Course FA DM v12 Lecture1 Detailed Update11092016

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INTRODUCTION Financial Information & Decision-Making - course

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Financial Information & Decision-Making
INTRODUCTION
1
INTRODUCTION
DR. DIRK BEERBAUM IN BRIEF

• Deutsche Bank AG, Co-Lead, IFRS 9-Impairment, Group Finance
• Aalto University School of Business, Helsinki, Finland, Executive in Residence, Department of Accounting/
Corporate Governance, Research Focus: Corporate Governance and Financial Accounting
• Doctorated from University of Surrey Business School, Surrey, UK
in 2015 on Corporate Governance and Electronic Reporting with XBRL
• Master in Business Administration, European Business School, ebs, Oestrich-Winkel
• Member of the ITCG at the International Accounting Standards Board, London
• Certified European Financial Analyst (CEFA), Society of Investment Professionals in Germany (DVFA)
• For further information:
https://www.linkedin.com/in/dr-dirk-beerbaum-5b51878b?trk=hp-identity-name
Disclaimer
This presentation expresses the opinion of the speaker. All views expressed in this lecture are those of the
author and do not necessarily reflect the position of Deutsche Bank AG. The information contained in this
presentation contains general information intended for educational purposes only. Any use unauthorized by the
author is not permitted. Address for correspondence: E-Mail: beerbaumdirk@db.com.
2
SYLLABUS OF THE COURSE
3
OBJECTIVES
• This course is an advanced course which emphasizes the role of financial accounting in
investor decision making and manager performance measurement.
• On successful completion, this course participants will have a thorough comprehension of
the state of the art theories of modern financial accounting.
• The course aligns the theoretical thinking with empirical and practical solutions within the
field of financial accounting.
• The course offers the diversity of solutions and helps to understand the industry specific
practices of financial accounting.
• This course will focus on the latest development in International Accounting Standards
and the role of the International Accounting Standards Board (IASB) for financial
accounting.
4
EXPECTED RESULTS AFTER THE COURSE

Skills
On successful completion of this module, students will have the proven ability to apply advanced
knowledge and relate pertinent concepts, i.e. they can
• interprete financial reporting information, with a particular focus on assessing accounting
quality
• assess financial accounting information regarding a firm's business model and demonstrate
effective skills in identifying red flags in accounting information
• analyse big (accounting) data and electronic data (XBRL)
Competence
On successful completion of this module, students can take responsibility to transfer theoretical
concepts to typical leadership, management and consulting situations, i.e. they can
• guide decision-making based on financial data
• appraise the role of using accounting information in contracts
• demonstrate the impact of reporting incentives
5
HAVE THE ABILITY TO:

Knowledge
• explain the concept of decision usefulness in financial accounting
• summarize how the use of accounting information in contracts may affect accounting
quality
• describe how behavioral aspects may affect the accounting process
• describe current "hot topics" in accounting standard setting
6
AND ADDITIONALLY:
Social skills and self-competence
• Work independently writing analytical essays based on given material and apply it
empirically
• work effectively in a team in order to contribute appropriately to the production of a
group output, report and presentation
• participate in group and one-to-one discussions
Scientific skills
• use scientific argumentation skills in the discussions
• write a short research report based on academic papers and empirical material
7
CONTENT OF LECTURES
Sep 9 Fri Getting organized:
Theoretical Foundations of Financial Accounting
Sep 23 Fri Financial Accounting and the Financial Crisis
Oct 14 Fri Conceptual Issues in Financial Accounting
Oct 21 Fri Financial Accounting and Corporate Governance
Oct 22 Sat Financial Accounting and Management Accounting
Oct 29 Sat Accounting Data and Business Analytics
8
TIMELINE OF LECTURE 1
Sep 9 Fri Getting organized:
Morning session
Introduction 9:00-11:00
Group Formation 11:00-11:15
Break 11:15-11:30
Theoretical Foundations of Financial Accounting 11:30-13:15
Lunch 13:30-14:30
Afternoon session:
Decision Usefulness
Why markets react to disclosures 14:30-16:45
9
LECTURE 1: SEP 9 FRI, SLIDE 1

1. Theoretical Foundations
1.1 Basic concepts of Financial Accounting theory – Decision Usefulness – or: Why Markets
React to Disclosures?
1.1.1 Normative vs. Positive Accounting Theory
1.1.2 Rule vs. Principle-based Accounting
1.1.3 Accounting as a signalling device: a Bayesian framework
1.1.4 Role of the International Accounting Standards Board (IASB)
1.1.5 Why do firms lobby for/against accounting standards? The case of stock options
1.1.6 Decision Usefulness – or: Why Markets React to Disclosures? The Ball & Brown
(1968) study and subsequent evidence
1.1.7 Is decision usefulness a questionable belief?
10

