2381 through three years than Japanese GAAP companies. It is found that
SEC rule companies are influenced by severe U.S. GAAP, a rule-based regarding the lower EARN. The market to book ratio MB and ave.TA of
SEC rule companies exceed Japanese GAAP companies in all fiscal year. For instance, the Mean of MB and ave.TA of SEC rule companies in 2008
is bigger as the other group. Moreover, the Mean of MB
t+1
is 5.590, about 4 times compared with the Mean 1.305 of Japanese GAAP
companies. MB shows how many times the stockholders equity net assets on measured the corporate value aggregate market value.
The market evaluates the capital efficiency of the enterprise. It is likely to be used as an investment standard by which the corporate value is
measured. Therefore, it means that the increase of Mean MB
t+1
of SEC rule companies from 2.340, the Mean MB
t-1
contributes the rise of those corporate value. F-test is effective for verifying the difference between
both groups. It is found that each F value of MB
t
, MB
t+1
are statistically significant at the significance level 1 in TABLE 8. Obviously, there are
some differences in the market valuation of SEC rule companies compared with Japanese GAAP companies.
There were some steps before Japanese and U.S.GAAP have been evaluated the equivalence of IFRS. CESR, an advisory panel of EC, has
published two or more drafts to approve the equivalence between IFRS and accounting standards of the third country. We suppose that the
evaluation might give one of good news in the market to Japanese firm prepared their financial statements based on the Japan or U.S.GAAP.
And it is assumed that the CESR announcement of the equivalence is effective specifically on SEC rule companies, Because of their
representing scale in Japan, they would have more incentive to finance in the financial market named Tokyo, New York, London. Therefore, IFRS
would be willingly replaced from the SEC rules, if it is officially admitted in Japan.
TABLE 9 verifies the outcome of two models. Obviously, the persistence of the earnings has been proven. The numerical value of the
result shows the following two significant points. One is that EARN
t
and
2382 EARN
t+1
have been influenced from EARN before one term respectively. In the persistence model, the two independent variables, EARN
t-1
earnings before one term and EARN
t-1
STANDARD
t
one that the dummy variable by the difference of the standard multiplied by the profit
before one term are statistically significant in 0.1 level for EARN
t
. That means the difference of earnings quality by the choice of GAAPs. In
addition, t values of the two independent variables, MB
t
and EARN
t-1
MB
t
are significant in 5 level. The other is that the influence of the independent variable for EARN
t+1
with the data of nearer closing year gets smaller.
According to the comparison, the independent variable, EARN
t
is significant in 0.1 level. However, it was not significant for the
independent variable, EARN
t
STANDARD
t
by which the dummy variable by the difference of standards of accounting multiplied. Two independent
variables related to MB are statistically significant in 5 level. This result appears no difference of earnings quality by the application, because U.S.
and Japanese GAAP have developed higher-quality. In the equation 2, the quality of accrual was evaluated by using the business cash flow. As
a result, a negative effect was confirmed as for CFO
t-1
and CFO
t
. Oppositely, CFO
t+1
has changed in the effect of the plus. It is assumed the one factor that the difference in the scale of between SEC rule
companies and Japanese GAAP companies became smaller. Those implications are proven usefully for hypotheses 1 and 2.
The convergence of accounting standards aims at making of higher- quality international standards. It is clear that the development have seen
in the case of Japanese firms in this study. Both of U.S. and Japanese GAAP have already raised the quality of earnings and the favorability in
the market valuation. A worldwide expansion toward IFRS results in improving the reliability of the third country U.S. and Japan , at least.
The attempt to a single set of International accounting standards leads in the convergence process that accounting standards progress in each
country. The higher quality of earnings in financial statements persists when higher-quality accounting standards exists. There is a meaning in
2383 above all can endure financial statements users indication needs. This
paper has some limitation for the number of sample data. The data set of Japanese companies applying SEC rules U.S.GAAP is just only 36,
while selected the other Japanese firm based on the Japanese GAAP by the scale. It is necessary to develop this study, improving the data.
