The adoption of IFRS by Greek listed companies: financial statement

368 Pages·2009·4.77 MB·English

The adoption of IFRS by Greek listed companies: financial
statement effects, level of compliance and value relevance

Ioannis Tsalavoutas, BSc, MBA

A thesis submitted for examination for the degree of
Doctor of Philosophy (PhD)

The University of Edinburgh
2009
Declaration

This is to certify that:

(i) This thesis has been composed by the candidate and is the candidate’s own work.

(ii) The work has not been submitted for any other degree or professional
qualification.

____________________ ____________________
Ioannis Tsalavoutas Date
Ph.D. Candidate

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‘…the steeper the mountain, the harder the climb,
the better the view from the finishing line…’
Anonymous

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Abstract
This study examines issues relating to the mandatory adoption of International
Financial Reporting Standards (IFRS) by Greek listed companies.
Initially, the impact of transition, as a result of differences between IFRS and Greek
GAAP, on the first IFRS financial statements in 2005 is assessed. Then, a disclosure
index is constructed, containing all the disclosure items mandated by the IFRS extant
at the end of April 2006. Based on this research instrument, and two disclosure index
methods, compliance with IFRS mandatory disclosures in their first year of
implementation is examined. A review of disclosure theories, the features of the
Greek financial reporting system, and considerations regarding the timing of the
research are used as a basis for establishing a priori expectations and testing the
potential factors explaining compliance with IFRS mandatory disclosures.
Subsequently, any change in the value relevance of accounting information before
and immediately after IFRS mandatory implementation is examined. Whether the
reconciliation statements required by IFRS 1 provided value relevant information to
investors is also explored. Finally, the valuation implications of IFRS mandatory
disclosures are explored.
The above analyses indicate the following. Greek listed companies’ financial
statements were affected significantly by the adoption of IFRS. The average level of
compliance with IFRS mandatory disclosures approximates to 80%. The impact on
net income and shareholders’ equity, as a result of the transition to IFRS, as well as
audit firm size, are significantly associated with the extent to which companies
comply. No change in the value relevance of accounting information between 2004
and 2005 is identified. Reconciliation adjustments are incrementally value relevant
and levels of mandatory disclosures do have valuation effects.
Based on the findings of the above analyses, the study contributes to the relevant
literature and discusses policy implications. It also concludes with suggestions for
further research and recommendations on the methods for measuring compliance
with IFRS mandatory disclosures.

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Dedication

This Thesis is Dedicated to my Parents,
Adamantia and Vaggelis.

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Acknowledgements

I would like to thank a number of people for their practical and emotional support
throughout what has been really a challenging process. First, I owe a debt of
gratitude to my supervisor, Professor Lisa Evans for her guidance, her tireless advice,
encouragement and support not only to issues related to this study but also to issues
related to how to approach life. Most of what I have achieved in academia so far is
because of Lisa. I would also like to thank Professor Paul André who, although he
did not (officially) serve as my supervisor, has provided me with guidance,
comments and support for major parts of this work. I also owe debt to Professor
David Hatherly for his insightful critiques and recommendations, especially at the
early stages of this study.
I would like to extend my heartfelt thanks to Mike Smith, my former line manager
during my days at Company Reporting Ltd, who has was kind enough to verify the
research instrument, to examine ten companies for the pilot study conducted as part
of this thesis but most importantly to stand my non-stop quest for learning more
about accounting standards. I owe thanks as well to Professor Alan Goodacre who
has offered me constructive comments in several parts of this work and provided a
supportive environment to accomplish my thesis during my first year in Stirling. I
also thank the Institute of Chartered Accountants of Scotland for funding the data
collection expenses for this study.
I gratefully acknowledge helpful comments received from Sir David Tweedie,
Pauline Weetman, Chris Nobes, Sidney Gray, Vivien Beattie, Darren Henry, Khaled
Hussainey, Donna Street, Salvador Carmona, Eddie Jones, Stergios Leventis, Costas
Caramanis, Ian Fraser, David Alexander, Mark Clatworthy, Allan Hodgson and
Martin Walker as well as the participants of the workshops and conferences where I
presented my work during these years. I owe a debt to Andrei Filip for providing me
with the necessary formulas so as to compute Cramer’s Z-statistic. I also owe a debt
to Dennis Oswald for assisting in performing the ‘Vuong Test’. Finally, thanks are
owed to four interviewees who provided key background information.
On a more personal note, I must thank my close friends George, Andreas, Chrysa,
Rodica, Stelios and Manolis for never compromising their friendship, even when
they were getting little in return. Also, Dimos, Dafni, Georgia, Manolis, Nikos,
Michalis, Luis, and Raj for making life in Edinburgh more enjoyable. Of course, I
acknowledge substantial emotional support from Dionysia (my ‘sporako’). Her smile
and energy kept me going during the last (and difficult in many respects) year of this
challenge.
Lastly, I am forever grateful for the love and support of my family. My wonderful
sister Matina, who has stood constantly as a motivating example for pursuing the
challenges appearing in my road, and my parents Adamantia and Vaggelis, for their
unconditional love and support throughout the entire journey of my life so far.
Thank you!

