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HAS THE ADOPTION OF THE AUSTRALIAN INTERNATIONAL
FINANCIAL REPORTING STANDARDS BEEN VALUE RELEVANT?
Tony BecisChew Ng*
Eduardo RocaGriffith University
(Working paper only. Please do not quote without permission from the authors)
Key words: International accounting harmonisation, AIFRS, value relevance, post-earnings-announcement drift, and Markov Switching Analysis
JEL classification: G14, M41
* Details of Corresponding Author:Department of Accounting, Finance and EconomicsGriffith Business SchoolGriffith UniversityNathan CampusQLD 4111Tel: (07) 3735 6492 Fax: (07) 3735 7760
HAS THE ADOPTION OF THE AUSTRALIAN INTERNATIONAL
FINANCIAL REPORTING STANDARDS BEEN VALUE RELEVANT?
Abstract
Australia adopted the international financial reporting standards in 2005 amidst
concerns as to its impact on Australian companies’ profits, balance sheets and share
prices. Only a few studies have attempted to investigate these concerns. One of those
is that of Becis, Ng and Roca (2006), which examined the impact of the Australian
International Financial Reporting Standards (AIFRS) on Australian company profits
and equity. In that study, they found that some companies were negatively affected
while others were positively impacted. Based on the same data that they used, we
extend their work by further investigating the effect of the AIFRS adoption on
company values. We perform the analysis based on a number of methods including
the recently developed and advanced econometric method that takes into account
market cycles – the Markov-regime switching model (Hamilton, 1990 and Krolzig,
1997). Despite the generally cash flow neutral impact of IFRS adoption, our results indicate
that for medium and small firms a positive relationship exists between the impact of AIFRS
on net profit after tax (NPAT) and market value. For large firms, this relationship is negative.
Our results provide evidence that the changes in accounting values arising from the
implementation of the IFRS are value relevant.
2
1. INTRODUCTION
In the lead up to the adoption of Australian International Financial Reporting
Standards (AIFRS) in 2005 users of financial reports issued by firms listed on the
Australian Stock Exchange faced a decision regarding which set of accounting
standards they would place their trust in when making investment decisions. With the
inclusion of comparative AIFRS accounting information in financial reports for the
year ending 30 June 2005 investors had the choice of basing their estimation of firm
value upon accounting numbers prepared under alternative accounting regimes – the
pre-existing Australian Generally Accepted Accounting Principles (AGAAP) and the
soon to be implemented AIFRS standards.
Australian reporting entities required to prepare financial reports in
accordance with Part 2M.3 of the Corporations Act 2001 must apply AIFRS for
annual reporting periods commencing on or after 1 January 2005. Prior to this, firms
were required to disclose for the interim and annual reporting periods ending on or
after 30 June 2004, increasingly detailed information regarding their transition to
AIFRS and the impact that adopting the new AIFRS standards was likely to have on
their reported financial performance and financial position. These disclosures were
required by AASB 1047 “Disclosing the Impacts of Adopting Australian Equivalents
to International Financial Reporting Standards”. Accounting Standard AASB 1047
was issued in April 2004.
In complying with the AASB 1047 disclosure requirements in relation to
30 June 2005 annual financial reports, many firms included in their 30 June 2005
preliminary final reports tabular reconciliations of net profit after tax (NPAT) and
shareholders’ equity determined under AGAAP and AIFRS. These quantitative
3
AIFRS reconciliations were amongst the first disclosures informing the market of the
likely quantitative impacts that the new accounting standards would have on the
financial reports of publicly listed Australian firms.
So, has the AIFRS been “value relevant”? In other words, has it impacted the
share prices of Australian companies? As noted, at the time of writing there were few
if any published studies investigating the value relevance of quantitative AIFRS
disclosures. The scarcity of research in this area is due to the relative recency of
quantitative AIFRS data. However, there have been a number of studies and surveys
conducted that investigate the impact of AIFRS on financial reports, company
earnings and shareholders’ equity.
One of the first studies in this area was performed by Jubb (2005) who
surveyed corporate AIFRS disclosures contained in annual and half-year reports for
periods ending 30 June 2004. The sample for the study was all ASX listed companies
as at 30 June 2004. Jubb’s study reveals that the main accounting changes introduced
by AIFRS relate to income tax, asset impairment, share-based payments, financial
instruments and intangibles. Jubb’s study did not focussed on quantitative
disclosures. Though in relation to such disclosures, Jubb (2005, p. 11) noted “only a
handful of companies used any quantification in their disclosures, although several
explicitly reported that there would be no material impacts”.
A study by accounting firm Ernst & Young (2005) considered the quantitative
and qualitative AIFRS disclosures contained in 30 June 2005 financial statements.
The population for the Ernst & Young study was the top 100 listed companies taken
from BRW’s 2005 Top 500 Public Companies list. The Ernst & Young study
reported that on average, firms disclosed that the transition to AIFRS was expected to
increase reported profit by 6% in the first AIFRS comparative year. Additionally,
4
Ernst & Young reported that firms expected total equity to decrease “by 15% at the
date of transition to AIFRS and by 17% at the end of the first AIFRS comparative
year”. Ernst & Young also observed that the accounting policies most impacted by
AIFRS adjustments were share based payments, goodwill amortisation, income taxes
and defined benefit plans. These ‘most impacted’ accounting policies are consistent
with those identified by Jubb (2005).
In December 2004, accounting firm KPMG (2005) surveyed fifty buy-side and
sell-side financial analysts in Sydney and Melbourne to gain an insight into how
Australian capital markets were likely to react to financial reporting under AIFRS.
The survey was conducted approximately nine months prior to the release of the
initial quantitative AIFRS impact data by 30 June balancers in 30 June 2005
preliminary final reports. KPMG (2005, p. 2) reported that the analysts surveyed
appeared to have an “overall familiarity” with new standards but lacked a “deep
understanding of their complexities and nuances”. Forty-nine percent of analysts
surveyed expected AIFRS to have some impact on market prices, and 62% indicated
that they were likely to mark down a company’s shares if they did not understand why
the company’s results looked different under AIFRS.
Importantly, almost 40% of analysts surveyed believed that market prices at
the time of the survey had not yet factored in the financial report impacts of AIFRS.
Somewhat surprisingly, only 30% of analysts surveyed believed that AIFRS would
improve investment decision making. However, this somewhat unexpected response
is understandable given that none of the analysts surveyed felt “very confident” that
they could “distinguish between variations in a company’s reported results due to a
change in the underlying business performance and those directly resulting from the
move to AIFRS” (KPMG 2005, p. 4). Significantly, the KPMG (2005, p. 6) survey
5
concluded “there is likely to be considerable confusion and market dislocation when
the first AIFRS-compliant financial reports begin entering the public domain”.
Utilising the AASB 1047 disclosures contained in the 30 June 2005
preliminary final reports of firms with a 30 June year-end, Becis, Ng and Roca (2006)
examined the impact of the adoption of the IFRS by Australia on the NPAT and
equity of Australian companies. Their analysis of the accounting data reveals that (1)
the majority of ASX 300 companies disclosed increased net profit under AIFRS
compared to AGAAP for the year ended 30 June 2005, and (2) the majority of ASX
300 companies disclosed decreased equity balances under AIFRS compared to
AGAAP as at 30 June 2004 and as at 30 June 2005.