Learning outcomes
• Commit to the rules of the game in the course-Introduction
• Understand the theoretical foundations of Financial Accounting
Pre-reading
Watts, R.L. and Zimmerman, J.L. (1990). Positive accounting theory: a ten year perspective.
Accounting review, 131-156.
Benston, G. J., Bromwich, M., & Wagenhofer, A. (2006). Principles‐versus rules‐based
accounting standards: the FASB's standard setting strategy. Abacus, 42(2), 165-188.
Ball, R., & Brown, P. (1968). An Empirical Evaluation of Accounting Income Numbers. Journal
of Accounting Research, 6(2), 159-178.
11

Structure of the lecture
2 Financial Accounting and the Financial Crisis
2.1 Fair Value vs. Historical Cost Accounting - Did Fair Value Accounting contribute to the
Financial Crisis?
2.2 Reaction of the International Accounting Standard Boards to the Financial Crisis
2.3 The firm as a nexus of contracts
2.4 Red flags and the fraud triangle
2.5 The classical PAT hypotheses and stewardship theory
2.6 Voluntary vs. Mandatory Disclosures
2.7 All Rational Decision Making? Behavioral Aspects in Accounting
12

Pre-reading
• Laux, C., & Leuz, C. (2010). Did fair-value accounting contribute to the financial crisis?.
The Journal of Economic Perspectives, 24(1), 93-118.Barth, M. E., & Landsman, W. R.
(2010). How did financial reporting contribute to the financial crisis? European accounting
review, 19(3), 399-423.
• Birnberg, J. G., & Shields, J. F. (1989). Three decades of behavioral accounting research: A
search for order. Behavioral Research in Accounting, 1(1989), 23-74.
• Bushman, R. M., & Smith, A. J. (2001). Financial accounting information and corporate
governance. Journal of accounting and Economics, 32(1), 237-333.
Assignment due dates
• 1. Group presentation Sep 23rd at 2:00 pm; Report is due Sep 30th at 9:00 pm
• 1st Group Presentation Topic: In-depth analysis of Accounting Scandal (Enron)
• Group (Benikov, Deore, Heinz, Ralli, Uhrhahn and Winkler): Name: Ashes 2 Ashes
13
LECTURE 3: OCT 14 FRI, SLIDE 1

3 Conceptual Issues in Accounting
• 3.1 Neutrality vs. conservatism
• 3.2 Accounting practices
• 3.2.1 IFRS 9 Financial Instruments Accounting
• 3.2.1.1 Incurred versus Expected Credit Loss Model
• 3.2.1.2 Case Study: Impairment of Greek Government Bonds under IAS 39 and IFRS 9
• 3.2.2 The new leasing model under IFRS 16
• 3.3 How the business model is reflected in financial statements?
14

1st Diary Oct 14 at 9:00 am
Pre-reading
Beerbaum, D., & Ahmad, S. (2015). Credit Risk According to IFRS 9: Significant Increase in
Credit Risk and Implications for Financial Institutions. Available at SSRN 2654120.
Impairment of Greek Government Bonds under IAS 39 and IFRS 9 (2015). Study for the ECON
Committee.
15

Key points
• Incurred versus Expected Credit Loss Model
• Case Study: Impairment of Greek Government Bonds under IAS 39 and IFRS 9
Learning outcomes
• Understand the impact of IFRS 9 on Financial Institutions
Group presentations
2nd Group presentation Oct 14 at 2:00 pm; Group Report is due Oct 18 at 9:00 pm
Topic: Auditing and accounting quality
Group (Paul, Jiao, Busch, Yang, Illig-Martin, Naumann); Name: Justia League
16

4 Financial Accounting and Corporate Governance
4.1 The Contracting Relevance of Accounting
4.2 IFRS 9 Impairment - Implications for Governance (Banking Supervision)
4.3 Corporate Governance Reporting: Development of a Taxonomy
4.4 Designing Executive Compensation Contracts
Group presentations
3rd Group presentation Oct 21 at 2:00 pm; Group Report is due Oct 24 at 9:00 pm
Topic: Related Party Reporting
Group (Kislay, Chen, Rathi, Porchez-Decaix, Peters)
17

