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Journal of Modern Accounting and Auditing, February 2017, Vol. 13, No. 2, 51-74 doi: 10.17265/1548-6583/2017.02.002

Analysis of Hidden Value and Value Relevance of Financial

Statements Pre- and Post-IFRS Adoption

Mukesh Garg Monash University, Victoria, Australia

This study analyses the hidden value and value relevance of financial statements pre- and post-IFRS (International

Financial Reporting Standards) adoption. Prior studies on IFRS adoption provide conflicting evidence on value

relevance. Market-to-book ratio and IFRS adoption value relevance using price is examined for Australian listed

firms. Results show that IFRS adoption is value relevant over a longer period of time. Results are opposite for

profit-making firms compared to loss-making firms which may explain the conflicting results. In the presence of

goodwill, IFRS is not value relevant when post-global financial crisis (GFC) period is included. Market-to-book

ratio has increased in the post-IFRS period lowering the usefulness of financial statements. Moreover, results show

that macro-economic changes affecting valuation of firms may explain for differences in the results for

market-to-book ratio and value relevance in different jurisdictions and time periods.

Keywords: goodwill, hidden value, International Financial Reporting Standards (IFRS), impairment, value relevance

Introduction Several studies around the world have examined the benefits of International Financial Reporting

Standards (IFRS) adoption. But the results from these studies provide conflicting evidence. This makes it difficult to draw definitive conclusions about the benefits of IFRS adoption. Different regimes have used varying approaches on goodwill recognition prior to IFRS adoption. Therefore, while IFRS adoption had a uniform impact on the way goodwill is reported and impaired, in the pre-IFRS regime, there are differences across jurisdictions that adopted IFRS.

In Australia, a key difference in IFRS is the impairment of goodwill as opposed to systematic amortization as in previous years. This study tries to examine the reason behind the inconclusive results using goodwill and segregation of firms based on profitability as key accounting items. The value relevance of IFRS is analysed over a longer period of time. Moreover, the study examines the usefulness of financial statements pre- and post-IFRS adoption and explores whether the usefulness has increased or decreased over a longer period of time.

Market-to-book ratio of the Standard & Poor’s 500 over the past two decades rose from just over one in the early eighties to a peak of six by 2000, falling back to 4.5 by late 2003 (Beattie & Thomson, 2005). Such large changes in the difference between market value of equity and book value of equity suggest over the last 20 years that the usefulness of financial accounting has reduced significantly. Lev (2002) suggested that the difficulty of valuing firms that deal with concepts, rather than tangible assets and growing size makes an

Mukesh Garg, Lecturer, Department of Accounting, Monash University. Email: [email protected].

DAVID PUBLISHING

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FINANCIAL STATEMENTS PRE- AND POST-IFRS ADOPTION

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economy more susceptible to Enron type collapses. Lev and Zarowin (1999) provided evidence which indicates that the usefulness of reported earnings, cash flows, and book (equity) values has been deteriorating over the past two decades. This study examines whether IFRS adoption has contributed to the usefulness of financial information by using the gap between book value of equity and market value of equity also measured as market-to-book ratio.

Association between market-to-book ratio and certain firm characteristics is examined for a sample of Australian listed firms in the period pre- and post-IFRS adoption to see whether there is any change in the relevance of key financial information and whether the explanation of the hidden value has changed due to IFRS adoption and change in goodwill reporting. The change in goodwill reporting may be one of the factors that contribute to conflicting results on the value relevance of IFRS adoption. The aim of this research is to examine and explain the hidden value (market-to-book ratio) of a firm and the value relevance of accounting information between pre- and post-IFRS adoption periods.

Amir, Harris, and Venuti (1993) used the term “value relevance” in the context of information content of accounting figures. An accounting figure/ratio is value relevant if it has significantly strong association with the stock prices and stock market indicators such as market-to-book ratio. Market-to-book ratio, also commonly known as Tobin’s Q, indicates how the market values the book value of a firm. The market value may or may not reflect solely the recorded assets of a firm. A Tobin’s Q greater than 1 indicates that the market value is greater than the value of the firm’s recorded assets. This means that the market value reflects some unmeasured or hidden assets of a firm which is mainly resulting from investors’ perception of the present value of future cash flow of the firm. Accounting standards prohibit the recognition of certain outlays of a firm. Firm spending on advertisements and promotion are expensed in the year they are incurred even though the benefits of such expenditure flow to the firm for several years in the future. Similarly, internally generated goodwill resulting from various reasons inherent to a firm cannot be capitalized even though the firm incurs a lot of expenditures in the process and continues to benefit from that in the future. In this study, the association between market-to-book ratio and firm characteristics closely associated with market value of a firm is examined to understand how well these firm characteristics can explain the hidden value of a firm. The association is examined in the pre- and post-IFRS adoption period in Australia to see whether there is any difference in the association resulting from the changes in accounting standards. A significant change in Australian accounting standards resulting from the adoption of IFRS is one related to recognition and disclosure of intangible assets including goodwill. AASB 138 “Intangibles” is an Australian equivalent of International Financial Reporting Standard (AIFRS). Adoption of AIFRS significantly changed the measurement and recognition practices for goodwill in Australia (Chalmers, Clinch, & Godfrey, 2008).

Market capitalization of listed firms as measured by quoted share prices is generally higher than the book value of the net assets of listed firms. For many firms, the difference between these two measures is significant. Research suggests that a significant portion of this “gap” may be attributable to the value of unrecognizable “intangible” assets. The difference (gap) may not be wholly due to unrecognisable intangibles. The gap might be linked to tangible assets not being re-valued. The gap is also due to the capital market’s estimation of future cash flows and growth potential expected of the firm (Dzinkowski, 2001). In this study, comparison is made between pre- and post-IFRS adoption for Australian firms, also showing the impact of IFRS on market-to-book ratio.


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Investment in research and development (R&D) and advertising often leads to new and improved products and brand recognition, which may benefit a firm for several years into the future. There have been several studies investigating the usefulness and relevance of accounting disclosure for firms with significant amount of unrecognisable intangibles. Amir and Lev (1996) found that earnings and book values for firms with significant levels of intangible assets tend to be excessively understated relative to their market. Since accounting reports do not adequately value intangible assets, their usefulness to investors is severely impaired. Gelb (2002) in his study has adopted a more direct approach and examined whether firms with significant levels of intangible assets choose to subordinate traditional GAAP-based accounting reports to more flexible voluntary supplemental disclosures. His results suggest that firms with higher levels of intangible assets perceive accounting disclosure as a relatively ineffective means of communicating with investors. The results of this study provide further support to previously provided evidence that investors value intangible assets and that market-to-book ratio is lower for firms reporting recognised goodwill. More importantly, the value relevance of financial statements and the explanation of hidden value improvement upon adoption of IFRS are explored.

Results show that IFRS adoption is value relevant in a longer period of time between 1992 and 2010. Results are opposite for profit-making firms compared to loss-making firms when the product of book value per share and earnings per share is introduced in the model. The proportion of loss-making (or profit-making) firms in the sample may explain the contradicting results in some value relevant studies. Moreover, when goodwill, other intangibles and leverage is introduced in the value relevance model, IFRS is still value relevant except when post-GFC period is included in the sample. Results are similar when IFRS is replaced with a year-based continuous variable between 1992 and 2011. Market-to-book ratio has increased in the post-IFRS period. But over a longer period of time between 1992 and 2011, the association with market-to-book is not statistically significant. Macro-economic changes that affect the valuation of firms may explain the reason for the insignificant result. Additional year by year test of market-to-book ratio shows that the negative association between market-to-book ratio and goodwill becomes more statistically significant in the post-IFRS period.

