Voluntary IAS and U.S. Gaap Adoption by Continental European Firms: The Role of Labor Relations

49 Pages Posted: 2 Jan 2007

See all articles by Joanna S. Wu

Joanna S. Wu

University of Rochester - Simon Business School

Ivy Zhang

University of California, Riverside

Date Written: November 2006

Abstract

We investigate the decision by a sample of Continental European firms to voluntarily adopt the International Accounting Standards (IAS) or U.S. GAAP. The strong employment protection laws in Continental Europe lead to labor practices that lack responsiveness to firm underlying economic performance. We argue that by switching to IAS/U.S. GAAP, a Continental European company can more credibly communicate with its labor force, and/or a potential third party (e.g. a government labor office, an arbitrator, or a labor court judge in the case of labor disputes), the true economic conditions of the firm and potentially reduce the costs associated with labor force adjustments. We expect the costs of rigid labor practices, thus the potential benefits of switching to IAS/U.S. GAAP, to be particularly high for firms with low labor productivity. Therefore, we predict that 1) firms with low labor productivity are more likely to adopt IAS/U.S. GAAP after controlling for other factors potentially affecting the adoption decision; 2) firms adopting IAS/U.S. GAAP and with low labor productivity report lower earnings than before the adoption and the earnings change is more negative than for similar non-adopting firms; 3) firms adopting IAS/U.S. GAAP and with low labor productivity are more likely to reduce labor forces than before the adoption and the reduction in labor forces is more pronounced than for similar non-adopting firms. Our results are consistent with these predictions.

Keywords: labor relations, international accounting standards, U.S. GAAP

JEL Classification: D82, F02, G28, J21, K31, M41, M44, M47

Suggested Citation

Wu, Joanna and Zhang, Ivy, Voluntary IAS and U.S. Gaap Adoption by Continental European Firms: The Role of Labor Relations (November 2006). Simon School Working Paper No. FR 06-09. Available at SSRN: https://ssrn.com/abstract=954599 or http://dx.doi.org/10.2139/ssrn.954599

Joanna Wu (Contact Author)

University of Rochester - Simon Business School ( email )

Carol Simon Hall 3-160D
Rochester, NY 14627
United States
585-275-5468 (Phone)
585-442-6323 (Fax)

Ivy Zhang

University of California, Riverside ( email )

900 University Ave
Riverside, CA 92521
United States

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