Key points
• Direct use of Financial Accounting information for corporate governance control
• Foundation of any structure in corporate governance is disclosure
Learning outcomes
• Understand the impact of accounting regulation on corporate governance and the role of
transparency
Pre-reading
Bushman, R. M., & Smith, A. J. (2001). Financial accounting information and corporate
governance. Journal of accounting and Economics, 32(1), 237-333.
Guidance on credit risk and accounting for expected credit losses (2015). Basel Committee on
Banking Supervision.
18
LECTURE 5: OCT 22 SAT, SLIDE 1

5 Financial Accounting and Management Accounting
5.1 Understand convergence between Financial and Management Accounting
5.2 Understand the role of information technology as a driver of change

2nd Diary Oct 22 at 9:00 am
19

Key points
• Financial and Management Accounting
Learning outcomes
• Understand convergence between Financial and Management Accounting
• Understand the role of information technology as a driver of change
Pre-reading
Taipaleenmäki, J., & Ikäheimo, S. (2013). On the convergence of management accounting and
financial accounting–the role of information technology in accounting change. International
Journal of Accounting Information Systems, 14(4), 321-348.
20

6 Accounting Data and Business Analytics
6.1 Information supply chain: Benefits of XBRL (eXtensible Business Reporting Language)
6.2 Real-time Economy
6.3 Electronic Reporting: European Single Electronic Format (ESEF)
Assignment due date

Group presentation:
4th Realtime Reporting – US GAAP: 10:00 am; Report is due Oct 31 at 6:00 pm
Group (Savina,Wummel,Hellmuth,Slutzky,Aksenov,Martensen)
5th Realtime Reporting – IFRS: 2:00 am; Report is due Oct 31 at 6:00 pm
Group (Lu,Hölzel, Michalek, Bantien,Koven, Jureviciute)
21

Key points
• XBRL (eXtensible Business Reporting Language)
Learning outcomes
• Understand benefits of Electronic Reporting
Pre-reading:
Beerbaum, D., & Piechocki, M. (2016). IFRS 9 for financial institutions - the case for IFRS and
FINREP taxonomies a conceptual gap analysis. Working paper (forthcoming).
Alles, M., & Piechocki, M. (2012). Will XBRL improve corporate governance?: A framework for
enhancing governance decision making using interactive data☆. International Journal of
Accounting Information Systems, 13(2), 91-108.
22
ASSESSMENT (MAXIMUM 120 POINTS)
max 20 points learning diaries

max 15 points classroom activities
max 10 points group presentation
max 15 points group report
max 60 points final written exam
23
COURSE DELIVERY 1 AND 2

Class room work including interactive lectures, guest lectures, cases and group presentations
by students.
Each student selects (one publicly quoted) company for detailed analysis for its learning diary.
In learning diaries, do not simply repeat what the authors said, but try to explain in your own
words what the main issues were and adopt those to your case company.
During the lectures we will use students’ companies as illustrative cases on the discussed
topic. With these case companies students bring practice into the lectures. Students Group
reports and presentations offer an opportunity to go deeper in specific topics.
24
DIARIES (MAX 20 POINTS) I, II

For two pre-readings, students write a personal report (diary) and the analysis of your case
company. Altogether maximum of two diaries will be written.
In learning diaries, do not simply repeat what the authors said, but try to explain in your own
words what the main issues were and adopt this to your case company. When you prepare
the learning diaries, consider following perspectives:
• What were the main issues in the pre-readings? max 1,5 page
– Did some issues remain unclear?
– How does this relate to your earlier knowledge?
– Do you disagree on something? Why?
• How does your case company look like from the perspective of this material? max 0,5
page
– What is the impact of the pre-readings to your case company? Explain!
25
DIARIES III
• The diary report should be 2 pages and returned no later than Friday at 9:00 am for
lectures to beerbaumdirk@gmail.com. The first diary is due October 14 9:00 am!
• The file should be named as follows:
– d1lastnamefirstname (d1 indicates diary 1, d2 = diary 2).
– The diary should be returned in word-format.
– Use Times New Roman Font 12 and 1,5 line spacing.
26
CLASSROOM ACTIVITIES (MAX 15 POINTS)

During the lectures, student will gain extra points with active and constructive participation.
In class participation critical thinking and high quality argumentation are highly respected.
During each lecture you may get max. 3 points
GROUP PRESENTATION AND REPORT (MAX 25 POINTS) I

In the groups of about six persons you will make a report on a topic you have selected.
The group will prepare a report of about 20-30 pages, which must be returned no later than
at 9:00 am one day prior to your presentation. At the same time you should send your group
presentation.
The group also presents the results during the lecturers according to the agreed time
schedule. All members should be involved in the presentation.
27
GROUP PRESENTATION AND REPORT II