The contribution of this study is twofold. First, it contributes to the previous studies on the value relevance of financial statements and the influence of IFRS adoption on the hidden value of a firm. In this study, different time periods are used along with an introduction of the variables that may have contributed to the change in value relevance. Results change when firms are partitioned into profit-making and loss-making samples. This may explain the conflicting results which can be driven by sample period and types of firms included in the sample.

Second, the study extends prior literature by examining the association in the pre- and post-IFRS adoption and uses intangibles including goodwill to examine the change in market-to-book ratio over a period of time. The results show that market-to-book ratio has increased over the last 20 years but macro-economic developments change the value of firms resulting in the change in the ratio. Moreover, market-to-book ratio has increased in the post-IFRS adoption period.

The findings of this study have implications for accounting standard setters and users of financial statements as to the value relevance of financial statements. Barth, Beaver, and Landsman (2001) concluded that the value relevance literature provides fruitful insights for standard-setting process. The changes in accounting standards upon adoption of IFRS do not lower the hidden value of a firm which suggests that standard setters should think about measurement and reporting of intangible assets such as human capital, currently not permitted.


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The paper has the following structure: Section two provides motivation of the study. Literature surrounding intangible assets, market-to-book ratio, and IFRS adoption is discussed in section three. Section four describes the methodology and data used in the paper. Empirical results are discussed in section five. Finally, section six summarises the main findings and concludes the paper.

Motivation Large numbers of financial and non-financial information are value relevant. But differences in book and

market value exist which could be due to difference in financial statements’ relevance or reliability, or both. There have been a lot of changes in the way a firm is valued over the last few decades. A study published in Personnel Today (2003) shows that book value of an organisation represented approximately 95% of its stock market value in 1978. Today, a high proportion of business market value is driven by intangible assets, such as human capital, which do not appear on the balance sheet. The financial reporting framework has not yet adjusted fully to accommodate this change and currently there is no recognised procedure for organisations to illustrate the return on investment in people. A question naturally arises whether the balance sheet is out-dated given the huge difference between the book value and market value of a firm. Batchelor (1999) suggested that out-of-date accounting methods prevent financial statements from accounting for about two-thirds of the real value of a firm. Many professional accountants and institutional investors suggest preparation of a statement of intellectual capital that would eventually supplement the balance sheet. It would not attempt to explain the entire gap that currently exists between book value and market value, but would provide information on an area of corporate value that is not currently covered in financial statements.

Market-to-book ratio compares a firm’s combined tangible and intangible reportable value to market value alone. Australia provides a useful setting to examine the association between market-to-book ratio and firm characteristics alongside the change in accounting for goodwill and other intangibles, being in the forefront of IFRS adoption with a developed capital market. Australian firms were required to adopt IFRS from January 1, 2005 (Shanahan, 2003). Given that Australian financial reporting has experienced significant change in accounting standards for reporting on intangible assets, it is interesting to find out the differences in market perception of a firm value in the pre- and post-IFRS adoption periods. The outcome of this study will lead to a contribution to knowledge because there is little published empirical research on the manner of financial reporting of intangible assets and its effect on market-to-book ratio in the pre- and post-IFRS adoption periods. The choice of Australia for this analysis is motivated by the work of Daske, Hail, Leuz, and Verdi (2008). Daske et al. (2008) found that the capital-market benefits occur only in countries where firms have incentives to be transparent and where legal enforcement is strong similar to that in Australia.

The accounting treatment for purchased goodwill is a very controversial topic in the U.K. and the U.S. (Jennings, Robinson, Thompson II, & Duvall, 1996). In a U.S. Department of Labour’s (2003) monthly labour review titled Valuing the Intangibles, Professor Baruch Lev suggests that between one-half and two-thirds of the total market value of publicly held corporations may reflect the value of intangible assets. He found that the market-to-book ratio on average rose from just over one in the early eighties to a peak of six by 2000, falling back to 4.5 by late 2003. In Australia, between 1992 and 2011, the average market-to-book ratio has increased from 2.25 times to as high as 4.34 times and then reduced to 2.56 times in 20111. Lev stressed on forming new

1 Descriptive statistics on changes in market-to-book ratio between 1992 and 2011 are provided in Table 1.


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standards for recognition of those aspects of intangible investment that should affect the main body of a firm’s financial statements for clearly disclosing intangible investments and their impacts. In a similar study in the U.K., Beattie and Thomson (2005) found that the average ratio of market-to-book was 2.52 for FTSE 100 profit-making firms. This meant that around 60% of the firms’ value was not reflected in the balance sheet.

One of the biggest changes in accounting treatment upon adoption of IFRS in Australia was the requirement for impairment testing of goodwill as against the practice of systematic amortization under Australian Generally Accepted Accounting Principles (AGAAP). In Australia, post-IFRS adoption, goodwill acquired in a business combination cannot be amortised. In accordance with AASB 136 “Impairment of Assets”, the acquirer is required to test goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired. Any amount of reduction in goodwill has to be closed to income statement. Duvall, Jennings, Robinson, and Thompson II (1992) found for U.S. firms that in 1970, the accounting practice for purchased goodwill solicited differing reactions due to its amortization requirement. Some saw it as having indefinite life and that it penalizes reported earnings, while some saw it as having a short life and that its wide range of amortization period allows the overstatement of reported earnings. Upon AIFRS adoption in Australia, all firms were required to conduct impairment testing of reported goodwill at least once every year which represents reality more than the previous practice of amortisation. Moreover, Shanahan (2003) commented on bankers and analysts’ lack of understanding of the effect that introducing IFRS will have on Australian firms. Callao, Jarne, and Laínez (2007), in their study of IBEX-35 firms examining the effects of the IFRS, found that the gap between book and market values is wider when IFRS are applied. They also suggested that while there has been no gain in terms of the usefulness of financial reporting in the short term, improved usefulness may be achieved in the medium to long term. Additionally, this study looks at a longer window of time between 1992 and 2011 to analyse the impact of IFRS adoption.

Literature Review Market-to-Book Ratio and Intangible Assets Reporting

Value creation in a business is driven by the tangible and recorded assets of the firm as well as intellectual capital in the form of human capital, relational capital, and structural capital. These intangible assets do not get recorded in the balance sheet due to reliable measurement issues.

Callao et al. (2007) in their study of IBEX-35 firms examined the effects of the IFRS standards on comparability and the relevance of financial statements in Spain. They found that local comparability is adversely affected if both IFRS and local accounting standards are applied in the same country at the same time. They also found that there has been no improvement in the relevance of financial statement to local stock market operators because the gap between book and market values is wider when IFRS are applied.

Ben Naceur and Goaied (2004) reported that earnings and book value are value relevant and found that dividend policy is a signalling device for Tunisian firms but debt and investment policies are not value relevant. The results of segmentation by capitalization show that dividend policy is value relevant only for smaller firms. The dividend coefficient is considerably larger for the medium return on equity (ROE) group and the book value variable is most influential when ROE is abnormally high.

Pãstor and Veronesi (2003) developed a simple approach to valuing stocks in the presence of learning about average profitability. They found that market-to-book ratio increases with uncertainty about average profitability, especially for firms that pay no dividends.


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Gelb (2002) examined whether firms with significant levels of intangible assets choose to subordinate traditional GAAP-based accounting reports to more flexible voluntary supplemental disclosures. His results suggest that firms with higher levels of intangible assets perceive accounting disclosure as a relatively ineffective means of communicating with investors. Gelb’s work is of relevance to this research as it shows that if the firm has high levels of unrecognised intangible assets, it is likely to look for other means for communicating the message to the investors as the accounting disclosure is a relatively ineffective method.

