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Enforcement of Accounting Standards in Europe: Capital Market Based Evidence for the Two-Tier Mechanism in Germany


Joerg-Markus Hitz


University of Goettingen

Jürgen Ernstberger


University of Bochum

Michael Stich


University of Regensburg

October 25, 2011

European Accounting Review, Forthcoming

Abstract:     
On the background of regulatory initiatives that mandate the establishment of comparable enforcement systems in EU jurisdictions to ascertain consistent and faithful application of IFRS, this paper provides capital market based evidence on investor reactions for one specific institutional setup: the two-tier enforcement system in Germany. In operation since 2005, the German enforcement mechanism consists of a private body, the DPR, which investigates compliance of published financial reports of listed firms and, upon error findings, involves the German securities regulator BaFin, which on a second level enforces disclosure of these findings to establish adverse disclosure (‘name and shame’). For a sample of error findings published in the period 2005-2009, we investigate short- and long-term market reactions to error announcements. Results for abnormal returns, abnormal trading volumes, and abnormal bid-ask spreads indicate that these announcements represent new, negative information and suggest that, despite an enforcement environment that is categorized as weak in the extant literature, the activities of the DPR/BaFin seem to penalize infringing firms and thus provide potential deterrence. Multivariate analyses yield weak evidence that the magnitude of the market value discount is positively associated with the severity of the errors, with the threat of subsequent litigation, and with cases in which firms disagreed with the error findings of the DPR.

Number of Pages in PDF File: 38

Keywords: Enforcement, IFRS, accounting quality, restatements, regulation, Germany

JEL Classification: M41

Accepted Paper Series


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Date posted: April 28, 2009 ; Last revised: February 10, 2012

Suggested Citation

Hitz, Joerg-Markus and Ernstberger, Jürgen and Stich, Michael, Enforcement of Accounting Standards in Europe: Capital Market Based Evidence for the Two-Tier Mechanism in Germany (October 25, 2011). European Accounting Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1395729

Contact Information

Joerg-Markus Hitz (Contact Author)
University of Goettingen ( email )
Platz der Goettinger Sieben 3
D-37073 Goettingen
Germany
+49 551 39 7313 (Phone)
HOME PAGE: http://www.uni-goettingen.de/en/110622.html
Jürgen Ernstberger
University of Bochum ( email )
Universitätsstraße 150
44801 Bochum
Germany
HOME PAGE: http://www.rub.de/accounting
Michael Stich
University of Regensburg ( email )
93040 Regensburg
D-93040 Regensburg
Germany
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