• In the presentation (maximum 10 points) (see also guidance for reports), following
aspects are respected:
– Use clear English and be properly prepared
– Understandability and clarity
– Combination of abstract theories and real world examples
– Level of professionalism in the presentation
• The group will prepare a report (maximum 15 points) of 20 pages. In the report, please
use Times New Roman, Font 12 and 1,5 line spacing.
28
GROUP PRESENTATION AND REPORT III

• Following aspects are appreciated both in the report and presentation:
– The quality of content means both to academic and practical relevance of the
content.
– The logic of structure refers to the flow of storyline
– The clarity of argumentation stands for the understandability of presented
statements.
– The capability to integrate the topic to the broader setting of Financial Accounting.
– The depth of analysis indicates with the criticalness and shortcomings of theory and
practice.
29
GROUP PRESENTATION AND REPORT IV

• The total time for each presentation is 30 minutes. The maximum time for presentation is
20 minutes and the rest of the time is devoted to discussion.
• The presentation should not be only a representation of each article separately. Make a
synthesis of articles and generate perspectives and ideas and also combine theory with
practice!
• As a base case, all members in the group will get the same points. In order to give fair
points for each group member, also other grading methods are possible.
30
EXAM (MAX 60 POINTS)

• In the exam, there will be five questions and students may answer to four of them. If five
are answered, best answer will be eliminated in grading.
• The exam covers all the reading material, lecturing material, case study and student
presentations.
• Some of the questions requires ability to apply knowledge to evaluate and solve an
empirical case.
31
GROUP BUILDING AND COMPANY SELECTION FOR DIARIES

• Build up four-person groups.
• Invent a descriptive name for the group!
• Select a company for your own analysis in the diaries and for your report in case you want
to use them for this purpose.
• Return the A4-paper to DB with the following information:
– Group name
– Group members with study number
– Company name of each group member (DB accepts)
– Rank three of your favorite topics (DB accepts).
32
TOPICS FOR GROUP PRESENTATIONS (LECTURES 2 UP TO 6):

• In-depth analysis of a corporate accounting scandal
• Auditing and accounting quality
• Regulatory Reporting
• Related Party Reporting
• Risk Report
• Realtime Reporting
33
THEORETICAL FOUNDATIONS
34
FINANCIAL ACCOUNTING THEORY

Ideal Information User Decision Accounting Mediation
Conditions Asymmetry Problem Reaction
②Adverse ② Rational ② Decision
Selection Investment Usefulness,
(Inside Information) Decision full disclosure
① Current
④Standard
value based
Setting
accounting
③ Moral ③ Motivate ③ Precice

Hazard and evaluate
vs. sensitive
(manager manager per-
effort) formance information
Source: Scott, W. R. (2014). Financial Accounting Theory (7th ed. ed.).Toronto: Pearson and own.
35
①
CURRENT VALUE BASED ACCOUNTING
• Net amount of the discounted expected cash flows pertaining to the assets
• Four parameters need to be known
– Expected cash flow
– Timing of those expected cash flows
– Number of years of the remaining lifetime
– The appropriate discount rate
• Under Ideal conditions
– Economy has perfect and complete markets
– All firm’s future cash flows an their probabilities are known
– No information asymmetries exist and other barriers to market entry
Source: Scott, W. R. (2014). Financial Accounting Theory (7th ed. ed.).Toronto: Pearson and own.
36
②
ADVERSE SELECTION (AKERLOFF)
• Occurs, as some persons such as form managers or insiders have better information
about the current condition and future than outside investors
• Adverse behaviour
– Delay or selectively release information early to selected investors or analysts
– Behave opportunistically by biasing information or managing information to
increase the value of own stock options
• Solutions
– Rational Investment Decision of investors and require information, which are
decision usefulness
– Financial accounting and reporting is a mechanisms to control such adverse
selection by extending insider information to outsider by proving full disclosures
– Information asymmetries are reduced to provide a level playing field
Source: Scott, W. R. (2014). Financial Accounting Theory (7th ed. ed.).Toronto: Pearson
37
②
DECISION USEFULNESS APPROACH TO FINANCIAL REPORTING
The Objective of financial reporting
• The main question addressed is how risk-averse investors make rational investment decisions
• Major professional accounting standard-setting bodies have adopted the theory as a guide to
the preparation of useful financial accounting information. (IASB/ FASB Conceptual Framework)
• Users of financial reporting
– Present and potential investors, lenders and other creditors, who use that information to
make decisions about buying, selling or holding equity or debt instruments and providing
or settling loans or other forms of credit
• Type of information
– about the resources of the entity not only to assess an entity's prospects for future net
cash inflows but also how effectively and efficiently management has discharged their
responsibilities to use the entity's existing resources (i.e. stewardship).
• This stewardship objective assumes that the information of financial statements serves for
providing information for investors about future firm performance as well as to inform about
managers performance
Source: IASB Framework, Scott, W. R. (2014). Financial Accounting Theory (7th ed. ed.).Toronto: Pearson
38
QUALITATIVE CHARACTERISTICS AND ENHANCEMENT OF USEFUL ②
FINANCIAL INFORMATION
How to improve qualitative characteristics?
Fundamental
Comparability
Materiality Faithful Relevance
Verifiability
Entity specific
Completeness Predicitve
relevance
Timeliness
Neutrality Confirmative
Understandability
Freedom
from Error
Source: IASB Framework, Scott, W. R. (2014). Financial Accounting Theory (7th ed. ed.).Toronto: Pearson
39
③
MORAL HAZARD (HOLMSTRÖM)
• Actions are taken by one party to a contractual relationship, which are unobservable
to the other contracting parties
• Example: Manager are motivated and involve a lot of effort, however investors due
to the separation of ownership can not observe, therefore managers may loose
motivation and blame bad performance to uncontrollable factors
• Principal (owner) are separated from agents (managers) and agents do not work in
full interest of the owners, but intend to maximise own interest and advantages
• Solution:
– Net income can serve as an input to management performance evaluation
through executive compensation; align unobservable performance of managers
with net income and interests of owners
– Accounting and reporting is the source for precise information of net income
– Net income can also inform the managerial labour market, so that managers
reputation declines and personal market value declines
40
④
THEORIES ON STANDARDSETTING – TWO MAIN STREAMS
Positive Normative
Content Seeks to develop a theory that What “should” be the content of