Chan, Lakonishok, and Sougiannis (2001) examined the stock market valuation of R&D expenditures to determine whether stock prices fully value firms’ intangible assets, especially R&D, when under U.S. accounting standards, financial statements do not report intangible assets and R&D spending is expensed. They found that firms engaged in R&D earn a rate of return that is no different from firms with no R&D. The evidence collected did not support a direct link between R&D spending and future stock returns. There is a restriction as to the amount of R&D that can be capitalized caused by U.S. GAAP. But with R&D, the benefit of such expenditure can only be derived when the development can be taken to the next stage of commercial production.

Jennings et al. (1996) examined the extent to which goodwill asset and expense numbers reported by the U.S. firms are valued by investors in determining the market value of a firm. Their results indicate a strong positive cross-sectional association between equity values and recorded goodwill asset amounts, after controlling for other components of net assets. They also found evidence of a negative association between equity values and goodwill amortization, after controlling for other components of expected earnings.

Finally, Kallunki, M. Martikainen, and T. Martikainen (1998) found that income statement items other than “bottom-line” earnings contain useful information when investors are creating cash flow expectations for Finnish firms. The findings of the study further suggest that in none of the various income levels investigated, negative accounting income is significantly and positively related to the market-to-book equity ratios.

IFRS Adoption and Value Relevance of Financial Statements Improvement in the relevance of financial statements upon adoption of IFRS has long been debated. Prior

studies have reported conflicting results on the value relevance of IFRS. Jarva and Lantto (2012) analysed the information content of financial statements based on IFRS in a

mandatory adoption regime in Finland. They found that book values of assets and liabilities measured under IFRS are no more value relevant than they are under Finnish Accounting Standards.

Clarkson, Hanna, Richardson, and Thompson (2011) investigated the impact of IFRS adoption in Europe and Australia on the relevance of book value and earnings for equity valuation. They found no change in the association between book value, earnings, and price suggesting that IFRS adoption benefits would appear to be limited.

Paglietti (2009) examined accounting quality in Italy from 2002 to 2007. An empirical analysis is carried out by using consolidated financial statement data and stock prices information from a sample of 552 firm-year observations concerning a cohort of 92 Italian non-financial companies listed on the Italian Stock Exchange. The results highlight that IFRS adoption increases the combined value relevance of book value and earnings.

Chalmers et al. (2008) investigated the association between share prices of Australian firms and capitalised goodwill and identifiable intangibles reported under two accounting regimes. Their results show that AIFRS measured intangibles reflect information useful to investors beyond that provided by AGAAP only for goodwill. Relative to IFRS, AGAAP measures of goodwill are not incrementally useful to investors.


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Daske et al. (2008) examined the economic consequences of mandatory IFRS reporting around the world. They analyzed the effects on market liquidity, cost of capital, and Tobin’s Q in 26 countries using a large sample of firms that are mandated to adopt IFRS. They found that market liquidity increases around the time of the introduction of IFRS.

Blanchette (2007), in an overview of the impact of Canada’s adoption of the IFRS on financial statements, stated that IFRS adoption is expected to raise certain differences in the general presentation of financial statements, such as balance sheet and income statement. It is also expected to create changes in asset valuation, liability accounting, equity accounts, and revenue and expense accounting.

Hung and Subramanyam (2007), using a sample of German firms, investigated the financial statement effects of adopting International Accounting Standards (IAS) during 1998 through 2002. They found that total assets and book value of equity, as well as variability of book value and income, are significantly higher under IAS than under German GAAP. But they did not find book value and income to be more value relevant under IAS than under German GAAP.

Armstrong, Barth, Jagolinzer, and Riedl (2006) examined the European stock market reaction to key events predicted to affect the adoption of IFRS in Europe. Their analyses provide evidence that the European equity markets responded positively (negatively) to events that increased (decreased) the likelihood of adoption of IFRS.

Jones and Higgins (2006) conducted a structured telephone survey on adoption of IFRS from 60 firms drawn from among Australia’s top 200 firms. They found evidence of strong systematic variation in survey responses with factors such as firm size, industry background, and expected impacts on financial performance, and the general results indicate that many respondents have not been well prepared for the transition and are generally very sceptical about the claimed benefits of IFRS as enunciated in the government’s Corporate Law Economic Reform Program (CLERP).

Harris and Muller (1999) investigated the difference in market valuation of earnings and book value prepared under IFRS and US-GAAP. They found that the US-GAAP earnings reconciliation adjustment is value relevant and that US-GAAP amounts are valued differently for market value and return models. Hung and Subramanyam (2007), for a sample of German listed firms, found that total assets and book value of equity are higher under IAS than under German GAAP.

Research Questions, Methodology, and Data

Research Questions This study addresses two main issues: firstly, the value relevance of IFRS adoption in Australia is

examined to explore what may have potentially resulted in conflicting results in prior studies; secondly, to examine whether IFRS and other accounting changes over a longer period of time contributed to reducing/increasing the gap between market value of equity and book value of equity. This will help examine the usefulness of reported earnings and equity in the recent years.

The two main research questions therefore are: (1) What may be contributing to the conflicting results on the value relevance of IFRS? (2) Have the usefulness of reported earnings and equity, and therefore, the role of accounting numbers in

determining the value of a firm improved over the years?


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The value relevance of IFRS is further examined by introducing leverage, goodwill, and other intangible assets in the model. Moreover, the sample of firms is segregated into profit-making and loss-making firms to see if profitability may contribute to the conflicting results. The usefulness of reported earnings and equity is examined by using market-to-book ratio to see if accounting changes including IFRS over a period of time helped reduce the difference between market value of equity and book value of equity.

Methodology Regression analysis is used to examine the association between market-to-book ratio and value relevance of

IFRS adoption in the pre- and post-IFRS adoption period. For the purpose of regression analysis, firm-specific variables are required to use as independent variable. Period between 1992 and 2011 is chosen for pre- and post-IFRS adoption examination. IFRS was first adopted in Australia in 2005 (transition period), and improved usefulness may be achieved in the medium to long term supported by Callao et al. (2007). Roychowdhury and Watts (2007) investigated the relation between two extensively used measures of conservatism: asymmetric timeliness of earnings and the market-to-book ratio. They predicted and observed that when asymmetric timeliness is measured cumulatively over long periods, its relation with end-of-period market-to-book ratio is positive. Further, asymmetric timeliness appears to measure conservatism more efficiently when it is estimated cumulatively over multiple periods. Period between 1992 and 2004 (pre-IFRS adoption) is chosen for the regression analysis to examine the association between market-to-book ratio and test variables immediately before as well as over a longer period prior to the adoption of IFRS in Australia, consistent with Roychowdhury and Watts (2007) to examine the cumulative effect of book value of equity on the price.

The two main models in the paper are the share price model (share price is the dependent variable) and the market-to-book model (market-to-book model is the dependent variable). The share price model is used to test the value relevance of IFRS adoption and to explore the reasons for inconsistent results from prior studies. The market-to-book model is used to address the second question of usefulness of financial statements pre- and post-IFRS adoption. Accounting-based valuation model of Ohlson (1995) is primarily used for value relevance studies. In conducting the analysis of value relevance of IFRS adoption and pre and post comparison, the following linear valuation model similar to Clarkson et al. (2011) is used:

μββββ ++++= iititti AdoptIFRSEPSBVPSPRICE _3210, (1)

where: PRICE: Price per share as at the balance sheet date;2 BVPS: Per share book value of common equity; EPS: Earnings per share after tax from continuing operations and before abnormals; IFRS_Adopt: A dummy variable for IFRS adoption with 0 for pre-IFRS and 1 for post-IFRS periods; µ: OLS-appropriate error term. Following the approach used by Clarkson et al. (2011), the cross-product of book value and earnings is

introduced in the model:

μββββ ++++= tiititti EPSBVPSEPSBVPSPRICE ,3210, *

(2)

With all other measures being similar to the ones in Model (1). 2 Results do not change when share price three months after fiscal year-end is used.