The findings presented by the overseas literature regarding the value relevance
of alternative accounting standard disclosures are somewhat inconsistent. It has been
suggested that this inconsistency is due to the peculiarities of the various accounting
standards considered. Nonetheless, this literature provides a valuable context for the
issues considered and the tests performed in this study. Most of the overseas
literature considers the value relevance of earnings reconciliations between various
non-US domestic GAAP, IAS and US GAAP. Australian data is used in some of the
overseas literature (for example Rees 1995; Barth & Clinch 1996). However, none of
these studies focus exclusively on Australian alternative accounting standard
reconciliations.
In this paper, we extend the work of Becis, Ng and Roca (2006). Based on the
same sample data, we combine their results with share market data to determine
whether firm share market returns reacted at the time that AASB 1047 and subsequent
AIFRS disclosures were released to the market. Answering this question provides
insights regarding the value relevance of the AIFRS and AGAAP accounting
6
standards. In addressing this question, this study performs five value relevance tests.
The first two tests are relatively short window event tests that compare the cumulative
average abnormal returns (CAAR) of firms that disclosed large increases to NPAT
under AIFRS (AIFRS winners) with the CAAR of firms that disclosed small increases
or decreases to NPAT under AIFRS (AIFRS losers). The third test examines the
correlation between changes to NPAT under AIFRS and cumulative abnormal returns
(CAR). The fourth test compares the long-term cumulative average returns (CAVR)
of AIFRS winners and losers during three distinct AIFRS disclosure periods within a
forty-four month window. The final test, also utilising a long window, employs
Markov Switching Analysis to objectively identify and compare the share-market
return characteristics of AIFRS winners and losers during three similar disclosure
periods.
The results of the short window event study show that despite the transition to
AIFRS broadly having no cash flow impact, in the 22 days following the AIFRS
reconciliation announcement for the year ending 30 June 2005, firms that reported
higher NPAT under AIFRS produced cumulative abnormal returns that were up to
two percent higher than returns for firms that disclosed lower NPAT under AIFRS.
The results of the long window event study suggest that the NPAT advantage enjoyed
by firms that generally report higher earnings under AGAAP than AIFRS gradually
eroded as those firms disclosed to the market their expected position under AIFRS.
2. IMPORTANCE AND CONTRIBUTIONS OF THE STUDY
There has been substantial discussion in the financial press regarding the
suspected market impacts arising from the adoption of AIFRS (for examples see:
7
Hogan 2005; Alderton 2006; Buffini 2006; CPA Australia 2006). Furthermore, in the
lead up to the adoption of AIFRS, the Financial Reporting Council (FRC) expecting
some kind of market reaction in response to the release of quantitative AIFRS
disclosures warned “for some companies, the impact on company reporting
requirements and potentially share prices as a result of the adoption of IASB
standards will be significant. There is a need to keep investors and users fully
informed” (FRC 2005, section i).1 Whilst there has been considerable speculation
regarding the market impacts of AIFRS adoption, there is currently little, if any,
empirical analysis available to support such arguments. This study aims to address
this deficiency and inform the debate by examining whether the market did in fact
react to AIFRS disclosures, and if so, to what degree.
Furthermore, from a capital markets perspective, the adoption of AIFRS may
be somewhat less warranted if it observed that the market did not react to financial
information presented in accordance with the new standards. That is, if the market
did not react to AIFRS disclosures, then it would be difficult to argue that the new
accounting standards provided the market with new or value relevant information
(Amir et al. 1993; Rees 1995). In this respect, this study considers whether
quantitative AIFRS disclosures are meaningful numbers to investors (Kothari 2001, p.
121).
The value relevance of accounting changes has been subject to debate in the
literature ever since the term “value relevance” was coined by Amir, et al (1993).
Venkatachalam (1999, p. 317) notes that studies investigating the value relevance of
amounts reported under different accounting standards are a “starting point for further
enquiries on the usefulness of such reconciling amounts”. This study provides a
1 The FRC is a body established under the Australian Securities and Investments Commission Act 2001 that is responsible in Australia for the broad oversight of the accounting standard setting process for private, public and not-for-profit sectors (FRC 2002).
8
starting point for further Australian research into the value relevance of AIFRS
reconciliations in the same way that studies investigating the value relevance of Form
20-F reconciliations in the US provided a starting point for more direct tests of value
relevance involving the accuracy of analysts’ forecasts or the predictive ability of
earnings under alternative accounting standards.
The second contribution to the literature made by this study relates to the
determination of firm value in an Australian context. Capital market theory suggests
that firm value is equal to the present value of future cash flows. Applying this
premise suggests that the adoption of AIFRS, which is generally a cash flow neutral
change, should have little or no impact on investors’ pricing decisions. If AIFRS
disclosures are in fact associated with changes in firm value this study will provide
insights regarding the information considered by investors when pricing firms.
The third contribution that this study makes to the literature relates to market
efficiency. The efficient market hypothesis suggests that all value relevant
information is immediately incorporated into market prices. However, post
announcement drift is a characteristic exhibited by share prices when they are slow to
react to unexpected earnings or other value relevant information. Accepting that there
may be reasons for investors to reassess firm value in reaction to AIFRS disclosures
despite their cash flow neutrality, in an efficient market one would expect prices to
immediately incorporate the information contained AIFRS disclosures. In the event
that it is observed that market prices react to AIFRS disclosures, the results of this
dissertation will contribute to the literature by identifying the period of time over
which quantitative AIFRS disclosures are impounded into share market prices.
9
Finally, this paper contributes to the literature by performing a Markov
Switching Analysis (Hamilton, 1989 and Krolzig, 1997) test utilising AIFRS
reconciliations and market data. This advanced methodology is a relatively recent
development in the time series econometrics literature that allows the analysis of the
relationships of the variables to vary according to regimes (or states) of the variables.
One of the major advantages of this approach is that it does not require prior
specifications or dating of returns’ regimes. Instead, regimes and their corresponding
probabilities of occurrence are endogenously determined rather than pre-determined.
Thus, the use of the Markov switching model allows us to perform a more robust and
informative analysis of the impact of the IFRS on share prices. This paper is likely
one of the first to utilise this methodology in relation to the analysis of AIFRS
reconciliation data.
The reconciliations from AGAAP to AIFRS, which form the basis of this
study, are an important source of information for investors. It is important to
understand whether these reconciliations are value relevant, and if they are value
relevant, it is important to understand how and why these reconciliations impact
market values despite their largely cash flow neutral nature.
3. METHODOLOGY
Five tests are conducted to determine the share return performance of AIFRS
winners and losers over the short-term, medium-term and long-term. Three event
studies are conducted (for examples, see Beaver 1968, Wilson 1986and Amir et al.
1993) – one for the short-term, another one for the medium term and another one for
10
the long-term. In addition, a correlation test was also performed for the short-term,
and a Markov regime switching analysis for the long-term.
3.1 Short and Intermediate Window Tests
The short window test identifies the cumulative average abnormal returns
(CAAR) of AIFRS winners and losers using daily data for the twenty-two trading
days immediately following the release of 30 June 2005 preliminary final reports.