can explain observed phenomena financial statements
Explain and predict accounting

Objective Prescribes accounting practice
practice
Represented by Zimmermann & Watt (1978) Ijiri (1975)
Research Method Inductive → Rule-based Deductive→ Principle-based
Source: Watts, R.L. and Zimmerman, J.L. (1990). Positive accounting theory: a ten year perspective.
Accounting review, 131-156 41
CHARACTERIZATION OF RULE VERSUS PRINCIPLE-BASED BY DIMENSION ④

Dimensions Typical Principles Typical Rules
Temporal Ex-post Ex-ante

Conceptual general / universal / abstract specific / particular / concrete
Functional large discretionary power little discretionary power
Representation declarative (what) procedural (how)
Knowledge needed quite a lot needed relatively little
Exception handling allow for exceptions all or nothing (strict)
(defeasible)
Conflict resolution by weight (trade off) no conflicts possible
Source: Burgemeestre, B., Hulstijn, J., & Tan, Y. H. (2009, July). Rule-based versus Principle-based
Regulatory Compliance. In JURIX (pp. 37-46). 42
④
US GAAP VS. IFRS-SYNOPSIS
Dimensions Typical Principles Typical Rules
Conceptual approach IFRS US GAAP

Risk Lack of implementation Provides a roadmap to
guidance and the the loss of avoidance of the accounting
comparability objectives inherent in the
standards
Country More than 100 countries USA
Objective Management judgement To reduce opportunities to use
judgements to manage earnings
Why? To avoid earnings To meet demand of
management management and auditors
Theoretical Underpinning Stewardship Theory Principle-Agent Theory
Source: Benston, G. J., Bromwich, M., & Wagenhofer, A. (2006). Principles‐versus rules‐based
accounting standards: the FASB's standard setting strategy. Abacus, 42(2), 165-188 and Owm 43
ACCOUNTING AS A SIGNALLING DEVISE: A BAYESIAN FRAMEWORK

• Managers with successful products will signal good corporate news to help investors
make investment decisions and the cost of capital will be decreased
• Voluntary disclosures will exceed regulatory requirements
• Investors regard greater transparency in company reports as a signal and an equal
result of more sound CG
• Before making a decision, the individual may want to get more evidence
• An example of more evidence is the information contained in the most recent
financial statements
• Bayes’ theorem is a formula that enables the decision maker to revise prior
probabilities into posterior probabilities
• Posterior probabilities of states of nature are probabilities of the various states that
might occur, after using Bayes’ theorem to revise prior probabilities following the
receipt of additional information
44
BAYES’ THEOREM
P(H)* P(GN|H)
P(H|GN) =
• The posterior propability of the high state is: P(H)* P(GN|H) + P(L)* P(GN|L)
• P(H|GN) == the subjective posterior probability of the high state, given a good-news
financial statement
• P(H) = the subjective prior probability of the high state
• P(GN|H) = the objective probability that the financial statements show good news,
given that the firm is in the high state
• P(L) is the prior propability of the low state
• P(GN|L) = the objective probability that the financial statements show good news,
given that the firm is in the low state
45
WHY DO FIRMS LOBBY FOR/AGAINST ACCOUNTING STANDARDS?