Mean Deviation
F-statistics EARN
t+1
SEC rule 0.0679
0.0020 0.0083
Jap. GAAP 0.1821
0.2413 -
EARN
t
SEC rule 0.0670
0.0003 0.0086
Jap. GAAP 0.1917
0.2727 -
EARN
t-1
SEC rule 0.0677
0.0012 0.0592
Jap. GAAP 0.1684
0.1965 -
MB
t+1
SEC rule 5.5893
659.316 1,019.755
Jap. GAAP 1.3047
0.6465 -
MB
t
SEC rule 4.6874
260.650 87.742
Jap. GAAP 2.2567
2.9706 -
MB
t-1
SEC rule 2.3404
5.7440 0.0322
Jap. GAAP 0.4704
178.445 -
p0.05, p0.01
TABLE 8. Difference of SEC rule and Jap.GAAP Companies
2384
For Indonesia case there is different approach that we conducted. We
use different method for Indonesian case because for Indonesia, we want to know the effect of several standards that has align with IFRS on
earnings quality. So, we investigate the effect of each standard on persistence and accruals quality. The results for Indonesia sample show
in TABLE10 and 11. We identified twelve accounting standards for our study for
Indonesian samples and focus on the period before and after each accounting standard. However, more than one standard became effective
in certain years. In this situation, we jointly consider all accou nting standards implemented during a year as one event. We therefore
Persistence 07EARN
Persistence 08EARN
40.572 36.132
-2.305 0.571
-2.148 -0.227
-13.042 -1.752
4.594 1.307
0.988 0.995
66 66
Accrual Quality
3.140 - 2.730
- 2.278 - 1.073
1.306 0.385
64
p0.05, p.0.01, p.0.001 ,
Degrees of Freedom Coeffcients
CFO
t+1
CFO
t
CFO
t-1
ΔSALES
t
PPE
t
Mean adj.R
2
EARN
t-1
MB
t
EARN
t-1
STANDARD
t
STANDARD
t
Mean adj.R
2
Degrees of Freedom Coeffcients
TABLE 9. Persistence and Accrual Quality
EARN
t-1
MB
t
2385 investigates The effect of IFRS implementation on earnings quality with
Indonesian sample use accounting-based measures: persistence, and accrual quality. We first consider the accounting
standard‘s incremental effect on persistence the
interaction of prior period‘s earnings and the accounting standard variable. Equation 1 is estimated for each
accounting standard and we report the results in TABLE 10. The mean adjusted R
2
for the persistence model is 45.5. The estimated coefficient for the incremental persistence is significant for each of the
eleven accounting standards. However, there is no consistency as to direction; the overall mean is not significant.
TABLE 10. Persistence Model
EARN
i,t
= α + α
1
EARN
i,t-1
+ α
2
MB
i,t
+ α
3
EARN
i,t-1
MB
i,t
+ α
4
STANDARD
t
+ α
5
EARN
i,t-1
STANDARD
t
+
i,t
____________________________________________________________ ________________
Standard s Persistence Coefficient
PSAK 13, 30 0.1194
PSAK 14, 26 0.1173
PSAK 16, 51, 58 0.0467
PSAK 19, 46, 55 0.0578
PSAK 24, 38 -0.0531
Mean accounting standard coefficients 0.0133
Mean adjusted R
2
45.5 Number of Standards with
Significant Positive Coefficients 6
significant at the 0.10 0.05 0.01 level. Variables are defined as follows: EARN is income before extraordinary
items scaled by average assets, MB is market-to-book ratios, and STANDARD is an indicator variable equal to one if the year identified
standard that align with IFRS is effective and zero otherwise.
2386 Second, we examine changes in accrual quality. We estimate
equation 2 and report our results in TABLE 11. The mean adjusted R
2
is 42.5. Eight of the eleven estimated coefficients for the accounting standard effect are
significant; five of which are positive. Overall, the mean effect is significant and positive 1.9279, p-value 0.10 indicating decreasing
quality. Combined, the overall evidence is that the accounting standards are associated with decreasing accounting quality lower accrual quality.