The intermediate window test observes the CAAR of AIFRS winners and losers for
the twenty-one weeks following the release of the 30 June 2005 preliminary final
reports. It is performed to supplement the findings of the short window test and to
gain an insight into the medium-term CAAR characteristics of AIFRS winners and
losers.
Another simple method for assessing whether quantitative AIFRS disclosures
are value relevant is to perform a correlation test. This study performs several
correlation tests to determine whether there is a relationship between changes to
NPAT under AIFRS and cumulative abnormal returns (CAR).2 The return window
for these tests span from the close of trading on the day before the event to the end of
the fifth trading day after the event.
Correlations are performed for the entire sample, and also for firms grouped
by sector and market capitalisation. These correlations are performed by using the
change in NPAT under AIFRS as a percentage of NPAT under AGAAP for the year
ending 30 June 2005.
2 Since the correlation tests involve individual firm observations, it is noted that cumulative average returns are used instead of cumulative average abnormal returns.
11
For the year ending 30 June 2005, a scatter diagram was produced plotting
sample firm AIFRS NPAT reconciliations as a percentage of AGAAP NPAT against
sample firm CAR measured from day -1 to day 5, where day 0 is the preliminary final
report release date. A six day event window was selected for this test based on the
results in Table 6 which show that the difference in CAAR of AIFRS winners and
losers reaches a relatively stable plateau approximately six days after the 30 June
2005 preliminary final reports are released to the market. A six day window also
gives the market time to react to the ostensibly ‘new’ quantitative AIFRS information
contained in 30 June 2005 preliminary reports. Rees (1995) uses a four day event
window for a similar study of reconciliations to US GAAP.
3.2 Long Window Association Test – Association between AIFRS Winners and
Losers and Long Term Returns
A long-term event study is also conducted that compares the long-term
cumulative returns of AIFRS winners and losers.3 The window for this test spans
forty-four months. It begins on 1 July 2002 and ends on 28 February 2006. During
the window, AASB 1047 required firms to release increasingly detailed disclosures
regarding their adoption of AIFRS. The AIFRS disclosure requirements during this
window can be classified into three distinct periods: pre-disclosure; qualitative
disclosure; and quantitative disclosure.
3 This test does not adjust firm returns for market returns as the period of observation for all firms begins on the same date, being 1 July 2002.
12
3.2.1 Pre-Disclosure
In the twenty-four months following the announcement of the move to AIFRS,
firms were not required by AGAAP to disclose information related to the expected or
actual impacts of the move. During this ‘pre-disclosure’ period investors were
unlikely to know with any meaningful degree of certainty whether a particular firm
would eventually be an AIFRS winner or an AIFRS loser. It is expected that changes
in firm returns during this period are not closely associated with whether firms
eventually become AIFRS winners or losers. The pre-disclosure period commenced
with the announcement to adopt AIFRS in July 2002 and ended during July 2004
when qualitative AIFRS disclosures were required by AASB 1047 to be included in
AGAAP financial reports.
3.2.2 Qualitative Disclosure
In financial reports for the year ended 30 June 2004 and the half-year ended
31 December 2004, AASB 1047 required firms to provide (1) an explanation of how
the transition to AIFRS was being managed and (2) a narrative explanation of the key
differences in accounting policies that were expected to arise from the adoption of
AIFRS (AASB 1047, 4.1). During this ‘qualitative disclosure’ period investors were
provided with qualitative information and an indication of the components of the
financial report that would be subject to quantitative changes. Based on these
qualitative disclosures, it is likely that analysts and sophisticated investors were able
to identify industries and firms that would eventually be AIFRS winners and AIFRS
losers. This period commenced during July 2004 and ended during July 2005.
13
3.2.3 Quantitative Disclosure
In financial reports for the year ended 30 June 2005, AASB 1047 required
firms to disclose data regarding the expected qualitative and quantitative impacts of
the adoption of AIFRS. During this ‘quantitative disclosure’ period firms were
required to identify specific components of the financial report that were expected to
be impacted by the adoption of AIFRS and also the size of any impact. This is the
first disclosure period in which ordinary investors could distinguish AIFRS winners
from AIFRS losers. This period commenced during July 2005 and ended with the
release of the first half-year financial reports prepared under AIFRS during January
2006.
3.3 Markov Switching Analysis
The final test assesses the value relevance of qualitative and quantitative
AIFRS disclosures by comparing the systematic risk or return characteristics vis-à-vis
the market of firms across three discrete disclosure periods. This test uses Markov
Regime Switching Analysis (Hamilton, 1990, and Krolzig, 1997) to perform this
assessment. The Markov Switching Analysis objectively determines the probability
of each firm’s return behaviour being in one of three “states” (or in Markov Switching
Analysis terminology, “regimes”) in each of three disclosure periods. The duration of
each regime is also determined. It then calculates the systematic risk of each firm in
each regime or cycle (for a detailed discussion of the Markov Regime Switching
methodology, see Roca and Wong, forthcoming). The Markov Regime Switching
14
approach therefore allows us to take into account market cycles. The periods used for
this test differ slightly from those used for the long window association test.
The window for this test spans 1 January 2000 to 28 February 2006. The three
periods used for this test are as follows. The first period called ‘pre-announcement’
precedes the announcement of the adoption of AIFRS. This period begins on 1
January 2000 and ends on 2 July 2002. The second period called ‘qualitative
disclosure’ spans the time from the announcement to adopt AIFRS until just before
the release of the first AIFRS quantitative impact data. This period begins 3 July
2002 and ends 31 July 2005. The third period called ‘quantitative disclosure’ spans
the time from the release of the first AIFRS quantitative impact data until the
commencement of research for this study. This final period begins on 1 August 2005
and ends on 28 February 2006.
3.4 Sample Description
The population for this study is the ASX 300 as at 28 September 2005 which
represented approximately 95% of the total market capitalisation of the ASX at that
date. The market capitalisation of firms in the ASX 300 ranged from $246 million to
$73.4 billion.4
The AIFRS reconciliation data used for this study was primarily collected
from AASB 1047 disclosures contained in 30 June 2005 preliminary final reports.
Generally, firms released their 30 June 2005 preliminary final reports within a two
month window – 1 August 2005 to 30 September 2005. Some firms did not include
AASB 1047 disclosures in their preliminary final report. Where a firm’s AASB 1047
4 The inclusion of medium and smaller sized firms improves the relevance of this study to firms of all sizes (Rees 1995, p. 307).
15
disclosures was made available via other means, such as on the firm’s website or in
the entity’s annual report, that AASB 1047 source was utilised. All monetary data in
this study, including financial results and share price data, is stated in Australian
dollars (AUD). Where an entity’s financial report or AIFRS reconciliations were not
issued in AUD, for example BHP, the relevant amounts were translated to AUD using
the 30 June 2005 exchange rate available from the Australian Taxation Office
website.
Of the 300 firms considered for inclusion in the final sample, fifteen firms did
not report under AGAAP and were excluded from the sample. Also excluded were
ten firms that were either publicly listed for the first time within the twelve months
preceding 30 June 2005 or that underwent other structural changes such as a mergers
or de-mergers during that time. One hundred and two firms with a year-end other
than 30 June 2005 were also excluded from the final sample. This resulted in 173
firms that could potentially provide AIFRS reconciliation data that would be suitable
for the study. Table 1 presents a summary of the firms excluded from the ASX 300 to
arrive at the final sample.