The case of stock options
• IFRS are applied in more than 100 countries it can be regarded as a truly global standard and
the IASB is a body which is non-profit and non-national dependant
• Accounting standards have an impact on firms net income, which is why companies try to
influence Standard Setters
• Due to the extensive development of share-based payments in the 1990s and their impact on
the firm’s performance IASB needed to react, FASB SAS 123 did not foresee an expense, which
was changed by IFRS 2
• New Research, which analyse lobbying behaviour and the impact on the IASB’s decision-making
shows that there is tremendous effort by preparers, however non of the interesting parties had
a dominant effect (IFRS 2)
Source: Giner, B., & Arce, M. (2012). Lobbying on accounting standards: Evidence from IFRS 2 on
share-based payments. European Accounting Review, 21(4), 655-691. 46
ROLE & RESPONSIBILITY OF THE IASB

The mission is to develop IFRS Standards that bring transparency, accountability and
efficiency to financial markets around the world. IASB’s work serves the public interest
by fostering trust, growth and long-term financial stability in the global economy.
• IFRS Standards bring transparency by enhancing the international comparability and
quality of financial information, enabling investors and other market participants to
make informed economic decisions.
• IFRS Standards strengthen accountability by reducing the information gap between
the providers of capital and the people to whom they have entrusted their money.
Our Standards provide information that is needed to hold management to account.
As a source of globally comparable information, IFRS Standards are also of vital
importance to regulators around the world.
• IFRS Standards contribute to economic efficiency by helping investors to identify
opportunities and risks across the world, thus improving capital allocation. For
businesses, the use of a single, trusted accounting language lowers the cost of
capital and reduces international reporting costs.
Source: IFRS.org: 47
• .
ROLE & RESPONSIBILITY OF IASB
Must Prepare
publish and issue
ED Standards
Form Review
Issue BC Steering
Committes comments
Full
Must discretion
undergo over
technical
Remain
field independant
agenda and
project
tests assignment
Source: IFRS.org: 48
DECISION USEFULLNESS -WHY
MARKETS REACT TO DISCLOSURES
49
DECISION USEFULLNESS
WHY MARKETS REACT TO DISCLOSURES?
Reasons for Market Response

• Investors have earnings expectations about the firm’s future performance, that
includes dividends, cash flow projections, growth rates, market share, which affects
risk and return of the firm’s securities; even if these beliefs are based on public
information, investors will have different interpretations and different objectives e.g.
growth vs. value investing, institutional vs. retail
• Once the release of the accounting information, investor expectation will be either
met, exceeded good news or below expectation bad news, therefore investors will
revise belief about future performance, but depends upon the basic belief in the
firm
• Investors who revised their belief might be optimistic about the future performance
and buy the firm’s shares
• If investors revise their beliefs downward, they might sell the shares
50
WHY MARKETS REACT
THE BALL & BROWN (1968) STUDY AND SUBSEQUENT EVIDENCE
Market response to accounting information
• The BB Study was the start of the empirical capital markets research, which analyse the value
relevance of accounting information; it is one of the most cited papers in accounting literature
Methodology
• A sample of 261 NYSE firms over nine years from 1957 to 1965
• Tested if firms with unexpected increases in accounting earnings had positive abnormal returns
and firms with unexpected decreases had negative abnormal returns
Findings
• Substantial evidence, that market responds to the good and bad news during a narrow window;
on average firms announced an increase in earnings experienced positive abnormal stock
returns (roughly 7%)
• on average firms announced a decrease in earnings experienced negative abnormal stock
returns (roughly 9%)
• 85-90% of earnings announcements is anticipated by investors
Source: Ball, R., & Brown, P. (1968). An Empirical Evaluation of Accounting Income Numbers. Journal of
Accounting Research, 6(2), 159-178.
51
MAIN FINDINGS
GN= Good News Financial

statements that are
highly informative
are
• Transparent
• Precise
BN= Bad News • High Quality
Source: Ball, R., & Brown, P.

(1968). An Empirical Evaluation of
Accounting Income Numbers.
Journal of Accounting Research,
6(2), 159-178.
52
Reasons for Differential Market Response (Earnings Response Coefficient Research)

“ERC” measures the extent of a security’s abnormal market return in response to the unexpected
component of reported earnings of the firm issuing that security”.
• Beta---> Lower ERC for more higher Beta securities, Collins & Kothari (1989), Easton and
Zmijewski (1998)
• Capital Structure: Debt/ Equity ---> lower ERC for highly leveraged firm, Dhaliwal, Lee and
Fargher (1991)
• Earnings Quality:
– Earnings persistence:---> Positive relation between changes in capital expenditures and
changes in earnings and this correlates with earnings persistence , Li (2011)
– Accruals Quality: ---> Discretionary accruals if used for earnings management; ERC respond
positively to accrual quality, Francis, LaFond, Olsson and Schipper (2005)
• Growth Opportunities: ---> ERC is higher for companies with growth opportunities, before they
are recognised in net income, Collins & Kothari (1989)
53
OVERVIEW
Source: Beerbaum, D. (2016). Towards an XBRL-enabled corporate governance reporting taxonomy.: An

empirical study of NYSE-listed Financial Institutions. BoD–Books on Demand. 54
CORPORATE GOVERNANCE REPORTING
Source: Beerbaum, D. (2016). Towards an XBRL-enabled corporate governance reporting taxonomy.: An

empirical study of NYSE-listed Financial Institutions. BoD–Books on Demand. 55
A STUDY ON CORPORATE GOVERNANCE REPORTING

Disclosures on Corporate Governance
• “Foundation of any structure in Corporate Governance is disclosure. Openness is the
basis of public confidence in the corporate system and funds will flow to centers of
economic activity that inspire trust” (Sir Adrian Cadbury 2004, Corporate
Governance: A Framework for Implementation).
• General: Timely and accurate disclosure and transparency on all matters material to
company performance, ownership, and governance and relating to other issues such
as employees and stakeholders.
• Narrow: Disclosures about major shareholders, management, board and director,
officer remuneration, director and officer shareholdings” (Center for International
Analysis and Research CIFAR, 1995).
Source: Beerbaum, D. (2013). A Taxonomy of Corporate Governance Reporting Concepts. Available at

SSRN 2256179.
56

Disclosures on Corporate Governance
• Healy and Palepu (2001) changes in corporate governance reporting disclosures are
not regarded as a “random event” and are seen as interrelated with changes in firm
governance.
• “Convergence School”: Hansmann & Kraakman 2001: a convergence of corporate
governance regimes is inevitable and immanent, as the shareholder-value
maximization model would be without alternative.
• “Divergence school”, Bebchuk and Roe, 1999 Path dependence, origin of the
economy and from the country-specific corporate rules.
• Functional convergence is according to La Porta et al. (2000) mainly a market-driven
change at the firm-level.
• 2007 Markarian et al. empirical study on disclosure practice: Non-Anglo-Saxon group
converges to the Anglo-Saxon Group.

SSRN 2256179.
57

Corporate Governance Reporting Concepts
• Hypothesis 1
– Companies, which are cross-listed on the NYSE have developed similar
corporate governance reporting models and converged due to market-driven
competition, however not all companies of one country are affected by this
phenomenon.
• Hypothesis 2
– Since allowing financial reporting disclosures based on International Financial
Reporting Standards (IFRS) in 2008 by the SEC, governance reporting of non-
domestic corporations cross-listed on the NYSE indicates formal convergence.

SSRN 2256179.
58

Sample
• Sample is based on 30 foreign private issuers listed on the New York Stock Exchange
comprising of financial institutions, industrial corporations and insurance entities
• Country distribution vs. Accounting GAAP

SSRN 2256179.
59

Taxonomy of Corporate Governance Reporting Concepts
Single Unified Combined
Annual Seperate Inte- Combined
Report on grated
Form 20-F
vs. Annual
Report
Format Specific Harmo- Harmonized

nized
Number of Two One One

Reports
Degree of Low High Medium

conver
gence
Example Siemens Barclays UBS

SSRN 2256179.
60

Distribution of CGR concepts within sample
 22
Aegon
Fresenius
Elsther Group
Siemens
ABB
Hitachi
Tyco
Accenture
Deutsche Bank
ING
Kyocera
Nomuro
6
Sumitumo
National Bank Greece Barclays
Banco Santander 2 Westpac
Mitsubishi Lloyds
Banco Latinoamericano Prudentisl
De Comercio Exterior Cedit Suisse RBS
Costamare UBS HSBC
Magna International
Single Combined Unified

SSRN 2256179.
61

Country Distribution, Accounting GAAP and Total for CGR Word Frequency*
* Source: Annual Reports on Form 20-F in 2011

SSRN 2256179.
62
IS DECISION USEFULNESS A QUESTIONABLE BELIEF?

