As outlined in Chapter 4.3, I exclude non-IFRS-adopting firms from the IFRS sample. I do this as in the EU/EEA only countries listed on EU-regulated markets fall under the scrutiny of enforcement mechanisms. These are the very firms that also have to adopt IFRS. However, as the sample potentially also comprises voluntary IFRS adopters who
are not subject to the supervision of an enforcement regime, my approach is a slightly simplified one. Ideally, one would work with lists published by the European Securities and Markets Authority (ESMA), which specify all countries on regulated markets in the EU in a given year. However, these lists are not obtainable anymore for some of the years included in my research design. Therefore, I work with the explained simplification in my sample selection process as other studies do too (e.g., André et al., 2015). It is worth-while noting that the potential inclusion of such firms who are not subject to enforcement scrutiny in my treatment sample would rather bias the sample in a way that would work against finding significant results. As I did, in fact, not find a significant association be-tween substantive changes in enforcement and conditional accounting conservatism for the IFRS sample, it is important to address the sample selection concerns in a robustness check. I do this using the ESMA lists of the years of enforcement changes, which I do have available (2007-2015), to arrive at a revised IFRS sample. I do this under the as-sumption that the firms listed on the EU-regulated market segments did not change dra-matically in the years surrounding the enforcement changes, which are not covered by the 2007-2015 ESMA lists. This reduces the size of IFRS sample I to 15,409 firm-year ob-servations. Results are displayed in Table 4.9. Again, I find no significant association between substantive enforcement changes and conditional conservatism, supporting the results of my previous analyses.
Table 4.9: Robustness check Clustered standard errors Firm This table displays coefficient estimates and t-statistics from estimating regression model (1) for the IFRS sample from Table 4.4 after deducting firms not listed on EU-regulated markets as indicated by the ESMA lists of the years with the substantive enforcement changes. The dependent variable is Conservatism measured by C_Score. Definitions of variables are reported in Table 4.3. t-values are reported in parentheses. ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively. The models include country, year and industry fixed effects.
Standard errors are clustered by firm.
4.6 Conclusion
This paper delivers evidence on the role of substantive changes in enforcement in shaping firms’ accounting conservatism. In line with prior literature, I hypothesise and find at least for a sample of non-IFRS countries that substantive enforcement changes are signif-icantly and positively associated with C_Score, a firm-year measure of conditional con-servatism. I do not find this association for a sample of IFRS-adopting countries though, suggesting that IFRS adoption may limit a firm’s leeway in making conservative account-ing choices. Hence, firms in IFRS countries would not be able to respond to substantive changes in enforcement as conservatively as firms in non-IFRS countries. As more con-servative accounting choices are expected to result in less erroneous or less fraudulent
accounting, my findings suggest that enforcement’s preventive function is efficient throughout the regarded non-IFRS countries.
Moreover, the findings can be interpreted as enforcement having several other positive effects. As García Lara et al. (2011, 2014, 2016) find that increased levels of accounting conservatism are associated with a higher efficiency in the allocation of capital, reduced levels of information asymmetry and lower cost of capital, enforcement’s association with conservatism subsequently also promotes these positive developments.
Furthermore, I find weak evidence that firms with weak corporate governance show a more pronounced increase in accounting conservatism following substantive changes in enforcement than firms with strong corporate governance. However, the robustness and economic significance of these results is limited and, therefore, they need to be interpreted with caution.
My study is subject to several limitations. First and foremost, I use a slightly simplified approach in the selection process of the IFRS sample, which cannot entirely rule out the possibility of some firms being included that are not subject to the enforcement changes at hand. I carry out a robustness test to address these concerns. Another limitation lies in the fact that I was not able to carry out the analysis for my second hypothesis across the entire samples I used in my analyses regarding the first hypothesis. Due to data availabil-ity constraints, I had to run a sub-sample analysis, which might not fully be generalisable across all regarded jurisdictions. Lastly, whether or not to make conservative accounting choices remains an endogenous managerial decision influenced by a number of other fac-tors which cannot be observed nor fully ruled out.
Future studies should look at the influence of enforcement changes on unconditional con-servatism once appropriate settings are identified. Furthermore, it would be highly inter-esting and relevant to shed further light on how enforcement’s association with conserv-atism may result in higher efficiency of capital allocation, reduced cost of capital, de-creasing information asymmetry and other positive capital market effects.
5 Conclusions