[INSERT TABLE 1 ABOUT HERE]
Table 2 presents a summary of the AIFRS NPAT and equity reconciliations
provided by sample firms. Of the 173 firms included in the final sample, 113 firms
(65%) provided a reconciliation of NPAT at 30 June 2005, 71 firms (41%) provided a
reconciliation of equity at 30 June 2004 and 101 firms (59%) provided a
reconciliation of equity at 30 June 2005.
16
[INSERT TABLE 2 ABOUT HERE]
To provide an understanding of the number of aggregate reconciliations issued
by each firm, of the 173 sample firms, 50 firms provided no aggregate reconciliations,
16 firms provided only one aggregate reconciliation, 51 firms provided two aggregate
reconciliations, and 56 firms provided all three aggregate reconciliations. Therefore,
where a firm issued reconciliation data it was likely to issue two or three of the
reconciliations of interest.
Share market return data for the ASX 300 entities was obtained from the
Datastream database. The precision of the Datastream return data was checked by
manually calculating the return for one entity based on its price and dividend history.
The preliminary final report dates used in this study were initially sourced
from the announcement date page on the Aspect Huntley web site. However, it was
found that these dates were often not the actual dates that preliminary final reports
were made public via ASIC. Therefore, additional confirmation of the actual ASIC
announcement date and time was necessary.5 The ASIC announcement date and time
information was ultimately sourced from the Aspect Huntley website using the
advanced search feature.
A check was performed regarding whether preliminary final reports were
released after market close (i.e., after 4pm Sydney time). This was necessary to
determine whether the day that a firm’s preliminary final report was released was the
first day that the market had an opportunity to react to the AIFRS disclosures
contained in the report. For firms that released their preliminary final reports after
market close their event day was considered to be the next ASX trading day. Of the
5 Rees (1995, p. 303) notes that “identifying the specific date that a particular item becomes public knowledge is critical when conducting event studies”.
17
sample firms that provided AIFRS reconciliations, thirteen (7.5%) released their
preliminary final report after 4pm.
Some firms did not issue financial results by the preliminary final report due
date. Where these entities released AIFRS reconciliations on a later date, that date
was used as the event date.
Table 3 presents a summary of the sample firms grouped by GICS sector; the
number of aggregate reconciliations observed for each sector; and the percentage of
firms in each sector that provided at least one of the three aggregate reconciliations of
interest. The sample firms operate within 10 sectors. The three sectors most
represented in the sample are Financial, Industrials and Consumer Discretionary.
Firms within these sectors represent 62% of all sample firms and contribute 61% of
all aggregate AIFRS reconciliations. The three sectors with the lowest incidence of
firms providing aggregate reconciliations data are Telecommunication, Information
Technology and Utilities. Firms in these sectors represent 8% of all sample firms and
contribute 10% of all aggregate AIFRS reconciliations.
[INSERT TABLE 3 ABOUT HERE]
Table 4 presents the sample firms categorised by market capitalisation bands.
Eighty- six percent of large firms (i.e., ASX 1-50), 79% of medium firms (i.e., ASX
51-100), and 67% of small firms (i.e., ASX 101-300) provided at least one aggregate
AIFRS reconciliation.
[INSERT TABLE 4 ABOUT HERE]
18
On average, larger firms disclosed more aggregate AIFRS reconciliation data
than smaller firms did. This difference is likely due to the extra resources available to
larger firms and more intense analyst scrutiny.
4. Analysis of Results
4.1 Aggregate Reconciliation Descriptive Statistics
Table 5 presents descriptive statistics of aggregate AIFRS reconciliation data
extracted from sample firm 30 June 2005 preliminary final reports. The population
for this data is the ASX 300. This data is used to provide evidence of whether AIFRS
disclosures are value relevant.
[INSERT TABLE 5 ABOUT HERE]
Overall, for the year ended 30 June 2005, sixty-five percent of sample firms
reported that NPAT would be higher under AIFRS than under AGAAP. Table 5
shows that for the year ended 30 June 2005, on average, firms reported that median
NPAT was $1.577 million higher under AIFRS than under AGAAP and mean NPAT
was $10.932 million higher under AIFRS than under AGAAP. As a percentage of
AGAAP NPAT, median and mean NPAT were approximately 4.2% and 7.1% higher
under AIFRS than under AGAAP, respectively. The frequency distribution is right-
skewed indicating that most sample firms reported higher NPAT under AIFRS than
under AGAAP.
19
On the other hand, 79% of sample firms reported that equity as at 30 June
2004 would be lower under AIFRS than under AGAAP. Table 5 shows that as at 30
June 2004, on average, sample firms disclosed that median equity was $12.928
million lower under AIFRS than under AGAAP and that mean equity was $139.86
million lower under AIFRS than under AGAAP. As a percentage of AGAAP equity
as at 30 June 2004, median and mean equity were approximately 3.6% and 7.1%
lower under AIFRS than under AGAAP, respectively.
Finally, 65% of sample firms reported that equity as at 30 June 2005 was
lower under AIFRS than under AGAAP Table 5 shows that as at 30 June 2005, on
average, firms reported that median equity was $4.541 million lower under AIFRS
than under AGAAP and that mean equity was $169.954 million lower under AIFRS
than under AGAAP. As a percentage of AGAAP equity as at 30 June 2005, median
and mean equity were approximately 1.1% and 5.3% lower under AIFRS than under
AGAAP, respectively.
4.2 Short Return Window Event Test Results
Table 6 presents statistics of the cumulative abnormal returns of AIFRS
winners and losers in the twenty-two trading days (approximately one calendar
month) following the release of 30 June 2005 preliminary final reports. The results of
this test are presented graphically in Figure 1. Figures 2, 3 and 4 show the CAAR of
winners and losers during this period grouped by large, medium and small market
capitalisation.
20
[INSERT TABLE 6 ABOUT HERE]
[INSERT FIGURE 1 ABOUT HERE]
[INSERT FIGURE 2 ABOUT HERE]
[INSERT FIGURE 3 ABOUT HERE]
[INSERT FIGURE 4 ABOUT HERE]
With respect to all firms within the ASX 300 that provided reconciliation data,
Table 6 shows that the CAAR of AIFRS winners exceeds the CAAR of AIFRS losers
in twenty-one out of the twenty-two days immediately following the release of 30
June 2005 final preliminary reports. The largest difference between the CAAR of
AIFRS winners and losers was 2.0% on day six. The largest difference between the
CAAR of the biggest AIFRS winners (firms with AIFRS NPAT increases in the
fourth quartile) and the biggest AIFRS losers (firms with AIFRS increases/decreases
in the first quartile) was 2.5% also on day six. On days sixteen and seventeen the
biggest AIFRS winners had CAAR that were 3.7% higher than the market return.
