Value Relevance of Financial Statements Pre and Post Convergence with IFRS: Evidence from Taiwan

1. Pre and Post-Convergence with IFRS and Value Relevance of Financial Statements: Evidence from Two Decades’ Accounting Standard Setting in Taiwan TsingZai C. Wu, Wan-Ting Hsieh, Chun-Chan Yu*, and Hsin-TiChu 2014. 8. 5

2. Outline • Motivation & Research Question • Institutional Background • Contributions • Research Design • Empirical Results • Robustness Checks • Concluding Remarks

3. Motivation & Research Question • Most countries around the world have adopted IFRS. • Convergence is still an option (such as the U.S., Japan, and India: limited convergence). • Does the value relevance of F/S, especially before and after the convergence with IFRS have improved in Taiwanese firms?

4. Financial Accounting Standard Setter History in Taiwan (1) • The AIC (or Initial) Period, 1969–1980 • The TFAB (or Transition) Period, 1981–1983 • The TFASC Period, 1984–2012 (1) Developing Period (1984–1999) (2)IFRS-Convergence Period (2000–2012) ‧Up to 2013, TFASChas issued 41 statements of financial accounting standards (twSFAS).

5. Financial Accounting Standard Setter History in Taiwan (2) • Developing Period (1984–1999) twSFASbasically followed the U.S. GAAP. (2) IFRS-Convergence Period (2000–2012) twSFASbegan to converge with IFRS until 2012. ‧A unique setting to test the “country-specific version of IFRS” (convergence) strategy proposed by Hail et al. (2010).

6. Contributions (1) • Given the complexity of cost-benefit analysis based on individual country’s circumstances, the decision to adopt IFRS is difficult. • We provide empirical evidence for the “country-specific version of IFRS” (convergence) strategy. • The empirical evidence from Taiwan may provide implications to international standards setters and regulators.

7. Contributions (2) • We use two method to test value relevance along years. • Adjusted R2 and abnormal pricing errors measures ─strengthen our findings.

8. Research Design (1) • Price Model─Long-term relations (Feltham and Ohlson 1995) Across-sample adjusted R2 comparisons 1. Joint Value Relevance (1a) Measuring Trend in Value Relevance along Years (2a)

9. Research Design (2) (2b) S2= dummy variable representing the IFRS-Convergence Period (if the sample period is during 2000–2011, S2=1, and 0 otherwise)

10. Research Design (3) 2. Incremental Value Relevance (1b) (1c) Using Equ. (2a) and (2b) to regress Incremental Value Relevance on Time.

11. Research Design (4) • The across-sample adjusted R2 comparisons are commonly used in accounting research (Basu 1997; Collins et al. 1997; Brown et al. 1999; Francis and Schipper1999; Lev and Zarowin1999; Ball et al. 2000; Core et al. 2003; Barth et al. 2012). • R2 gives a measure of the explanatory power of an economic model only specific to a sample and the underlying population. • It is difficult to attribute different adjusted R2 to a change in the value relevance or to mere sampling differences from different population.

12. Research Design (5) Examining Abnormal Pricing Errors (Gu 2007) ‧Using the magnitude of residuals(pricing errors) directly as the indicator for explanatory power comparisons among different samples. ‧In addition,we try to control the scale effect (i.e.,high price usually produces high pricing errors).

13. Research Design (6) 1.Joint Value Relevance (1a) • Measuring Trend in Value Relevance along Years • (3a) (3b)

14. Sample (1) • Firms listed in the Taiwan Stock Exchange • Financial data from Taiwan Economic Journal (TEJ) databanks • Deleting firms in the utilities and financial service industries due to their special accounting practices • Winsorizingall variables at the 1% and 99% levels • Sample period: 1990–2011 • 1990:the first year that sample size is more than 100 complete financial data for all of our models • 2012: transition year to adopt IFRS in Taiwan

15. Sample (2) • Scenario 1—Full Sample (N=10,037) • Scenario 2—”Full Sample” minus observations of negative EPS (Collins et al. 1997) (N=8,211) • Scenario 3 —”Full Sample” minus results of year 2007-2008 (global financial crisis) (N=7,108)

16. Descriptive Statistics

17. Empirical Results ─Adjusted R2 Comparison Method (Developing: 1990-1999; Convergence: 2000-2011)

18. Patterns of Adjusted R2from Regressions of the Price Model 1990-2011 (Scenario 1, N=10,037) (1)

19. Patterns of Adjusted R2from Regressions of the Price Model 1990-2011 (Scenario 1, N=10,037) (2)

20. Empirical Results ─ Abnormal Pricing Error Method (Developing: 1990-1999; Convergence: 2000-2011)

21. Patterns of Abnormal Pricing Errorsfrom Regressions of the Price Model 1990-2011 (Scenario 1, N=10,037)

22. Robustness Checks • Short-term Relations between Stock Price and Financial Statements- the Return Model • The Cross-sectional Effects of Nonrecurring Items This problem does not result in significant influence on our original study. • Using Stock Prices on the Final Announcement Dates of Annual Financial Reports→Robust

23. Concluding Remarks • Financial reporting system is a function not only of accounting standards, but also of interpretations, auditing, incentives, and the law environments. • The empirical evidence from Taiwan may provide implications to international standards setters and regulators,especially for countries which have not decided to adopt or converge with IFRS.

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25. Q & A

26. Research Design • The abnormal pricing errors are estimated as follows: