Under the entity concept, alternative accounting procedures are designed to permit a corporation to change its strategy for survival in the light of its economic and financial outlook. To this extent alternative accounting procedures have financial implications. In as much as the funds statement is a report of a corporation's financial operations, it is argued that all income determinants that are subject to alternative treatment need be included in the funds statement on the strength of their having financial implications. This argument is submitted as the reason why some non-fund adjustments receive prominent attention in funds statement preparation and why others do not.
Under the entity concept, financial statements are considered to be means through which a corporation's point of view is made known. As a corporation moves from one stage of development to another, changes in accounting procedures are needed so as to depict properly its changes in outlook and strategy for survival. So long as disclosures are made, and if coupled with education and/or public accountants' evaluations, it is contended that the use of alternative accounting procedures will not only make financial statement presentation more revealing and meaningful, but also permit corporations at different stages of development to compete for financial competence. The use of alternative accounting procedures is thus consistent with a corporation's objective of survival.
This article focuses on the income taxes and income tax allocation under the entity concept. Corporate income taxes under the entity concept are commonly viewed as a distribution of income. The following statement, by a Committee of the American Accounting Association, is a representative expression of this view. If the management does nothing, other things being equal, the reported net income for subsequent years will drop, assuming the wage rate in effect in each year is the basis for computing labor cost. Income taxes, as a cost, are subject to managerial control and reduction. From management's standpoint, an effective way to reduce income taxes is through a continual program of plant modernization. So long as it follows such a program, the amount of income tax cost will he and should be low. If and when it abandons such a program, the amount of taxes will be and should be high. The amount of income taxes, in other words, is a reflection of management's effectiveness in controlling income taxes as a cost.
Under the entity concept, the corporation is an institution in its own right and a competent party to contract. In contracting for capital supplied by stockholders, the only significant representation made by the corporation is for it to agree to pay dividends when and if declared. From this, it is deduced that, in a stock issue, the offering price constitutes consideration for the right to receive future dividends. Furthermore, it is argued that stockholders do not have a claim to capital thus supplied so long as the corporation remains a going concern, an implicit assumption of the entity concept. From these, it is concluded that capital supplied by stockholders becomes the equity of the corporation. It is also argued that the acceptance of this view will not retard the stockholders' supplying capital to the corporation and that the payment of dividends is consistent with the corporation's striving to survive and to maintain an attractive investment atmosphere. On the contrary, the acceptance of this view tends to remove an area of inconsistency related to the treatment of retained earnings under the entity concept.
[Prior research suggests that option trading affects the availability and timeliness of predisclosure information about firms and that the price-earnings relation is influenced by characteristics of the predisclosure information environment. Motivated by these research findings, this study (1) examines various firm-specific attributes that are likely to explain the different information environments of firms with and without exchange-traded options, and (2) investigates the price-earnings relation of such firms. The price-earnings relation is examined in both "event study" (short-window) and "association study" (long-window) contexts. The short-window analysis tests the hypothesis that the "surprise" in quarterly earnings reports (measured by the abnormal stock return variability around earnings announcements) is greater for nonoption firms than for option firms (hypoth. H1). The long-window analysis tests the hypothesis that security prices signal future earnings changes earlier for option firms than for nonoption firms (hypoth. H2A). The hypothesis also predicts that nonoption firms are more likely than option firms to exhibit post-FYE (fiscal year-end) drift (hypoth. H2B). The results indicate that option firms are associated with five firm-specific attributes: (1) larger firm size, (2) higher institutional concentration, (3) higher analyst coverage, (4) higher trading volume, and (5) more Wall Street Journal Index news releases. Based on 3,721 quarterly earnings announcements of 431 firms during the 1980-1983 period, the results support the first hypothesis; abnormal return variability surrounding quarterly earnings announcements is significantly greater for nonoption firms than for option firms. To examine how the five firm-specific attributes provide alternative explanations for the observed results, the empirical tests are repeated by using a unilateral matching approach. Five subsamples (each based on one of the five variables) are constructed. The results for each support the first hypothesis. In addition, a control portfolio is constructed that conservatively controls for the five proxy variables (i.e., the nonoption firms in this portfolio are associated with larger firm size, higher institutional concentration, higher analyst coverage, higher trading volume, and more Wall Street Journal Index news releases). With a relatively smaller sample size, the control portfolio results also support the first hypothesis. Finally, multiple regression results indicate that option trading possesses incremental explanatory power over the other variables in explaining the differential content of earnings releases for option and nonoption firms. The only other variable that is significant in the regression analysis is the number of Wall Street Journal Index news releases, which is negatively related to measured information content. This suggests that press coverage is also an important variable in explaining cross-sectional differences in information content, at least for the sample firms. With respect to the second hypothesis, the results for the entire sample, the matched subsamples, and the control portfolio indicate that the security prices of option firms anticipate accounting earnings earlier than do those of nonoption firms. For option firms, about 50 percent of the price change associated with economic events contributing to the current year's earnings change is realized in the previous fiscal year. For nonoption firms, however, a significant portion (about 70 percent) of the price change associated with the earnings change occurs in the current fiscal period and in the 12 months following the fiscal year-end. In addition, the magnitude of the post-FYE drift is greater for nonoption firms than for option firms. Certain important caveats apply to the results. First, given that the tests for the matched subsamples attempt to control only for one factor at a time, the results are subject to a missing-variable problem. Second, while the option-trading variable exhibits statistical significance in the regression analysis, the explanatory power of the full regression is low (although it is similar to that achieved in typical cross-sectional analyses of abnormal security returns). Finally, given the lack of a formal theory concerning option trading and information flows, it is difficult to infer that option trading causes the differences in the price-earnings relation across firms.]