The short window test results show that the relationship between changes to
NPAT under AIFRS and market returns is positive for the ASX 300 as a whole,
however when considered by firm size, the relationship is negative for large firms and
positive for medium and small firms.6
Furthermore, the difference between the CAAR of AIFRS winners and losers
suggests that AIFRS NPAT reconciliations are value relevant. That is, firm CAAR
seem to vary in proportion to the impact of AIFRS on NPAT. Therefore, it is
suggested that generally cash flow neutral AIFRS NPAT disclosures are value
relevant.
6 Amir (1993, p. 262) notes the inclusion of observations of financial institutions may confound results produced by this type of test.
21
As mentioned the largest difference between the CAAR of AIFRS winners
and losers was 2.0% on day six. This suggests that it took the market approximately
six days (the drift period) to incorporate into prices the value relevant information
contained in 30 June 2005 preliminary final reports. Notably, the difference between
the CAAR of AIFRS winners and losers was relatively stable for the sixteen trading
days immediately following the drift period (Days 7 to 22). Therefore, it is concluded
that the cumulative average abnormal returns of AIFRS winners and losers exhibit
post-announcement drift.
4.3 Intermediate Return Window Event Test Results
This test observes the CAAR of AIFRS winners and losers for the twenty-one
weeks following the release of the 30 June 2005 preliminary final reports. It is
performed to supplement the findings of the short window test and to gain an insight
into the medium-term CAAR characteristics of AIFRS winners and losers. The
results of this test are presented in Table 7. A graphical representation of the results is
provided in Figure 5. The weekly return statistics were derived by averaging the daily
average abnormal returns in each week. Table 7 shows that the CAAR of AIFRS
winners exceeded the CAAR of AIFRS losers in seventeen out of the twenty-one
weeks immediately following the release of 30 June 2005 preliminary reports. The
largest difference between the cumulative average abnormal returns of AIFRS
winners and losers was 3.1% in week fourteen.
[INSERT TABLE 7 ABOUT HERE]
22
[INSERT FIGURE 5 ABOUT HERE]
The largest positive difference between the CAAR of the biggest AIFRS
winners (fourth quartile) and the biggest AIFRS losers (first quartile) was 2.6% in
week eight. Notably, in some weeks the group of firms that were the second biggest
losers (second quartile) had CAAR that was lower than the group of firms that were
the biggest AIFRS losers (first quartile). During week four the biggest AIFRS
winners (fourth quartile) have cumulative average returns that were 3.2% higher than
the market return.
Overall, the results of the intermediate window test are consistent with the
results of the short window test. The following points are noted. First, the post
announcement divergence between the CAAR of AIFRS winners and losers is clearly
observable suggesting that AIFRS NPAT disclosures are value relevant. Second, the
CAAR of AIFRS winners are higher than those of AIFRS losers, suggesting that
AIFRS NPAT changes and CAAR are positively related. Third, the intermediate
window results show that the post announcement divergence between the CAAR of
AIFRS winners and losers persists for approximately 95 days (see Figure 5).
4.4 Correlation Test Results
4.4.1 Correlation between Cumulative Abnormal Returns and NPAT
Reconciliations as a Percentage of AGAAP NPAT
For the year ending 30 June 2005, a scatter diagram was produced plotting
sample firm AIFRS NPAT reconciliations as a percentage of AGAAP NPAT against
23
sample firm CAR measured from day -1 to day 5, where day 0 is the preliminary final
report release date. A six day event window was selected for this test based on the
results in Table 6 which show that the difference in CAAR of AIFRS winners and
losers reaches a relatively stable plateau approximately six days after the 30 June
2005 preliminary final reports are released to the market. A six day window also
gives the market time to react to the ostensibly ‘new’ quantitative AIFRS information
contained in 30 June 2005 preliminary reports. Rees (1995) uses a four day event
window for a similar study of reconciliations to US GAAP.
An examination of the initial scatter diagram revealed a number of outliers.
Outliers with values that were more than ± three standard deviations from their
respective mean were removed from the data before performing the Pearson’s
product-moment correlation analysis and producing a second scatter diagram.
[INSERT FIGURE 6 ABOUT HERE]
A review of the resulting scatter diagram reveals that most observations fall
within the upper-right quadrant indicating that sample firms with positive aggregate
AIFRS NPAT reconciliations generally produced positive CAR over the return
window period. For this outlier adjusted sample, over the observation period there
was a slight correlation between AIFRS NPAT reconciliations (expressed as a
percentage of NPAT under AGAAP) and CAR (r = 0.0916).
24
4.4.2 Correlation by Firm Size
A similar correlation test was also performed for sample firms grouped by
market capitalisation. This analysis showed that the correlation between CAR and
AIFRS NPAT changes as a percentage of AGAAP NPAT was negative for large
firms (r = -0.0771). However, the correlation was positive for medium firms (r =
0.1384) and small firms (r = 0.0630). These results support the graphical data
presented in Figures 2, 3 and 4. It can be seen that large firm returns reacted
differently to generally cash flow neutral AIFRS adoption disclosures than medium
and small firms. This may be due to the larger analyst following enjoyed by large
firms.
4.43 Correlation by Sector
A further correlation test was performed for sample firms grouped by sector.
The results are presented in Table 8. This analysis shows that the correlation between
CAR and aggregate AIFRS NPAT changes as a percentage of AGAAP NPAT is
positive for five out of nine sectors.
[INSERT TABLE 8 ABOUT HERE]
4.5 Long Window Association Test Results
Table 9 presents the cumulative return performance of AIFRS winners and
losers relative to the mean cumulative return performance of all sample firms. The
25
window for this test spans the forty-four months commencing with the announcement
on 3 July 2002 of the decision to adopt AIFRS and ending with the issue of the first
AIFRS half-year financial reports in February 2006. The return results during this
window are grouped into three disclosure periods: pre-disclosure, qualitative
disclosure and quantitative disclosure. Table 9 shows that the cumulative returns of
AIFRS losers were lower than the cumulative returns AIFRS winners in twenty-four
months out of the forty-four month observation window (56%).
The data in the Table 9 is derived as follows. The cumulative return of each
firm is determined for the period starting 3 July 2002 and ending at the end of the
month being tested. The mean of the cumulative returns of all sample firms is also
determined for this period. These results are compared. For example, in the test for
Jul 02, it was found that 59% (39%) of AIFRS losers (winners) had a cumulative
return that was below the mean of the cumulative returns of all sample firms. By
necessity, for the same period, 41% (61%) of AIFRS losers (winners) had a
cumulative return that was above the mean of the cumulative returns of all sample
firms. In this manner, the cumulative return performance of AIFRS winners and
losers relative to the cumulative returns of all sample firms was identified for each
month in the observation period.
[INSERT TABLE 9 ABOUT HERE]
Considered on a “disclosure period” basis, during the pre-disclosure period
AIFRS losers had lower cumulative returns than AIFRS winners in eleven out of
twenty-five months (44%), during the qualitative disclosure period AIFRS losers had
26
lower cumulative returns in eight out of twelve months (67%), and during the
quantitative disclosure period AIFRS losers had lower cumulative returns than AIFRS
winners in five out of six months (83%).
Overall, these ‘disclosure period’ based results suggest that the cumulative
returns of AIFRS losers progressively deteriorated in the lead up to the adoption of
AIFRS relative to the mean of the cumulative returns of all sample firms. It is
suggested that this relative deterioration occurs in response to the increasingly
detailed information released by AIFRS losers to the market disclosing the negative
impact that AIFRS would have on their reported financial performance.
