The Value Relevance of Accounting Income Reported By DAX-30 German Companies

International Financial Reporting Standards (IFRS) are required for consolidated financial statements of all European Union (EU) publicly traded companies starting from the December 2005 fiscal year end [Regulation (EC)]; and endorsed by the International Organization of Securities Commission (IOSCO) for its member countries beginning in 2000. We examine the challenges and benefits, including value relevance, of the adoption of IFRS by DAX-30 companies, the German premium stock market. Based on a survey sent to DAX-30 company executives, we find most companies agreeing that implementing IFRS should improve the comparability of financial statements. The complex nature, high cost of adopting and lack of guidance for implementing IFRS, as well as increased volatility of earnings after adopting IFRS, are listed among the most important challenges of conversion to IFRS. We use regression to measure another benefit: the value relevance of book values of earnings and equity in explaining market values of DAX-30 companies during the period 1995–2004. Using 265 observations, we find that adopting IFRS or US Generally Accepted Accounting Principles or cross-listing on the New York Stock Exchange significantly increases the value relevance of earnings relative to market prices.

[1]  Mingyi Hung,et al.  ACCOUNTING STANDARDS AND VALUE RELEVANCE OF FINANCIAL STATEMENTS: AN INTERNATIONAL ANALYSIS , 2000 .

[2]  F. R. Buchanan.  International accounting harmonization: Developing a single world standard , 2003 .

[3]  S. Gray,et al.  Factors influencing the extent of corporate compliance with International Accounting Standards: summary of a research monograph , 2002 .

[4]  Shimin Chen,et al.  The Impact of Standard Setting on Relevance and Reliability of Accounting Information: Lower of Cost or Market Accounting Reforms in China , 2005 .

[5]  Esther Ortiz.  GAAP choice by European companies , 2005 .

[6]  Mark Lang,et al.  THE VALUE RELEVANCE OF GERMAN ACCOUNTING MEASURES: AN EMPIRICAL ANALYSIS , 1994 .

[7]  Hervé Stolowy,et al.  International accounting disharmony: the case of intangibles , 2001 .

[8]  Ann Tarca,et al.  International Convergence of Accounting Practices: Choosing between IAS and Us Gaap , 2004 .

[9]  Paquita Y. Davis-Friday,et al.  Inflation Accounting and 20-F Disclosures: Evidence from Mexico , 2000 .

[10]  W. Thomas,et al.  A Review of Markets-Based International Accounting Research , 2003 .

[11]  Mary E. Barth,et al.  Market rewards associated with patterns of increasing earnings , 1999 .

[12]  A. Tarca.  International Convergence of Accounting Practices: Choosing between IAS and Us Gaap , 2004 .

[13]  A. Stahl,et al.  Changing from German GAAP to IFRS or US GAAP: Objectives and achievements - An empirical survey of German companies - , 2004 .

[14]  Mary E. Barth,et al.  The Relevance of the Value Relevance Literature for Financial Accounting Standard Setting: Another View , 2001 .

[15]  Pascal Dumontier,et al.  Why Firms Comply Voluntarily with IAS: an Empirical Analysis with Swiss Data , 1998 .

[16]  K. Schipper,et al.  Implications of Accounting Research for the SEC's Consideration of International Accounting Standards for U.S. Securities Offerings , 1999 .

[17]  Andrei Shleifer,et al.  Corporate Ownership Around the World , 1998 .

[18]  J. Flower.  European Financial Reporting , 2004 .

[19]  Hollis Ashbaugh,et al.  Non-US Firms' Accounting Standard Choices , 2001 .

[20]  D. Street,et al.  The quest for international accounting harmonization: A review of the standard setting agendas of the IASC, US, UK, Canada, and Australia, 1973-1997 , 1998 .

[21]  Paul Zarowin,et al.  Capitalization of R&D and the Informativeness of Stock Prices , 2007 .

[22]  S. P. Kothari,et al.  The Effect of International Institutional Factors on Properties of Accounting Earnings , 1999 .

[23]  W. Buijink,et al.  Voluntary adoption of non-local GAAP in the European Union: A study of determinants and consequences , 2005 .

[24]  K. Ely,et al.  Intangible Assets and Stock Prices in the Pre-SEC Era , 1999 .

[25]  Gregory S. Miller.  Will Harmonizing Accounting Standards Really Harmonize Accounting ? , 2007 .

[26]  K. Schipper.  The introduction of International Accounting Standards in Europe: Implications for international convergence , 2005 .

[27]  A. Haller.  Financial accounting developments in the European Union: past events and future prospects , 2002 .

[28]  W. Beaver.  Perspectives on Recent Capital Market Research , 2002 .

[29]  S. Bryant,et al.  Disclosure Level and Compliance with IASs: A Comparison of Companies With and Without U.S. Listings and Filings , 2000 .

[30]  A. Shleifer,et al.  Investor Protection and Corporate Valuation , 1999 .

[31]  D. Street,et al.  LARGE ACCOUNTING FIRMS’ SURVEY REVEALS EMERGENCE OF “TWO STANDARD” SYSTEM IN THE EUROPEAN UNION , 2004 .

[32]  Mingyi Hung,et al.  Financial statement effects of adopting international accounting standards: the case of Germany , 2007 .

[33]  H. Kahle.  Maßgeblichkeitsgrundsatz auf Basis der IAS , 2002 .

[34]  A. Haller,et al.  The Adaptation of German Accounting Rules to IFRS: A Legislative Balancing Act , 2004 .

[35]  Stephen J. Brown,et al.  Use of R-Squared in Accounting Research: Measuring Changes in Value Relevance Over the Last Four Decades , 1998 .

[36]  Victor Showers.  The world in figures , 1973 .

[37]  Richard M. Levich,et al.  The capital market effects of international accounting diversity , 1990 .

[38]  M. Glaum.  Bridging the GAAP: the Changing Attitude of German Managers towards Anglo‐American Accounting and Accounting Harmonization , 2000 .

[39]  Joseph J. Schultz,et al.  The impact of national influence on accounting estimates: Implications for international accounting standard-setters , 2001 .

[40]  C. Saccon,et al.  International Financial Reporting Convergence: Evidence from Three Continental European Countries , 2005 .

[41]  Ross L. Watts,et al.  The Relevance of the Value Relevance Literature for Financial Accounting Standard Setting , 2000 .

[42]  J. Lindemann.  Kapitalmarktrelevanz der Rechnungslegung — Konzepte, Methodik und Ergebnisse empirischer Forschung , 2006 .

[43]  Jere R. Francis,et al.  The role of accounting and auditing in corporate governance and the development of financial markets around the world , 2003 .

[44]  Nancy B. Nichols,et al.  Assessing the Acceptability of International Accounting Standards in the US: An Empirical Study of the Materiality of US GAAP Reconciliations by Non-US Companies Complying with IASC Standards , 2000 .

[45]  C. Leuz,et al.  The Role of Accounting in the German Financial System , 2003 .

[46]  Mary E. Barth,et al.  International Accounting Differences and their Relation to Share Prices: Evidence from U.K., Australian, and Canadian Firms , 1996 .

[47]  James A. Ohlson.  Earnings, Book Values, and Dividends in Equity Valuation* , 1995 .

[48]  Rudolph A. Jacob,et al.  An empirical investigation of multinational firms' compliance with International Accounting Standards , 1999 .

[49]  K. V. Hulle.  From Accounting Directives to International Accounting Standards , 2004 .

[50]  S. Bryant,et al.  Acceptance and Observance of International Accounting Standards: An Empirical Study of Companies Claiming to Comply with IASs , 1999 .