Conclusion on decision usefulness
• Accounting should provide an informative information system that link current financial
statements with future state realizations and payoffs
• Relevance and reliability are characteristics to help to predict investors investment decisions
• Issuer of Financial Information need to understand the decision problems of investors to
provide useful information
• Main objective of investors is to assess the securities expected returns and the riskiness of
these returns
• Financial statements are one of the most important sources for providing information to predict
future firm performance, which in turn help to predict future investments returns
• Besides the financial disclosures also non-financial information such as Corporate Governance
have become more important for investors
• Major accounting standard-setting bodies have adopted the decision usefulness approach,
which shows a clear recognition of the role of financial reporting in providing useful
information for investors
63
64
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INTRODUCTION Financial Information & Decision-Making - course

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DR. DIRK BEERBAUM IN BRIEF

EXPECTED RESULTS AFTER THE COURSE

HAVE THE ABILITY TO:

LECTURE 1: SEP 9 FRI, SLIDE 1

LECTURE 1: SEP 9 FRI, SLIDE 2

LECTURE 2: SEP 23 FRI, SLIDE 1

LECTURE 2: SEP 23 FRI, SLIDE 2

LECTURE 3: OCT 14 FRI, SLIDE 1

LECTURE 3: OCT 14 FRI, SLIDE 2

LECTURE 3: OCT 14 FRI, SLIDE 3

LECTURE 4: OCT 21 FRI, SLIDE 1

LECTURE 4: OCT 21 FRI, SLIDE 2

LECTURE 5: OCT 22 SAT, SLIDE 1

Assignment due dates

LECTURE 5: OCT 22 SAT, SLIDE 2

LECTURE 6: OCT 29 SAT, SLIDE 1

Assignment due date

LECTURE 6: OCT 29 SAT, SLIDE 2

ASSESSMENT (MAXIMUM 120 POINTS)

max 20 points learning diaries

COURSE DELIVERY 1 AND 2

DIARIES (MAX 20 POINTS) I, II

CLASSROOM ACTIVITIES (MAX 15 POINTS)

GROUP PRESENTATION AND REPORT (MAX 25 POINTS) I

GROUP PRESENTATION AND REPORT II

GROUP PRESENTATION AND REPORT III

GROUP PRESENTATION AND REPORT IV

EXAM (MAX 60 POINTS)

GROUP BUILDING AND COMPANY SELECTION FOR DIARIES

TOPICS FOR GROUP PRESENTATIONS (LECTURES 2 UP TO 6):

FINANCIAL ACCOUNTING THEORY

③ Moral ③ Motivate ③ Precice

Content Seeks to develop a theory that What “should” be the content of

Explain and predict accounting

Represented by Zimmermann & Watt (1978) Ijiri (1975)

Research Method Inductive → Rule-based Deductive→ Principle-based

CHARACTERIZATION OF RULE VERSUS PRINCIPLE-BASED BY DIMENSION ④

Temporal Ex-post Ex-ante

Conceptual approach IFRS US GAAP

ACCOUNTING AS A SIGNALLING DEVISE: A BAYESIAN FRAMEWORK

WHY DO FIRMS LOBBY FOR/AGAINST ACCOUNTING STANDARDS?

ROLE & RESPONSIBILITY OF THE IASB

ROLE & RESPONSIBILITY OF IASB

Reasons for Market Response

GN= Good News Financial

Source: Ball, R., & Brown, P.

Reasons for Differential Market Response (Earnings Response Coefficient Research)

Source: Beerbaum, D. (2016). Towards an XBRL-enabled corporate governance reporting taxonomy.: An

CORPORATE GOVERNANCE REPORTING

Source: Beerbaum, D. (2016). Towards an XBRL-enabled corporate governance reporting taxonomy.: An

A STUDY ON CORPORATE GOVERNANCE REPORTING

Source: Beerbaum, D. (2013). A Taxonomy of Corporate Governance Reporting Concepts. Available at

A STUDY ON CORPORATE GOVERNANCE REPORTING

Source: Beerbaum, D. (2013). A Taxonomy of Corporate Governance Reporting Concepts. Available at

A STUDY ON CORPORATE GOVERNANCE REPORTING

Source: Beerbaum, D. (2013). A Taxonomy of Corporate Governance Reporting Concepts. Available at

A STUDY ON CORPORATE GOVERNANCE REPORTING

Source: Beerbaum, D. (2013). A Taxonomy of Corporate Governance Reporting Concepts. Available at

A STUDY ON CORPORATE GOVERNANCE REPORTING