In summary, Table 9 shows that the relative return performance of AIFRS
winners and losers across the disclosure periods is not the same. The cumulative
returns of AIFRS losers are relatively better in the pre-disclosure period when little
AIFRS information was available, whilst the cumulative returns of AIFRS winners
are relatively better in the quantitative disclosure period when the market is more
aware of the expected quantitative impacts of AIFRS. Therefore, it is concluded that
there is no association between AIFRS NPAT reconciliations and long term
cumulative returns. For the same reasons, it is also concluded that the Cumulative
returns during the three disclosure periods are not associated with AIFRS NPAT
changes.
4.6 Markov Switching Analysis Results
Table 10 presents Markov Switching Analysis regime probabilities for sample firms.
The window for this test commences 1 January 2000 and ends on 28 February 2006.
The test results show the regime probabilities for AIFRS winners and losers during
27
the three disclosure periods. Similar to the long window association test, the
observation window is grouped into three disclosure periods: pre-announcement (as
opposed to pre-disclosure in long window association test), qualitative disclosure and
quantitative disclosure.
[INSERT TABLE 10 ABOUT HERE]
The regime probabilities in Table 10 show that in the pre-announcement period
AIFRS winners were classified by the Markov Switching Analysis as being in the
high growth regime for a lesser amount of time (6.0%) than AIFRS losers (7.9%).
Similarly, in the qualitative disclosure period AIFRS winners were classified as being
in the high growth regime for a lesser amount of time (17.3%) than AIFRS losers
(18.5%). However, in the quantitative disclosure period AIFRS winners were
classified as being in the high growth regime for a greater amount of time (18.2%)
than AIFRS losers (15.6%). These statistics show that in the period following the
disclosure of quantitative AIFRS information the returns of AIFRS winners exhibited
high growth characteristics for a greater amount of time than the returns of AIFRS
losers which is a reversal of the situation that existed in both the pre-announcement
and qualitative disclosure periods.
In relation to time spent in the recession regime, in the pre-announcement
period AIFRS winners were classified as being in the recession regime for a greater
amount of time (30.3%) than AIFRS losers (26.7%). Similarly, in the qualitative
disclosure period AIFRS winners were classified as being in the recession regime for
a greater amount of time (18.2%) than AIFRS losers (17.3%). However, in the
quantitative disclosure period AIFRS winners were classified as being in the recession
28
regime for a lesser amount of time (23.8%) than AIFRS losers (27.2%). These
statistics show that in the period following the release of quantitative AIFRS
information the returns of AIFRS winners exhibited recessionary characteristics for a
lesser amount of time than the returns of AIFRS losers. Again, this is a reversal of the
situation that existed in both the pre-announcement and qualitative disclosure periods.
In summary, the Markov Switching Analysis provides objective evidence that
following the release of 30 June 2005 AASB 1047 disclosures the share market
returns of AIFRS winners were more ‘bull-like’ (i.e., high-growth) and less ‘bear-
like’ (i.e., recessionary) than the market returns of AIFRS losers. This is a reversal of
the return characterisations for these groups that existed prior to the release of
quantitative AIFRS disclosures. If the return characteristics of AIFRS winners and
losers were unrelated to the expected impact of AIFRS on those firms, the relative
regime probabilities of AIFRS winners and losers should be similar in any given
disclosure period. This is not the case. Therefore, it is concluded that changes to
return characteristics (i.e., regime probabilities) of AIFRS winners and losers across
disclosure periods will be uniform and unrelated to the expected impact of AIFRS on
NPAT.
5. Summary and Conclusions
This paper investigated the impact of the adoption of AIFRS on market values.
Five empirical tests investigating the value relevance of qualitative and quantitative
AIFRS disclosures were conducted. The tests also examined the relative market
performance of AIFRS winners and losers over short, intermediate and long windows.
29
The tests in this paper are motivated by the Australian share market’s buoyant
behaviour surrounding the initial release of quantitative AIFRS information.
Particularly of interest was whether share market returns were being driven by
disclosures of increased NPAT under AIFRS. However, assuming that the share
market is efficient, intuition suggests that disclosures of increased earnings under
AIFRS alone should not drive market returns higher without related increases to
underlying cash flows. Despite the lack of underlying changes to cash flow, the test
results show that the share market performance of AIFRS winners consistently
exceeded that of AIFRS losers over the following periods: (1) the twenty-two trading
days immediately following the release of quantitative AIFRS data; (2) the twenty-
one trading weeks immediately following the release of quantitative AIFRS data, and
(3) the period beginning prior to the announcement to adopt AIFRS and ending six
months after the release of quantitative AIFRS data. These results are supported by
an objective Markov Switching Analysis test.
Overall, the results suggest that AIFRS NPAT disclosures are value relevant.
This finding is consistent with those of Amir, Harris and Venuti (1993) and Rees
(1995) who, in studies involving reconciliations to US GAAP from non-US GAAP,
found a positive relationship between aggregate alternative accounting standard
reconciliations and market-adjusted returns.
The test results in this study suggest that the positive impact of AIFRS on
NPAT has flowed through to the security values of medium and small firms.
Uncertainty exists regarding why investors in these firms have apparently reacted to
reports of increased earnings under AIFRS that are broadly unaccompanied by similar
increases to underlying cash flows. Market values of large firms are seemingly
unaffected by reports of higher NPAT under AIFRS. The results of this study leave
30
open the question of whether the market’s overall positive reaction following the
release of quantitative AIFRS disclosures is due to: (1) earnings being misstated under
AGAAP and therefore being more accurate under AIFRS; (2) the market being
inefficient and unduly reacting to cash flow neutral AIFRS earnings information; or
(3) some other reason. Given these possibilities, it is suggested that quantitative
AIFRS NPAT disclosures of medium and small firms are positively related to changes
in market value as these firms have smaller analyst followings and are therefore more
open to the influence of AIFRS disclosures. This paper provides a basis for further
investigations regarding this issue.
The inclusion of AIFRS comparatives in 30 June 2005 preliminary final
reports presents researchers with a unique data set that can be used to study the
market’s reaction to alternative accounting information in an Australian context. In
summary, the test results presented in this dissertation show that AIFRS winners
generated higher market returns than AIFRS losers following the release of
quantitative AIFRS data. This finding is important for several reasons. First, it
suggests that a naive trading strategy based on cash flow neutral AIFRS earnings
results would have generated cumulative abnormal returns of up to two and a half
percent. Second, it suggests that quantitative AASB 1047 disclosures are value
relevant which in turn implies that the market believes that AIFRS produces higher
quality accounting information than AGAAP.
Possibilities for further research arising from the discussions in this
dissertation include the following. First, due to the novelty of AIFRS disclosures,
further research could investigate whether the market takes longer to react to earnings
surprises stemming from AIFRS disclosures than from AGAAP disclosures. For
example, an analysis of the post-announcement drift durations following AGAAP and
31
AIFRS earnings surprises could be undertaken. Second, research could investigate
whether the accuracy of analyst’s forecasts improves following the adoption of
AIFRS. This would provide additional evidence regarding the quality of the new
standards relative to AGAAP.