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List of Contents
List of Contents..........................................................................................................vi 
Abbreviations ..............................................................................................................x 
Figures .............................................................................................................xi 
Tables .............................................................................................................xi 

Chapter 1 -  Motivation, Objectives and Overview of the Study........................1 
1.1  Motivation.......................................................................................................1 
1.2  Greece and Its Relevance to the Dimensions Examined.................................3 
1.3  Research Questions..........................................................................................6 
1.4  Research Objectives - Contribution.................................................................7 
1.4.1  Contribution to the literature exploring the financial statement
effects of transition to IFRS..........................................................................10 
1.4.2  Contribution to the literature on compliance with IFRS mandatory
disclosures after 2005...................................................................................10 
1.4.3  Contribution to the literature on the methods for measuring
compliance with accounting standards’ mandatory disclosures..................11 
1.4.4  Contribution to the literature on the applicability of disclosure
theories when examining compliance with mandatory disclosures..............13 
1.4.5  Contribution to value relevance research and valuation theory
using the Ohlson (1995) model (OM)...........................................................16 
1.5  Ontology and Epistemology..........................................................................20 
1.6  Data and Sources...........................................................................................22 
1.7  Limitations.....................................................................................................23 
1.8  Organisation of the Study..............................................................................24 

Chapter 2 -  The Greek Accounting Environment.............................................26 
2.1  Introduction...................................................................................................26 
2.2  The Country...................................................................................................27 
2.3  The Legal System..........................................................................................28 
2.4  Taxation, Creative Accounting and the Role of Culture...............................29 
2.5  The Profession...............................................................................................32 
2.6  Business Enterprises and Financing System.................................................33 
2.7  Corporate Governance...................................................................................34 
2.8  The Athens Stock Exchange (ASE)...............................................................35 
2.9  The Capital Market Regulator (HCMC)........................................................36 
2.10  Financial Reporting and Transition to IFRS..................................................37 
2.11  Conclusion – Focusing on The Greek Environment.....................................39 

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Chapter 3 -  Financial Statement Effects and Auditor Size...............................40 
3.1  Introduction...................................................................................................40 
3.2  The Context...................................................................................................40 
3.3  Literature Review..........................................................................................42 
3.3.1  The impact of transition to IFRS in the EU...................................................42 
3.3.2  The impact of transition to IFRS in Greece..................................................44 
3.4  Differences between Greek GAAP and IFRS and Research
Hypotheses.....................................................................................................46 
3.4.1  Differences between Greek GAAP and IFRS................................................46 
3.4.2  Curtailment of creative accounting...............................................................52 
3.4.3  Research hypotheses.....................................................................................54 
3.5  Research Methods and Data..........................................................................57 
3.5.1  Research methods.........................................................................................57 
3.5.2  Statistical tests employed..............................................................................61 
3.5.3  Data...............................................................................................................61 
3.5.4  Categories of transitional information.........................................................62 
3.6  Results and Discussion..................................................................................63 
3.6.1  Quality of transitional information...............................................................63 
3.7  Impact on financial position, performance, financial indicators
(H3.1 and H3.2) and audit quality (H3.3)......................................................65 
3.8  Individual standards’ effects on shareholders’ equity and audit
quality (H3.4 and H3.5).................................................................................70 
3.9  Limitations.....................................................................................................76 
3.10  Conclusions...................................................................................................77 

