Sandy Hilton

Abstract

The role of securities markets regulations in the interpretation of accounting information

Accounting standard setters discussing global harmonization of accounting information have focused mainly on the accounting principles (GAAP) while spending little time discussing harmonization of securities regulations and enforcement. Harmonized accounting standards may be necessary to ensure global comparability of accounting information but they may not be sufficient. I examine the importance of harmonized securities regulations and enforcement. My research is particularly relevant to standard setters who are currently debating the future of global accounting standards, to securities commissions who are considering allowing foreign cross-listed companies to file foreign GAAP financial statements, and also for future international accounting research.

In spite of the potential importance of regulation harmonization, there has been little academic research examining the relation between regulation and capital markets. I examine how investors react to varying quality of securities regulation and enforcement. I use value relevance tests to determine if investors consistently give higher valuations to firms subject to higher securities regulation. I also use earnings response tests to provide additional evidence on whether investors place more credibility and reliance on accounting information released by those firms. I examine two different research settings -- one within-country and one cross-country. The within-country design exploits a unique situation in Canada, where more than one regulatory body exists within a single country. I then expand my research to examine one cross-country setting, Canada-U.S.

Managers' choice of exchange listing (crosslisting) implicitly chooses the level of regulation and enforcement their firm is subject to. This self selection may potentially cause bias in my value relevance and earnings response coefficient tests, and therefore I use a two-stage process to control for self selection. I first model managers' listing (crosslisting) decisions and then use those results in both the value relevance and earnings response coefficient tests.

The results from my value relevance tests are limited. The majority of the within-country tests found no statistically significant difference in the equity cost of capital after controlling for other known determinants and potential self selection. The results for the cross-country sample are also limited. When using share trading turnover as the proxy for cost of equity capital, my value relevance hypothesis is supported. The other cost of equity capital proxies provide no support for the value relevance hypothesis.

The results for the earnings response coefficient tests support my second hypothesis for both the within-country and cross-country samples. Two of the three year-by-year tests for the within-country sample indicate that earnings response coefficients are higher for firms subject to more regulation and enforcement, consistent with my prediction. The cross-country sample results are also consistent with my prediction.

The limited evidence for both hypotheses in my research suggests that harmonization of securities regulation and enforcement may be a necessary part of obtaining globally harmonized accounting information. This suggests that regulators carefully consider the current trend of adopting harmonized GAAP without other major changes to their securities regulations and enforcement capabilities.