The Reduction of Firms' Ownership Induced Agency Costs Following Financial Reporting Reform in the European Union

37 Pages Posted: 5 Jan 2006

See all articles by Jinhan Pae

Jinhan Pae

Korea University Business School (KUBS)

Daniel B. Thornton

Smith School of Business at Queen's University

Michael Welker

Queen's University - Queen's School of Business

Date Written: February 1, 2006

Abstract

We predict and find that regulations expected to harmonize and strengthen firms' financial reporting in the European Union (EU) in the early 2000s increase Tobin's Q ratios of firms with high agency costs due to (a) concentration of control (entrenchment) and (b) an excess of the largest shareholder's voting rights over cash flow rights. These results are consistent with stronger reporting standards enhancing firm value by mitigating incentives for controlling shareholders to expropriate minority shareholders. Increases in Tobin's Q associated with financial reporting reform are concentrated in EU firms that (a) are not cross-listed in the US; (b) have families as their largest shareholders; (c) are earnings-management-intensive prior to reform; and (d) attract low analyst following. These results suggest that minority shareholders of firms with the most severe perceived information asymmetries are among the major beneficiaries of EU financial reporting reform.

Keywords: International Accounting Standards, European Union, Agency Costs

JEL Classification: G38, G12, G29, G34, M41, M43, M44, M45

Suggested Citation

Pae, Jinhan and Thornton, Daniel B. and Welker, Michael, The Reduction of Firms' Ownership Induced Agency Costs Following Financial Reporting Reform in the European Union (February 1, 2006). Available at SSRN: https://ssrn.com/abstract=873607 or http://dx.doi.org/10.2139/ssrn.873607

Jinhan Pae

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea

Daniel B. Thornton

Smith School of Business at Queen's University ( email )

143 Union Street, #358
Kingston, Ontario K7L 3N6
Canada
613-328-5213 (Phone)
613-533-2321 (Fax)

HOME PAGE: http://smith.queensu.ca

Michael Welker (Contact Author)

Queen's University - Queen's School of Business ( email )

Kingston
Ontario, Ontario K7L 3N6
Canada

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