Chapter 4 -  Level of Compliance with IFRS Mandatory Disclosures.............79 
4.1  Introduction...................................................................................................79 
4.2  Accounting Disclosures: Voluntary vs. Mandatory......................................79 
4.2.1  Regulatory and Free Market theories...........................................................81 
4.3  Literature Review..........................................................................................83 
4.3.1  Costs based theories......................................................................................83 
4.3.2  Agency theory................................................................................................86 
4.3.3  Market based theories...................................................................................89 
4.4  Prior Empirical Studies..................................................................................92 
4.4.1  Compliance with national standards’ mandatory disclosures......................93 
4.4.2  Compliance with IFRS mandatory disclosures.............................................97 
4.5  Development and Formulation of Testable Hypotheses..............................104 
4.5.1  Structure-related variables.........................................................................105 
4.5.2  Performance-related variables...................................................................111 
4.5.3  Market-related variables.............................................................................115 
4.6  Data and Research Methods........................................................................118 
4.6.1  Data.............................................................................................................118 
4.6.2  The two disclosure index methods employed..............................................118 
4.6.3  Developing the disclosure checklist: validity and reliability......................123 

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4.6.4  Measurement of variables...........................................................................132 
4.6.5  Univariate analyses.....................................................................................139 
4.6.6  Multivariate analyses..................................................................................141 
4.6.7  Econometric considerations........................................................................145 
4.7  Results and Discussion................................................................................147 
4.7.1  Introduction.................................................................................................147 
4.7.2  Extent of Greek companies’ compliance with IFRS mandatory
disclosures...................................................................................................148 
4.7.3  Compliance with the disclosure requirements of each standard
separately....................................................................................................152 
4.7.4  Comparisons across categories of companies............................................155 
4.7.5  Univariate analyses.....................................................................................157 
4.7.6  Multivariate analyses..................................................................................161 
4.7.7  Discussion of the results.............................................................................165 
4.8  Limitations...................................................................................................174 
4.9  Conclusions.................................................................................................176 

Chapter 5 -  Value Relevance of Accounting and ‘Other Information’.........180 
5.1  Introduction.................................................................................................180 
5.2  Accounting Quality and Value Relevance...................................................180 
5.3  Theoretical Framework - Residual Income Valuation (RIV) and The
Ohlson (1995) Model (OM)........................................................................182 
5.4  Literature Review........................................................................................186 
5.4.1  Adoption of IFRS: relative and incremental value relevance.....................186 
5.4.2  Value relevance of disclosures using the Ohlson (1995) Model
(OM)............................................................................................................198 
5.5  Research Design..........................................................................................212 
5.5.1  Controlling for sample selection bias.........................................................212 
5.5.2  The main model...........................................................................................215 
5.5.3  Pre-and post-IFRS relative value relevance (H5.1 - H5.6)........................219 
5.5.4  Incremental value relevance of the reconciliation adjustments
(H5.7 and H5.8)..........................................................................................222 
5.5.5  Value relevance and compliance with IFRS mandatory disclosures
(H5.9 – H5.11)............................................................................................226 
5.6  Results and Discussion................................................................................228 
5.6.1  Descriptive statistics...................................................................................228 
5.6.2  Pre-and post-IFRS relative value relevance (H5.1 – H5.6)........................231 
5.6.3  Incremental value relevance of reconciliation adjustments (H5.7
and H5.8)....................................................................................................239 
5.6.4  Value relevance and compliance with IFRS mandatory disclosures
(H5.9 – H5.11)............................................................................................246 
5.7  Limitations...................................................................................................256 
5.8  Conclusions.................................................................................................258 

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Chapter 6 -  Concluding Remarks.....................................................................261 
6.1  Introduction.................................................................................................261 
6.2  Summary of Research Objectives, Questions, and Approach.....................261 
6.2.1  Research objectives.....................................................................................261 
6.2.2  Research questions......................................................................................262 
6.2.3  Research approach.....................................................................................263 
6.3  Research Findings, Contribution and Implications.....................................265 
6.3.1  Summary of findings....................................................................................265 
6.3.2  Contribution and implications....................................................................272 
6.4  Limitations of the Study..............................................................................276 
6.5  Suggestions for Future Research.................................................................277 

References ..........................................................................................................279 
Appendix I – List of the companies examined in this study................................309 
Appendix II – The disclosure index employed in this study...............................313 
Appendix III – Correlation matrix of independent variables
determining compliance with IFRS..............................................355 

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