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In the above model, value relevance is also analysed with only loss-making and profit-making firms separately to examine whether profitability explains the reason for conflicting results from prior studies.

Market-to-book ratio suggests the difference between the market value of equity and book value of equity, the extent to which the book value of net assets understates the market value of equity. Conservatism in accounting results in higher market-to-book ratio (Ahmed & Duellman, 2007). Daske et al. (2008) suggested that market-to-book ratio is a more comprehensive measure than the cost of capital. They further suggested that better transparency resulting from IFRS adoption increases growth expectations. Similar to Daske et al. (2008), market-to-book ratio is used as a proxy for firms’ equity valuations and measure of conservatism (similar to Ahmed and Duellman, 2007).

In the following regression model, market-to-book ratio is the dependent variable:

μβββ +++= ititit EPSBVPSMKTBOOK 210 (3)

Following Model (3), year dummy (YEAR) variable is added to the model to see the effect of yearly change. This approach is used to control for time series correlation by adding year fixed effects. In this approach, year dummy variable is added to the model:

μββββ ++++= iititit YEAREPSBVPSMKTBOOK 3210 (4)

where: MKTBOOK: The ratio of last reported market price per share and book value per share for firm i at the end of

financial year; YEAR: The year dummy variable. In the next stage, IFRS adoption dummy is introduced to analyse the impact of IFRS adoption with

leverage as a control variable:

μβββββ +++++= iitititit AdoptIFRSLEVEPSBVPSMKTBOOK _43210 (5)

where LEV is leverage of a firm and is calculated as total assets divided by shareholder’s equity of firm i at the end of financial year;

With all the measures as explained previously. In the above model, leverage (LEV) is used as a measure of risk and a control variable similar to Dempsey

(2010). Since goodwill reporting has been a significant change under IFRS, value of goodwill per share and other

intangible assets per share are introduced in Model (6) as follows:

0 1 2 3 4

5 6

__

it it it it it

it i

MKTBOOK BVPSAdj EPS GW O INTLEV IFRS Adopt

β β β β ββ β μ

= + + + + ++ +

(6)

where: BVPSAdj: Per share book value of common equity excluding goodwill and other intangibles; GW: The reported goodwill per share of firm i in time t; O_INT: The reported intangible assets other than goodwill per share for firm i in time t. With all the measures as explained previously in Model (1).


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All variables are divided by the number of shares outstanding at the end of the financial year similar to Chalmers et al. (2008).

The two types of models have been kept simple for ease of explaining the conflicting results on value relevance of IFRS adoption and the usefulness of financial reports.

Data Collection The sample includes all Australian Securities Exchange (ASX) listed firms between 1992 and 20113. For

the purpose of consistency, 2011 is used as the main year of listing and the selection of firms in the sample is based on continuous listing from 1989 and up until 2011. All firms were listed and traded at the time of data collection. Financial information is collected from FinAnalysis database. The full sample consists of 17,326 firm years. Of the sample, 2,296 firm years are lost due to missing accounting information on goodwill and other intangible assets leaving 15,030 firm years used in the full model.

Results Descriptive Statistics

Table 1 reports descriptive statistics on market-to-book ratio for Australian listed firms between 1992 and 2011.

Table 1 Descriptive Statistics of Market-to-Book Ratio for ASX Listed Firms Between 1992 and 2011 Year Mean Median Std. dev. Minimum Maximum No. of firms 1992 2.029 1.170 3.757 0.130 47.750 367 1993 3.048 1.595 5.444 0.040 73.980 396 1994 2.401 1.525 2.899 0.040 34.210 462 1995 1.867 1.160 3.858 0.170 66.670 497 1996 2.415 1.500 3.223 0.010 31.190 514 1997 2.597 1.500 5.351 0.120 76.470 543 1998 1.878 1.080 3.830 0.090 61.820 577 1999 2.676 1.350 4.590 0.010 58.310 609 2000 2.914 1.490 5.419 0.130 63.930 717 2001 2.800 1.325 5.844 0.080 65.840 790 2002 2.495 1.430 4.293 0.070 66.040 829 2003 2.570 1.350 4.301 0.080 57.820 851 2004 3.077 1.720 5.167 0.150 74.880 981 2005 3.102 1.810 5.271 0.110 70.350 1,113 2006 3.417 2.060 4.962 0.130 54.770 1,237 2007 4.343 2.500 6.145 0.050 71.290 1,444 2008 2.767 1.520 4.503 0.050 66.500 1,616 2009 2.321 1.130 4.294 0.020 65.060 1,594 2010 2.490 1.370 4.144 0.030 68.540 1,668 2011 2.565 1.430 4.052 0.030 57.840 1,777 Note. Market-to-book ratio is the market value of equity divided by book value of equity of firm i in time t between 1992 and 2011.

3 Table 2 includes the sample size between 1992 and 2011.


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The mean (median) values have fluctuated across 20 years. Interestingly, and as expected, the market-to-book ratio increased in 2006 to 3.417 (2.060), reaching to 4.343 (2.500) in 2007 which was the highest in 20 years. There was a significant decline in the market-to-book ratio during the GFC period.

Descriptive statistics of variables used in regression analysis are reported in Table 2 for all the years between 1992 and 2011.

Table 2 Descriptive Statistics of Independent Variables Used in Regression Analysis for ASX Listed Firms

Variable N Mean Std. dev. Minimum Q1 Median Q3 Maximum Market capitalisation ($m) 17,326 919.082 6,596.703 0.065 7.509 23.235 130.094 244,260 PRICE ($) 17,326 1.822 5.334 0.010 0.1 0.300 1.250 133.95 EPS ($) 17,326 7.447 41.196 -467 -2.8 -0.500 7.700 914.90 BVPS ($) 17,326 0.998 3.343 0.010 0.07 0.190 0.880 158.43 MKTBOOK 17,326 2.461 3.427 0.010 0.889 1.500 2.750 80.00 Hidden value per share ($) 17,326 0.824 4.051 -128.530 -0.02 0.060 0.370 112.05 LEV 15,030 1.803 1.928 0.070 1.07 1.300 1.940 75.17 GW ($) 15,030 0.150 0.736 0.00 0.00 0.00 0.0198 20.49 Goodwill ($m) 15,030 70.717 663.497 0.00 0.00 0.00 1.491 20,635 Other intangibles ($m) 15,030 62.114 861.086 0.00 0.00 0.00 0.429 49,032 O_INT ($) 15,030 0.095 0.603 0.00 0.00 0.00 0.005 33.61 Notes. MKTBOOK is the ratio of last reported market value of shares and book value of equity for firm i; GW is reported goodwill of firm i divided by the number of shares; O_INT is reported intangible asset other than goodwill for firm i divided by the number of shares; EPS is the earnings per share of firm i; PRICE is the price per share of firm i; Market capitalisation is market value of equity for firm i; LEV is the ratio of last reported total liability and equity of firm i; BVPS is the book value of equity divided by the number of shares for firm i; hidden value is the difference between market capitalisation and book value of equity for firm i.

The mean (median) market capitalisation of all firms across 20 years is $919m ($23.23m) with the minimum being as low as $65,000 and the maximum being $224,260m. The mean (median) price per share is $1.8224 ($0.30). The EPS mean is $7.447 but the median EPS is a negative of $0.50, suggesting more than half of the sample firms during the period are loss-making firms. The book value per share (BVPS) mean (median) is $0.998 ($0.19) with a standard deviation of $3.343. The market-to-book ratio (MKTBOOK) mean (median) is 2.4618 (1.5) with a minimum of as low as 0.01 and the minimum at 80 times. The hidden value per share (PRICE minus BVPS) has a mean (median) of $0.8241 ($0.06) with the mean being very close to the mean of book value per share.

Other variables used in the study are leverage (LEV) with a mean (median) of 1.803 (1.3), goodwill per share (GW) with a mean (median) of $0.15 (0.00). The total goodwill has a mean of $70.71m with more than half of the firms (out of 15,030) with no goodwill. The standard deviation of goodwill is $663.49m and the third quartile value of goodwill is only $1.49m. Intangibles other than goodwill have a mean (median) of $62.11m (0.00) and the intangibles per share (O_INT) mean (median) is $0.095 (0.00). Descriptive statistics suggest that around 25% of the book value per share comprises of intangible assets on average during the sample period.

Multivariate Results In this section, results of multivariate regression are discussed. Table 3 reports the results of Model (1)

where price is regressed on book value per share, earnings per share, and IFRS adoption dummy. In panel A of Table 3, results using firms from all the 20 years from 1992 to 2011 are reported. In panel B of the table, 2010 and 2011 years are excluded and panel C reports results where 2011 year is excluded.


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Table 3 Multivariate Regression Analysis of Value Relevance of IFRS

Model (1): 2, 0 1 3 ,_i t it it i tPRICE BVPS EPS IFRS Adoptβ β β β μ= + + + +

Variable Parameter estimate t-value p-value Panel A: Multivariate regression analysis of all firms from 1992 to 2011

Intercept 0.6902 17.79 < 0.0001 BVPS 0.5678 63.93 < 0.0001 EPS 0.0710 98.6 < 0.0001 IFRS_Adopt 0.0758 1.5 0.1331 F-value 9,684.05 Adjusted R2 0.6264 N 17,326 Variable Parameter estimate t-value p-value

Panel B: Multivariate regression analysis of all firms from 1992 to 2009 Intercept 0.7333 17.87 < 0.0001 BVPS 0.5351 52.92 < 0.0001 EPS 0.0699 86.39 < 0.0001 IFRS 0.1733 2.97 0.003 F-value 6,601.58 Adjusted R2 0.5832 N 14,150 Variable Parameter estimate t-value p-value

Panel C: Multivariate regression analysis of all firms from 1992 to 2010 Intercept 0.7116 17.84 < 0.0001 BVPS 0.5456 56.25 < 0.0001 EPS 0.0714 93.39 < 0.0001 IFRS 0.1146 2.13 0.0336 F-value 7,891.79 Adjusted R2 0.6015 N 15,683 Notes. IFRS_Adopt is a dummy variable with 0 for years prior to 2005 and 1 for year post 2004. All other variables are previously defined.

As expected, the results for BVPS and EPS are statistically significant with a p-value of less than 0. The adjusted R2 of the model is 0.6264 with F-value of 9,684 which is significant. But the IFRS dummy is not significant with a t-value of only 1.5. Panel B of Table 3 reports the results where years 2010 and 2011 are taken out from the sample. As a result of that, the independent variable IFRS_Adopt is significant with a p-value of only 0.003. Even if only the year 2011 is taken out from the sample, IFRS variable is significant at the 5% level with a p-value of 0.0336 as reported in panel C of Table 3.

The results of Table 3 suggest that IFRS adoption has been value relevant in the case of Australia. The different results (if any) reported are driven by the impact of the events in 2010 and 2011 on the financial numbers of the firms in the sample period. If 2010 and 2011 years are excluded from the study, the result for IFRS adoption is statistically significant.

Results of Model (2) are reported in Table 4 where IFRS has been replaced by the product of book value per share and earnings per share to examine the incremental impact of book value and earnings per share. The results are presented in three panels, with panel A reporting results of the full sample of 17,326 firm years.


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In panel B, results for loss-making firms are reported and in panel C, results for only profit-making firms are reported. Since a large proportion of Australian firms are loss-making, it is interesting to see how results change depending on whether the firms are profit-making or loss-making.

Table 4 Multivariate Regression Analysis of Value Relevance

Model (2): , 0 1 2 3 ,*i t it it i tPRICE BVPS EPS BVPS EPSβ β β β μ= + + + +

Variable Parameter estimate t-value p-value Panel A: Multivariate regression analysis of all firms

Intercept 0.6964 26.62 < 0.0001 BVPS 0.5994 64.85 < 0.0001 EPS 0.0754 93.89 < 0.0001 BVPS*EPS -0.0003 -11.88 < 0.0001 F-value 9,807.93 Adjusted R2 0.6294 N 17,326 Variable Parameter estimate t-value p-value

Panel B: Multivariate regression analysis of negative EPS firms Intercept 0.05966 4.23 < 0.0001 BVPS 1.29641 75.23 < 0.0001 EPS -0.00673 -8.33 < 0.0001 BVPS*EPS 0.00254 60.88 < 0.0001 F-value 2,354.23 Adjusted R2 0.4213 N 9,700 Variable Parameter estimate t-value p-value

Panel C: Multivariate regression analysis of positive EPS firms Intercept 0.11477 1.94 0.0521 BVPS 0.63122 32.88 < 0.0001 EPS 0.09929 79.52 < 0.0001 BVPS*EPS -0.00109 -19.32 < 0.0001 F-value 5,499.05 Adjusted R2 0.6839 N 7,626 Note. All variables are defined previously.

In panel A, results of full sample of 17,326 firm years are reported. Price is negatively associated with the product of BVPS and EPS (BVPS*EPS) with a t-value of -11.88. The results are different from Clarkson et al. (2011) because they found a positive association. This contradiction in results can be explained by separating the sample firms into loss-making and profit-making for analysis4.

Panel B of Table 4 reports the results for only loss-making firms across 20 years. As expected, the t-value of independent variable EPS is negative and significant at -8.33. But the product of BVPS and EPS (BVPS*EPS) is positive with a t-value of 60.88.

Panel C reports the results using only profit-making firms across 20 years. The results are opposite to what we get using only negative EPS firms. The BVPS*EPS variable has a negative coefficient with a t-value of -19.32. 4 In the sample of 17,326 firm years, 9,700 have a negative EPS between 1992 and 2011.


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Results of Table 4 suggest that negative or positive earnings of a firm have a big influence on the value relevance of accounting numbers. This may also explain the reason why Clarkson et al. (2011) found different results across different countries they examined as the weightage of loss (profit) making firms in the sample will differ across countries.

Tables 5 and 6 report results of multivariate regressions using market-to-book ratio (MKTBOOK) as a dependent variable.

Table 5 Multivariate Regression Analysis of Market-to-Book Ratio for All Years Variable Parameter estimate t-value p-value

Panel A: Multivariate regression analysis of all firms

Model 3: 0 1 2it it itMKTBOOK BVPS EPSβ β β μ= + + +

Intercept 2.5961 66.59 < 0.0001 BVPS -0.1013 -7.64 < 0.0001 EPS 0.0058 5.35 < 0.0001 F-value 30.26 Adjusted R2 0.0034 N 17,326 Variable Parameter estimate t-value p-value

Panel B: Multivariate regression analysis of market-to-book ratio

Model 4: 0 1 2 3it it it iMKTBOOK BVPS EPS YEARβ β β β μ= + + + +

Intercept 1.47403 0.62 0.5366 BVPS -0.0911 -9.99 < 0.0001 EPS 0.00534 7.21 < 0.0001 YEAR 1992 0.35873 0.15 0.8809 YEAR 1993 1.24337 0.52 0.6032 YEAR 1994 0.89106 0.37 0.7094 YEAR 1995 0.38934 0.16 0.8706 YEAR 1996 1.04266 0.44 0.6627 YEAR 1997 1.04649 0.44 0.6615 YEAR 1998 0.3416 0.14 0.8864 YEAR 1999 1.17209 0.49 0.6239 YEAR 2000 1.28877 0.54 0.5896 YEAR 2001 0.94775 0.4 0.6915 YEAR 2002 0.85646 0.36 0.7199 YEAR 2003 0.78892 0.33 0.7412 YEAR 2004 1.12085 0.47 0.6388 YEAR 2005 1.2207 0.51 0.6092 YEAR 2006 1.69878 0.71 0.4768 YEAR 2007 2.51538 1.05 0.292 YEAR 2008 0.9207 0.39 0.6997 YEAR 2009 0.51287 0.21 0.8299 YEAR 2010 0.61487 0.26 0.7967 YEAR 2011 0.73332 0.31 0.7587 F-value 26.36*** Adjusted R2 0.0312 N 17,314