32
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Beaver, W. 1968, The information content of annual earnings announcements,
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36
TABLE 1
Sample Firms: Potential AIFRS Reconcilers:
Extracted from 30 June 2005 Preliminary Final Reports
Population – ASX 300 at 28 September 2005 300— Firms that do not disclose under AGAAP 15— Firms not listed for twelve months or that were restructured 10— Firms that do not have a 30 June 2005 year end 102Total sample firms 173
TABLE 2
Sample Firms: Actual AIFRS Reconcilers:
Extracted from 30 June 2005 Preliminary Final Reports
NPAT30 June 2005
Equity1 July 2004
Equity30 June 2005
Total sample firms 173 173 173— No Reconciliation 60 102 71Total Aggregate Reconciliations
113 71 102
Reconciliation Change— AIFRS Increase 72 9 30— AIFRS Decrease 39 56 66— No Change 2 6 6Total Aggregate Reconciliations
113 71 102
37
TABLE 3
AIFRS Reconciliations by Sector:
Extracted from 30 June 2005 Preliminary Final Reports
Sector Firms Sum of Aggregate NPAT and Equity Reconciliations
Percentage of Firms Providing
One or More Reconciliation
Consumer Discretionary
26 49 0.77
Consumer Staples 7 13 0.71Energy 10 16 0.80Financials 53 86 0.72Health Care 13 18 0.69Industrials 29 40 0.59Information Technology
5 10 0.80
Materials 21 36 0.67Telecommunication 3 7 1.00Utilities 6 11 0.83
Total 173 Total 286 Ave 0.71
TABLE 4
AIFRS Reconciliations by Market Capitalisation:
Extracted from 30 June 2005 Preliminary Final Reports
MarketCapitalisationBand
Firms Observations(Aggregate NPAT and
Equity Reconciliations)
Percentage of Firms Providing
Reconciliations
ASX 1–50 (Lge) 22 45 0.86ASX 51–100 (Med) 28 48 0.79ASX 101–300 (Sml)
123 193 0.67
Total 173 Total 284 Ave 0.71
38
TABLE 5
Summary Statistics for Aggregate AIFRS Reconciliations of All Sample Firms:
Extracted from 30 June 2005 Preliminary Final Reports
Median Mean(Ave)
Standard Deviation
First Quartile
Third Quartile
Number of Observations
∆N 1.577 10.932 93.338 –0.875 14.099 113 ∆N/N 4.2% 7.1% 68.2% –2.5% 20.6% 113 ∆N/E05 0.6% 0.8% 3.8% –0.6% 2.4% 113 ∆E04 –12.928 –139.860 419.610 –81.493 –0.500 71 ∆E04/E04 –3.6% –7.1% 17.9% –9.7% –0.2% 71 ∆E05 –4.541 –169.954 781.220 –49.827 0.904 102 ∆E05/E05 –1.1% –5.3% 19.9% –7.5% 0.5% 102
∆Nis the change in NPAT under AIFRS (compared to NPAT under AGAAP) for the year ended 30 June 2005 (‘millions).
∆N/Nis the change in NPAT under AIFRS for the year ended 30 June 2005 expressed as a percentage of AGAAP NPAT for the year ended 30 June 2005.
∆N/E5is the change in NPAT under AIFRS for the year ended 30 June 2005 expressed as a percentage of AGAAP equity at 30 June 2005.
∆E04 is the change in equity under AIFRS at 30 June 2004 (‘millions).
∆E04/E04is the change in equity under AIFRS at 30 June 2004 expressed as a percentage of AGAAP equity at 30 June 2004.
∆E05 is the change in equity under AIFRS at 30 June 2005 (‘millions).
∆E05/E05is the change in equity under AIFRS at 30 June 2005 expressed as a percentage of AGAAP equity at 30 June 2005.
39
TABLE 6
Cumulative Average Abnormal Returns for the Twenty Two Trading Days following
the Release of 30 June 2005 Preliminary Final Reports (Short Window)
Trading Day
All SampleFirms
AIFRS Losers
AIFRS Winners
W +/- L 1st
Quartile2nd
Quartile3rd
Quartile4th
Quartile
1 0.008 0.007 0.008 0.001 0.005 0.012 0.004 0.0112 0.010 0.003 0.013 0.010 (0.001) 0.017 0.003 0.0193 0.013 0.007 0.015 0.008 0.002 0.022 0.004 0.0224 0.012 0.005 0.016 0.011 0.004 0.017 0.008 0.0205 0.015 0.002 0.021 0.019 0.002 0.019 0.017 0.0216 0.018 0.004 0.025 0.020 0.004 0.022 0.019 0.0287 0.018 0.008 0.023 0.015 0.012 0.020 0.015 0.0278 0.016 0.005 0.022 0.016 0.007 0.021 0.010 0.0279 0.016 0.005 0.022 0.017 0.006 0.019 0.013 0.02410 0.014 0.003 0.020 0.017 0.006 0.013 0.012 0.02411 0.016 0.005 0.023 0.017 0.007 0.013 0.014 0.03012 0.014 0.002 0.021 0.019 0.006 0.010 0.013 0.02713 0.015 0.007 0.020 0.014 0.012 0.008 0.010 0.03014 0.016 0.005 0.022 0.017 0.012 0.008 0.010 0.03215 0.019 0.011 0.023 0.012 0.020 0.012 0.011 0.03416 0.020 0.013 0.024 0.011 0.022 0.011 0.011 0.03717 0.019 0.011 0.024 0.014 0.018 0.013 0.008 0.03718 0.017 0.011 0.022 0.011 0.018 0.010 0.007 0.03319 0.016 0.008 0.020 0.012 0.015 0.008 0.006 0.03420 0.016 0.012 0.020 0.008 0.018 0.007 0.003 0.03521 0.015 0.014 0.017 0.002 0.023 0.005 0.002 0.03022 0.018 0.020 0.019 -0.001 0.027 0.008 0.007 0.029
40
TABLE 7
Cumulative Average Abnormal Returns for the Twenty One Weeks following the
release of 30 June 2005 Preliminary Final Reports (Intermediate Window)
Trading Week
All SampleFirms
AIFRS Losers
AIFRS Winners
W +/- L 1st
Quartile2nd
Quartile3rd
Quartile4th
Quartile
1 0.011 0.005 0.014 0.010 0.009 0.001 0.019 0.017 2 0.017 0.005 0.022 0.017 0.011 0.003 0.032 0.020 3 0.016 0.006 0.022 0.016 0.015 -0.006 0.029 0.025 4 0.018 0.011 0.022 0.011 0.018 -0.002 0.021 0.032 5 0.017 0.019 0.017 -0.001 0.025 -0.002 0.019 0.025 6 0.013 0.019 0.011 -0.008 0.017 0.004 0.010 0.021 7 0.009 0.003 0.014 0.010 0.003 0.001 0.010 0.023 8 0.007 -0.003 0.015 0.017 0.000 -0.010 0.012 0.026 9 0.005 -0.005 0.013 0.018 0.005 -0.023 0.013 0.024 10 0.008 -0.002 0.016 0.018 0.012 -0.026 0.020 0.024 11 0.003 -0.005 0.010 0.015 0.010 -0.025 0.014 0.012 12 -0.005 -0.017 0.004 0.021 0.007 -0.042 0.010 0.003 13 -0.011 -0.026 0.001 0.027 -0.003 -0.049 0.009 -0.001 14 -0.015 -0.033 -0.002 0.031 -0.010 -0.044 0.005 -0.010 15 -0.017 -0.034 -0.004 0.030 -0.013 -0.044 0.004 -0.015 16 -0.016 -0.031 -0.005 0.025 -0.004 -0.046 0.000 -0.016 17 -0.013 -0.020 -0.006 0.013 0.010 -0.041 -0.002 -0.020 18 -0.015 -0.016 -0.011 0.005 0.015 -0.037 -0.014 -0.024 19 -0.015 -0.015 -0.012 0.003 0.013 -0.037 -0.013 -0.023 20 -0.014 -0.007 -0.014 -0.007 0.023 -0.039 -0.013 -0.026 21 -0.017 -0.006 -0.019 -0.013 0.025 -0.045 -0.012 -0.035
41
TABLE 8
Correlation by Industry of Aggregate AIFRS NPAT Reconciliations and Cumulative Average
Abnormal Returns
Sector n ∆N/N R rConsumer Discretionary 18 0.0689 0.0313 0.1113 Consumer Staples 5 0.3876 –0.0092 0.3398 Energy* 7 –0.2282 0.0192 –0.1549 Financials* 35 0.1500 0.0080 0.1114 Health Care 8 0.1478 0.0351 0.7654 Industrials* 15 0.0555 0.0315 –0.3156 Information Technology 4 0.1703 –0.0025 0.1787 Materials* 10 –0.3028 0.0218 –0.2068 Telecommunication 2 0.7731 0.0694 - Utilities 5 0.0620 –0.0085 –0.1858
n is the number of NPAT reconciliation observations for the industry.
