The Adoption of IFRS 3: The Effects of Managerial Discretion and Stock Market Reactions

Posted: 13 Dec 2009

See all articles by Mattias Hamberg

Mattias Hamberg

Norwegian School of Economics (NHH)

Mari Paananen

University of Hertfordshire

Jiri Novak

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic

Date Written: December 3, 2009

Abstract

In recent years, several accounting standards, including IFRS 3, issued by the IASB substitute historical cost with fair value measures and so provide managers with increased discretion to determine the fair value without an actual market for the asset. Using Swedish data, we document the accounting consequences of the adoption of IFRS 3 and the stock market’s reaction. After the adoption of this standard in January 2005 the amount of capitalized goodwill increased substantially. Goodwill impairments under IFRS are considerably lower than goodwill amortizations and impairments made under Swedish GAAP. Consequently, the adoption of IFRS 3 increased reported earnings. An analysis of economic incentives influencing the impairment decision at the initial adoption of IFRS 3 shows that tenured management is negatively associated with the impairment decision. However, most firms did not reclassify goodwill or make additional impairments. Firms with substantial amounts of goodwill yielded abnormally high returns despite abnormally low earnings. Investors seem to, correctly or incorrectly, have viewed the accrual-based increase in earnings stemming from IFRS 3 as an indication of higher future cash flows.

Keywords: goodwill, IFRS 3, impairments, managerial discretion, accounting choice, Sweden

JEL Classification: M44, M41

Suggested Citation

Hamberg, Mattias and Paananen, Mari and Novak, Jiri, The Adoption of IFRS 3: The Effects of Managerial Discretion and Stock Market Reactions (December 3, 2009). European Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1517774

Mattias Hamberg (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

Mari Paananen

University of Hertfordshire ( email )

Hertford Herts, SG13 8QF
United Kingdom

Jiri Novak

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic ( email )

Opletalova 1606/26
Praha 1, 11000
Czech Republic
+420 222 112 314 (Phone)

HOME PAGE: http://ies.fsv.cuni.cz/cs/staff/novakji

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