65

(Table 5 continued)

Variable Parameter estimate t-value p-value Panel C: Multivariate regression analysis of market-to-book ratio

Model 5: 0 1 2 3 4 _it it it it iMKTBOOK BVPS EPS LEV IFRS Adoptβ β β β β μ= + + + + +

Intercept 14.0834 29.5 < 0.0001 BVPS -0.1066 -7.99 < 0.0001 EPS 0.0056 5.08 < 0.0001 LEV 0.2859 16.51 < 0.0001 IFRS_Adopt 0.18067 2.39 0.0168 F-value 83.99 Adjusted R2 0.019 N 17,326 Notes. YEAR = Year dummy for 1992 to 2011. *** indicates significance at the 1% level. All other variables are previously defined.

In Table 5, panel A reports the results for BVPS and EPS as independent variables. Market-to-book ratio is negatively associated with BVPS and positively associated with EPS as expected. The adjusted R2 is very low at 0.0034, but the F-value at 30.26 is significant.

In panel B, results have not changed for BVPS and EPS, compared to those reported in panels A and B. But the YEAR dummy variable is not significant, suggesting over a period of 20 years, market-to-book ratio has not necessarily gone up every year. The reason behind this is more likely the economic cycle that significantly determines how firms are valued.

In panel C, leverage and IFRS adoption dummy are introduced. The result for BVPS and EPS is still significant simple to the results reported in panel A. Leverage is significant with a t-value of 16.51. IFRS dummy is also significant at the 2% level with a t-value of 2.39. Results for IFRS adoption suggest that, compared to pre-IFRS adoption period, in the post-IFRS adoption period between 2005 and 2011, the market-to-book ratio has increased.

In Table 6, a result of the full model is reported with BVPSAdj, EPS, GW, O_INT, LEV, and IFRS_Adopt as independent variables. Results are reported in three panels with different periods in analysis.

Table 6 Multivariate Regression Analysis of Market-to-Book Ratio

Model: 0 1 2 3 4 5 6_ _it it it it it it iMKTBOOK BVPSAdj EPS GW O INT LEV IFRS Adoptβ β β β β β β μ= + + + + + + +

Variable Parameter estimate t-value p-value Panel A: Multivariate regression analysis of all firms between 1992 and 2011

Intercept 1.9447 25.56 < 0.0001 BVPSAdj -0.0898 -5.55 < 0.0001 EPS 0.0066 5.08 < 0.0001 GW -0.2482 -3.94 < 0.0001 O_INT -0.2480 -3.46 0.0005 LEV 0.3919 18.39 < 0.0001 IFRS_Adopt 0.2301 2.71 0.0067 F-value 66.12 Adjusted R2 0.0253 N 15,030


66

(Table 6 continued)

Panel B: Multivariate regression analysis of market-to-book ratio between 2003 and 2007 Intercept 2.21654 10.9 < 0.0001 BVPSAdj -0.6121 -5.59 < 0.0001 EPS 0.01718 4.46 < 0.0001 GW -0.3484 -2.19 0.0289 O_INT -0.4472 -2.58 0.0099 LEV 0.48657 8.95 < 0.0001 IFRS_Adopt 0.83953 3.94 < 0.0001 F-value 21.2 Adjusted R2 0.0256 N 4,623

Panel C: Multivariate regression analysis of market-to-book ratio based on year coding

Model: 0 1 2 3 4 5 6_it it it it it it iMKTBOOK BVPSAdj EPS GW O INT LEV YEARβ β β β β β β μ= + + + + + + +

Intercept 1.90302 19.99 < 0.0001 BVPSAdj -0.0784 -7.06 < 0.0001 EPS 0.0063 7.06 < 0.0001 GW -0.2104 -4.86 < 0.0001 O_INT -0.2193 -4.46 < 0.0001 LEV 0.27494 18.45 < 0.0001 YEAR 1992 -0.5963 -2.47 0.0134 YEAR 1993 0.4651 2.14 0.0321 YEAR 1994 0.0743 0.37 0.7149 YEAR 1995 -0.4485 -2.27 0.023 YEAR 1996 0.29581 1.52 0.1286 YEAR 1997 0.22718 1.2 0.2309 YEAR 1998 -0.5489 -2.74 0.0061 YEAR 1999 0.38011 1.99 0.0461 YEAR 2000 0.50514 2.95 0.0032 YEAR 2001 0.175 1.06 0.2904 YEAR 2002 0.05234 0.32 0.7477 YEAR 2003 0.00587 0.04 0.9712 YEAR 2004 0.40937 2.65 0.0082 YEAR 2005 0.5432 3.66 0.0003 YEAR 2006 1.01325 7.09 < 0.0001 YEAR 2007 1.8977 13.92 < 0.0001 YEAR 2008 0.18869 1.42 0.1544 YEAR 2009 -0.2559 -1.91 0.0562 YEAR 2010 -0.1279 -0.97 0.3344 F-value 37.05*** Adjusted R2 0.0545 N 15,021 Notes. *** indicates significance at the 1% level. All variables are defined previously.

Panel A reports the regression results of the full sample of 15,030 firm years between 1992 and 2011. MKTBOOK is significantly and positively associated with EPS and LEV at the 1% level as expected. The association between MKTBOOK and BVPSAdj, GW, and O_INT is negative and significant at the 1% level. The t-value for IFRS_Adopt is also significant at the 1% level suggesting that the gap between book value of assets and market value has increased post the adoption of IFRS. The result for IFRS adoption is similar to the results from the value relevance model. The F-value of the model is 66.12 and adjusted R2 is 0.0253.


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In panel B of the model, market-to-book ratio is analysed between 2003 and 2007. Results are very similar to those reported in panel A of Table 6 except for goodwill which is now significant with a p-value of 0.0289. The main reason behind this change can be the adoption of IFRS which has resulted in significant change in the way goodwill is reported (from an amortisation regime to an impairment regime).

In panel C of the table, IFRS_Adopt is replaced with YEAR dummy variable to examine the impact on market-to-book ratio over a period of 20 years. The association between MKTBOOK and BVPSAdj, GW, and O_INT is negative and statistically significant at the 1% level. The association is positive and significant with EPS and LEV. But the association between MKTBOOK and YEAR dummy variable is not significant in 1992, 1993, 1994, 1996, 1997, 1999, 2001, 2002, 2003, 2008, and 2010. The association is negative and significant in 1995, 1998, and 2009 and positive and significant in 2000, 2004, 2005, 2006, and 2007. The results suggest that market-to-book ratio has not gone up gradually every year. The macroeconomic changes that significantly affect the valuation of listed firms may explain the difference in results across the years.

Additional Tests Additional tests are conducted, the results of which are reported in this sub-section. In Table 7, results are reported for a full sample of 15,030 firm years with share price as a dependent variable.