∆N/Nis the average change in NPAT under AIFRS for the year ended 30 June 2005 expressed as a percentage of AGAAP NPAT for the year ended 30 June 2005.
Rthe market–adjusted return from day -1 to day 5, where day 0 is the preliminary final report release date.
ris the correlation coefficient. Correlation only shown for industries with three or more observations.
* one outlier removed from this industry.
42
TABLE 9
Long Window Relative Cumulative Returns Surrounding the Release of Quantitative AIFRS Disclosures: July 2002 to January 2006
Below Mean Cumulative Returns Above Mean Cumulative ReturnsMonth Losers Winners Lowest Losers Winners HighestPre-Disclosure period:Jul 02 0.59 0.39 L 0.41 0.61 WAug 02 0.63 0.54 L 0.38 0.46 WSep 02 0.75 0.44 L 0.25 0.56 WOct 02 0.59 0.38 L 0.41 0.62 WNov 02 0.63 0.41 L 0.38 0.59 WDec 02 0.63 0.43 L 0.38 0.57 WJan 03 0.69 0.46 L 0.31 0.54 WFeb 03 0.63 0.48 L 0.38 0.52 WMar 03 0.66 0.49 L 0.34 0.51 WApr 03 0.69 0.57 L 0.31 0.43 WMay 03 0.63 0.59 L 0.38 0.41 WJun 03 0.63 0.66 W 0.38 0.34 LJul 03 0.69 0.70 W 0.31 0.30 LAug 03 0.72 0.72 W 0.28 0.28 LSep 03 0.69 0.79 W 0.31 0.21 LOct 03 0.69 0.75 W 0.31 0.25 LNov 03 0.69 0.79 W 0.31 0.21 LDec 03 0.63 0.79 W 0.38 0.21 LJan 04 0.69 0.80 W 0.31 0.20 LFeb 04 0.69 0.75 W 0.31 0.25 LMar 04 0.63 0.75 W 0.38 0.25 LApr 04 0.66 0.70 W 0.34 0.30 LMay 04 0.66 0.74 W 0.34 0.26 LJun 04 0.66 0.70 W 0.34 0.30 LJul 04 0.59 0.72 W 0.41 0.28 LAverage 0.44 0.56 0.56 0.44Qualitative Disclosure Period:Aug 04 0.66 0.74 W 0.34 0.26 LSep 04 0.72 0.74 W 0.28 0.26 LOct 04 0.72 0.74 W 0.28 0.26 LNov 04 0.84 0.82 L 0.16 0.18 WDec 04 0.78 0.77 L 0.22 0.23 WJan 05 0.88 0.84 L 0.13 0.16 WFeb 05 0.88 0.84 L 0.13 0.16 WMar 05 0.81 0.84 W 0.19 0.16 LApr 05 0.84 0.82 L 0.16 0.18 WMay 05 0.84 0.80 L 0.16 0.20 WJun 05 0.84 0.84 L 0.16 0.16 WAverage 0.67 0.33 0.33 0.67Quantitative Disclosure Period:Jul 05 0.84 0.84 L 0.16 0.16 WAug 05 0.84 0.85 W 0.16 0.15 LSep 05 0.91 0.87 L 0.09 0.13 WOct 05 0.91 0.87 L 0.09 0.13 WNov 05 0.91 0.89 L 0.09 0.11 WDec 05 0.91 0.89 L 0.09 0.11 WJan 06 0.91 0.90 L 0.09 0.10 WAverage 0.83 0.17 0.17 0.83
Average All 0.56 0.44 0.44 0.56
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TABLE 10
Markov Switching Analysis Regime Probabilities and Durations:
1 January 2000 to 28 February 2006
AIFRSWinners / Losers
Disclosure Period
Regime Number of Observations
Average Probability
Average Duration
Winners Pre-announce High 49 0.060 3.3 Normal 49 0.616 14.5 Recession 49 0.303 4.3
Qualitative High 56 0.173 14.1 Normal 56 0.645 67.7 Recession 56 0.182 9.8
Quantitative High 55 0.182 1.5 Normal 55 0.580 6.1 Recession 55 0.238 1.7
Losers Pre-announce High 21 0.079 5.2 Normal 21 0.654 16.6 Recession 21 0.267 4.0
Qualitative High 25 0.185 12.3 Normal 25 0.642 60.9 Recession 25 0.173 6.2
Quantitative High 25 0.156 1.6 Normal 25 0.573 4.7 Recession 25 0.272 1.9
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FIGURE 1
Short Window Cumulative Average Abnormal Returns for the 30 Trading Days Surrounding the Event – ASX 300
FIGURE 2
Short Window Cumulative Average Abnormal Returns for the 30 Trading Days Surrounding the Event – ASX 1-50 (Large Firms)
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FIGURE 3
Short Window Cumulative Average Abnormal Returns for the 30 Trading Days Surrounding the Event – ASX 51-100 (Medium Firms)
FIGURE 4
Short Window Cumulative Average Abnormal Returns for the 30 Trading Days Surrounding the Event – ASX 101-300 (Small Firms)
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FIGURE 5
Intermediate Window Cumulative Average Abnormal Returns for the Twenty-One Weeks (105 Trading Days) following the Event
FIGURE 6
Scatter Diagram: AIFRS NPAT 30 June 2005 Reconciliations and Market-Adjusted Returns
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