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Value relevance of IFRS mandatory disclosure requirements

Ioannis Tsalavoutas · Dionysia Dionysiou

88 citations0/0 files storedJournal of Applied Accounting Research

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Financial Reporting and Valuation Research

Abstract

Purpose – The purpose of this paper is to address recent calls for research regarding the valuation implications of mandatory disclosure requirements (cf. Hassanet al., 2009; Leuz and Wysocki, 2008; Schipper, 2007). Design/methodology/approach – The paper measures compliance with all International Financial Reporting Standards (IFRS) mandatory disclosure requirements for a sample of firms. The paper subsequently explores whether the compliance scores (i.e. the mandatory disclosure levels) are value relevant and whether the value relevance of accounting numbers differs across high- and low-compliance/disclosure companies. Findings – The paper finds that the levels of mandatory disclosures are value relevant. Additionally, not only the relative value relevance (i.e.R2) but also the valuation coefficient of net income of high-compliance companies is significantly higher than that of low-compliance companies. Research limitations/implications – This paper is an indicative single country case study that focuses on the IFRS adoption year (2005) in the EU. It forms a new avenue for research regarding the valuation implications of mandatory disclosure requirements. It remains to future research to examine whether the findings also hold in other countries and periods. Practical implications – These findings are expected to be particularly relevant to standard setters and regulatory bodies that are concerned about the implications of mandatory disclosure requirements (Schipper, 2007). Originality/value – To the best of authors’ knowledge, this is the first paper that examines the value relevance implications of IFRS mandatory disclosure requirements, focusing on European country after 2005. The authors indicate that IFRS mandatory disclosures do lead to more transparent financial statements (cf. Pownall and Schipper, 1999), mitigating concerns about companies’ fundamentals (cf. Anctilet al., 2004).

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References

1998Law and Finance 1995Earnings, Book Values, and Dividends in Equity Valuation*2000The effect of international institutional factors on properties of accounting earnings 2008International Accounting Standards and Accounting Quality 2001Capital markets research in accounting 2001Essays on disclosure 2004Costs of Equity and Earnings Attributes 1997Changes in the value-relevance of earnings and book values over the past forty years

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