Table 7 Multivariate Regression Analysis of Value Relevance of IFRS with Intangibles

Model: 0 1 2 3 4 5 6 __it it it it it it iPRICE BVPSAdj EPS GW O INT LEV IFRS Adoptβ β β β β β β μ= + + + + + + +

Variable Parameter estimate t-value p-value Panel A: Multivariate regression analysis of all firms from 1992 to 2010

Intercept 0.5028 11.23 < 0.0001 BVPSAdj 0.38897 40.88 < 0.0001 EPS 0.07202 94.21 < 0.0001 GW 1.95056 52.56 < 0.0001 O_INT 0.73824 17.5 < 0.0001 LEV 0.12032 9.6 < 0.0001 IFRS_Adopt -0.13037 -2.61 0.009 F-value 4,777.24 Adjusted R2 0.656 N 15,030 Variable Parameter estimate t-value p-value

Panel B: Multivariate regression analysis of all firms from 2003 to 2007 Intercept -0.16353 -1.82 0.0684 BVPSAdj 1.15963 24 < 0.0001 EPS 0.0728 42.88 < 0.0001 GW 2.34846 33.4 < 0.0001 O_INT 0.91648 11.99 < 0.0001 LEV 0.16916 7.06 < 0.0001 IFRS_Adopt 0.32905 3.5 0.0005 F-value 2,308.65 Adjusted R2 0.7497 N 4,623 Note. All variables are previously defined.


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The association between PRICE and the independent variables BVPSAdj, EPS, GW, O_INT, and LEV is positive and statistically significant at the 1% level as reported in panel A of Table 7. But the association with IFRS_Adopt is negative and significant. This suggests that over a longer period of time, the impact of IFRS adoption has been negative. The adjusted R2 of the model is 0.656 with the F-value of 4,777.24.

In panel B of Table 7, results are reported based on a shorter time period between 2003 and 2007. The results are similar to those reported in panel A for all the variables except for IFRS for which the association is positive and significant at the 1% level. In Table 8, results are reported with price as a dependent variable. The IFRS_Adopt variable has been replaced with a YEAR dummy variable, with all other variables similar to those reported in Table 7.

Table 8 Multivariate Regression Analysis of Value Relevance Comparison from 1992 to 2011

Model: 0 1 2 3 4 5 6_it it it it it it iPRICE BVPSAdj EPS GW O INT LEV YEARβ β β β β β β μ= + + + + + + +

Variable Parameter estimate t-value p-value Intercept 0.22151 2.72 0.0066 BVPSAdj 0.39135 41.15 < 0.0001 EPS 0.07181 94 < 0.0001 GW 1.95509 52.72 < 0.0001 O_INT 0.73816 17.53 < 0.0001 LEV 0.1205 9.44 < 0.0001 YEAR 1992 0.11653 0.56 0.5725 YEAR 1993 0.16412 0.88 0.3769 YEAR 1994 0.12389 0.71 0.4768 YEAR 1995 -0.1976 -1.17 0.2422 YEAR 1996 0.196 1.18 0.2396 YEAR 1997 0.54396 3.35 0.0008 YEAR 1998 0.25273 1.48 0.14 YEAR 1999 0.46322 2.84 0.0045 YEAR 2000 0.35118 2.39 0.0167 YEAR 2001 0.5598 3.95 < 0.0001 YEAR 2002 0.41537 2.98 0.0029 YEAR 2003 0.19033 1.37 0.1718 YEAR 2004 0.17197 1.3 0.1942 YEAR 2005 0.26015 2.05 0.0407 YEAR 2006 0.3998 3.27 0.0011 YEAR 2007 0.685 5.87 < 0.0001 YEAR 2008 -0.0098 -0.09 0.9314 YEAR 2009 -0.0826 -0.72 0.4718 YEAR 2010 -0.0498 -0.44 0.6608 F-value 1,204.12*** Adjusted R2 0.6578 N 15,021 Notes. *** indicates significance at the 1% level. All variables are previously defined.

The association between PRICE and the independent variables BVPSAdj, EPS, GW, O_INT, and LEV is positive and statistically significant at the 1% level. But YEAR dummy variable is positive and significant in 1997, 1999, 2000, 2001, 2002, 2006, and 2007. The economic cycles that significantly determine how firms are valued may explain the significant results in these years. The results suggest that after controlling for all other variables, price has only done down over a period of time between 1992 and 2011.


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In Table 9, results for simple valuation model are reported for every year between 1992 and 2011.

Table 9 Value Relevance Regression Results Across 20 Years

Model: , 0 1 2i t it itPRICE BVPS EPSβ β β μ= + + +

Year Intercept BVPS EPS Adjusted R2 F-value

1992 Parameter estimate 0.22931 0.9296 0.05529 0.8846 1,093.29 t-value 2.61*** 23.35*** 13.45***

1993 Parameter estimate 0.6248 0.42509 0.08522 0.8004 743.08 t-value 7.33*** 34.64*** 32.04***




1997 Parameter estimate 0.1459 1.49892 0.04033 0.8454 1,423.14 t-value 1.77* 26.43*** 9.38***




2001 Parameter estimate 0.23857 1.60758 0.02705 0.6092 587.07 t-value 1.7* 21.16*** 5.17***








2009 Parameter estimate 0.00724 1.53261 0.01644 0.6911 1,649.76 t-value 0.1 42.14*** 8.69***



Notes. All variables are previously defined. *, **, and *** indicate significance at the 10%, 5%, and 1% levels respectively.


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Share price is significantly and positively associated with BVPS and EPS at the 1% level for all the years. In each of the years, F-value is significant and the adjusted R2 is high ranging from as low as 0.5613 in 1994 to 0.8454 in 1997.

In Table 10, results are reported for year in the model where the dependent variable is market-to-book ratio and the independent variables are BVPSAdj, EPS, GW, O_INT, and LEV.

Table 10 Hidden Value Regression Results Between 1992 and 2011 by Year

Model: 0 1 2 3 4 5_it it it it it itMKTBOOK BVPSAdj EPS GW O INT LEVβ β β β β β μ= + + + + + +

Year Intercept BVPSAdj EPS GW O_INT LEV Adjusted R2 F-value

1992

Parameter estimate

1.74815

-0.3228

0.02468

-0.2203

-0.1365

0.1296

0.032

2.64**

t-value 7.89 -2.11 1.95 -0.22 -1.42 2.97 P-value < 0.0001 0.0361 0.0525 0.823 0.1557 0.0032

1993

Parameter estimate

2.75763

-0.0527

-0.0084

-0.3438

-0.231

0.08968

0.0034

1.22

t-value 9.82 -1.63 -1.07 -0.27 -0.61 0.93 P-value < 0.0001 0.104 0.2844 0.7839 0.5424 0.3546

1994

Parameter estimate

1.43133

-0.0072

-0.0073

-1.4833

-0.1899

0.72382

0.043

4.36***

t-value 3.94 -0.21 -0.74 -0.74 -0.4 4.38 P-value < 0.0001 0.8341 0.4616 0.4589 0.689 < 0.0001

1995

Parameter estimate

1.37095

-0.0262

0.00534

-1.3794

-0.2433

0.31622

0.0184

2.51**

t-value 6.04 -1.21 0.9 -1.07 -0.91 3.19 P-value < 0.0001 0.2265 0.3664 0.2868 0.3654 0.0015

1996

Parameter estimate

-0.0896

-0.0958

0.00414

-5.9466

-0.4126

1.91904

0.0721

7.5***

t-value -0.13 -0.85 0.23 -1.4 -0.41 5.99 P-value 0.8998 0.3947 0.8175 0.161 0.6848 < 0.0001

1997

Parameter estimate

1.67894

-0.1794

0.00604

-0.8126

-0.313

0.58094

0.0178

2.62**

t-value 4.24 -1 0.45 -0.35 -0.55 3.4 P-value < 0.0001 0.32 0.6549 0.7258 0.5857 0.0007

1998

Parameter estimate

-0.3526

-0.037

-0.0039

-1.2274

-0.0964

1.36525

0.0943

9.12***

t-value -0.58 -0.21 -0.2 -0.37 -0.12 6.72 P-value 0.5637 0.8354 0.8431 0.7133 0.9025 < 0.0001