These results do not support our hyphoteses but consistent with the FASB‘s increased focus on the balance sheet where more variability may
then be introduced to the income statement.
TABLE 11. Accrual Quality Model
SD_AQ
i,t
=
o
+
1
LNASSETS
i,t
+
2
SD_CFO
i,t
+
3
SD_SALES
i,t
+
4
LOSS
i,t
+
5
STANDARD
t
+
i,t
____________________________________________________________ _______________
Standard s Accrual Quality
PSAK 13, 30 6.1209
PSAK 14, 26 1.2278
PSAK 16, 51,58 2.4909
PSAK 19, 51, 58 13.373
PSAK 24, 38 -23.5200
PSAK 19, 51,58 13.3731
Mean accounting standard coefficients 1.9279
Mean adjusted R
2
42.5 Number of Standards with
Significant Positive Coefficients 8
Significant Negative Coefficients 3
significant at the 0.10 0.05 0.01 level.
2387
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2389
ACCOUNTING CONSERVATISM AND FUTURE BAD NEWS: THE CASE OF SINGAPORE AND PAKISTAN
Zuhrohtun, SE, M.Si Universitas Pembangunan Nasional ―Veteran‖
Ph.D Student Universitas Gadjah Mada, Yogyakarta, Indonesia
Abstract
This study investigates the benefits of accounting conservatism to the share holder. In particular, this study examine whether
higher levels of conservatism are associated with lower levels of future bad news. To address whether conservatism leads to
lower likelihood of future bad news, this study examine the association of accounting conservatism with 1 likelihood of
future earnings decreases, and 2 likelihood of future dividend decreases. The sample consist of all non financial firms that
listing in Singapore and Pakistan stock exchange with December fiscal year ends over the 2005-2007 time period, and
the data available on OSIRIS database. We find evidence that higher level of accounting conservatism is associated with
lower likelihood of future dividend decreases.
Keywords: conservatism, future bad news, future earnings
decreases, future dividend decreases
2390
1. Introduction
Investors and potential investors in the firm‘s securities demand information, not only on the firm‘s past financial performance and its net assets, but also on its
expected future performance. e.g., its future cash flows. However, there are limits to the extent to which management-provided information can be credible.
As information becomes less verifiable, it becomes easier for the manager to manipulate and less credible making it less useful to investors. If accounting
cannot solve the problem of reducing information asymmetry by providing unverifiable information, how does conservative accounting reduce information
asymmetry between equity investors? Two potential mechanisms suggest themselves. First, conservative accounting could well provide the best possible
non- stock price ―hard‖ summary information on current performance for
uninformed investors. Second, that hard information provides a benchmark that makes it possible for alternative ―soft‖ sources to generate credible information
on unverifiable gains LaFond and Watts, 2007.
2391
The conservative principle, defined as the more timely recognition of unrealized losses vs. gains in annual earnings, has characterized for centuries
the practice of accounting reporting Basu, 1997. Watts 2003 and others argue that conservatism helps in corporate governance specifically in
monitoring firms‘ investment policies. We hypothesize that if conservatism
reduces m anagers‘ ex ante incentives to take on negative NPV projects and
improves the ex post monitoring of investments, firms with more conservative accounting ought to have higher future profitability and lower likelihood and
magnitude of future special items charges. We find that firms with more conservative accounting have i higher future cash flows and gross margins,
and ii lower likelihood and magnitude of special items charges than firms with less conservative accounting. Our results hold after control ling for industry, firm
size, leverage, growth opportunities, prior special items charges, and stock returns. These findings are i consistent with conservatism mitigating agency
problems associated with managers‘ investment decisions as predicted by Watts
2003 and Ball and Shivakumar 2005, and ii inconsistent with standard