1999

Parameter estimate

2.57557

-0.1412

0.00712

0.03724

-0.3973

0.15616

0.0009

1.08

t-value 8.32 -1.49 0.82 0.03 -0.9 1.59 P-value < 0.0001 0.1369 0.4144 0.9745 0.3675 0.1122

2000

Parameter estimate

1.71815

-0.21815

0.01348

-0.28003

-0.3948

0.72714

0.1780

26.46***

t-value 6.32 -1.96 1.42 -0.69 -1.04 11.35 P-value < 0.0001 0.0500 0.1552 0.4895 0.2975 < 0.0001

2001

Parameter estimate

1.79724

-0.5199

0.02536

-0.1465

-0.0609

0.51391

0.0391

6.28***

t-value 6.71 -3.25 3.33 -0.49 -0.25 4.86 P-value < 0.0001 0.0012 0.0009 0.6218 0.8036 < 0.0001


71

(Table 10 continued)

Model: 0 1 2 3 4 5_it it it it it itMKTBOOK BVPSAdj EPS GW O INT LEVβ β β β β β μ= + + + + + +

Year Intercept BVPSAdj EPS GW O_INT LEV Adjusted R2 F-value

2002

Parameter estimate

1.94709

-0.4661

0.02368

0.01361

-0.0148

0.33181

0.0277

4.88***

t-value 8.32 -2.77 3.2 0.05 -0.08 3.59 P-value < 0.0001 0.0058 0.0014 0.9575 0.9401 0.0004

2003

Parameter estimate

1.95258

-0.3664

0.01298

-0.0554

-0.1731

0.35821

0.0157

3.18***

t-value 7.85 -2.34 2.2 -0.18 -1.11 3.33 P-value < 0.0001 0.0193 0.0282 0.8538 0.2653 0.0009

2004

Parameter estimate

3.12848

-0.7408

0.02886

-0.3723

-0.3239

0.10523

-0.0019

0.7

t-value 5.86 -1.69 1.44 -0.5 -0.63 0.44 P-value < 0.0001 0.091 0.1517 0.6143 0.5267 0.6604

2005

Parameter estimate

2.97203

-0.7895

0.02771

-0.1169

-0.8027

0.25023

0.0008

1.15

t-value 5.82 -2.03 1.88 -0.24 -1.09 1.03 P-value < 0.0001 0.0422 0.0606 0.8136 0.2762 0.3043

2006

Parameter estimate

2.0035

-0.8599

0.02205

-0.503

-1.0883

1.04403

0.1552

38.74***

t-value 9.13 -4.46 3.13 -1.88 -2.7 13.37 P-value < 0.0001 < 0.0001 0.0018 0.0604 0.0071 < 0.0001

2007

Parameter estimate

4.01523

-0.6337

0.01555

-0.4162

-0.6433

0.28534

0.0258

7.43***

t-value 20.91 -3.98 3.32 -2.08 -1.91 4.6 P-value < 0.0001 < 0.0001 0.0009 0.0376 0.0565 < 0.0001

2008

Parameter estimate

2.42157

-0.2881

0.01296

-0.2004

-0.455

0.12004

0.0351

10.79***

t-value 20.67 -4.26 6.63 -2.27 -2.21 2.37 P-value < 0.0001 < 0.0001 < 0.0001 0.0232 0.0272 0.0178

2009

Parameter estimate

1.78319

-0.1434

0.00605

-0.1389

-0.2451

0.2074

0.023

7.08***

t-value 16.66 -2.34 2.64 -1.43 -1.13 5.12 P-value < 0.0001 0.0194 0.0085 0.1518 0.259 < 0.0001

2010

Parameter estimate

2.06432

-0.2315

0.01503

-0.2236

-0.453

0.13141

0.0332

10.26***

t-value 24.81 -3.87 5.2 -2.51 -2.31 4.7 P-value < 0.0001 0.0001 < 0.0001 0.0122 0.0212 < 0.0001

2011

Parameter estimate

2.16243

-0.1985

0.01221

-0.1693

-0.3602

0.13219

0.0204

7.05***

t-value 22.34 -3.78 4.47 -1.79 -1.93 3.13 P-value < 0.0001 0.0002 < 0.0001 0.0743 0.0544 0.0018

Note. ** and *** indicate significance at the 5% and 1% levels respectively. All variables are previously defined.

The coefficient on BVPSAdj is negative in all of the 20 years as expected but is not statistically for the period between 1992 and 1998. In 2004, the significance for BVPSAdj is at the 10% level and in 2005 at the 5% level. For all other years, the p-value is less than 1%. Results suggest that, over a period of time between 1992 and 2011, the market-to-book ratio has increased.


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The coefficient for EPS is positive for 17 years and negative for 1993, 1994, and 1998 but not statistically significant. Between 1999 and 2011, the results are not significant for 1999 and 2004, but significant at the 5% level in 2004. In 2003, the coefficient for EPS has a p-value of 0.0282 and 0.0606 in 2005. For all other years, the coefficient for EPS is significant at the 1% level. The association between market-to-book ratio and leverage is statistically significant at the 1% level in all the years except for 2004 and 2005.

The association between market-to-book ratio and goodwill is negative in all the years between 1992 and 2011 except for in 1999 and 2002. But between 1992 and 2005, the results are not statistically significant. The coefficient for goodwill becomes significant from 2006 (post-IFRS adoption) when the p-value is 0.0604, 0.0376 in 2007, and 0.0232 in 2008. In 2009, goodwill is insignificant with the p-value of 0.1518. p-value is 0.0122 in 2010 and 0.0743 in 2011. The results for other intangible assets are very similar to those reported for goodwill.

Conclusion Prior studies on value relevance of IFRS adoption have provided conflicting results in different

jurisdictions. The reason for the different results can be contributed to sample size, period of analysis, type of firms, and jurisdiction-based differences. Moreover, the market value of a firm may or may not reflect all the recorded values of a firm due to the existence of unrecognizable or hidden assets of a firm. An association between share price and book value of equity and earnings per share is examined between 1992 and 2011 by looking at pre- and post-IFRS adoption periods. Market-to-book ratio of a firm and financial characteristics is examined to understand the effect of IFRS adoption in an Australian setting and to reexamine the value relevance of financial statements over a longer period of time.

Results show that IFRS adoption is value relevant when the adoption period is partitioned between 1992 and 2004 (pre-IFRS adoption period) and 2005 and 2010 (post-IFRS adoption period). But when the product of book value per share and earnings per share is used in the model, the results are opposite for loss-making firm compared to profit-making firms. This may explain some of the conflicting results from prior studies, suggesting the partition of firms based on profitability. The analysis shows that market-to-book ratio is negatively associated with BVPS and positively associated with EPS as expected. While market-to-book ratio has not gone up over a period of time (due to macro-economic changes), the ratio has increased in the post-IFRS adoption regime after controlling for leverage. Results change with change in t-value when goodwill and other intangible assets are included in the model, when looking at different time periods. Overall, the association remains negative and significant. Macro-economic condition is also responsible for changes in results across the time period suggesting that this may also have had an impact on conflicting results reported in prior studies.

The results of the study show that, while financial statements have become more value relevant over a period of time, the valuation changes due to macro-economic changes which changes the market-to-book ratio significantly. Results also suggest that increase in market-to-book ratio has reduced the significance of reported assets and liabilities in the balance sheet which questions the role of accounting standards in determining the value of firms. The implication of the study is that we need to consider changes in accounting standards which will increase the importance of book value of assets and reduce the gap between market value of equity and book value of equity. Other option is to explore means by which firms are able to report items like human capital, spending on advertising, business process improvement expenditure, and other expenses separately, which have long-term value implication but are currently expensed as per the requirement of IFRS.


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