Academic Roundup – August 2007

Manifest-I presents a summary of recently released academic papers on international corporate governance and corporate social responsibility issues.

Do IFRS/UK-GAAP reconciliations convey new information?
Edward Lee and Martin Walker, University of Manchester – Division of Accounting & Finance; and Hans Christensen, Manchester Business School.

IFRS reconciliations issued by UK companies provide new information to the market, despite suggestions that the switch to the new accounting standard is simply an accounting translation with no impact on expected future cash flows, this paper has found.

International Financial Reporting Standards (IFRS) became mandatory for all listed firms across the EU for financial years beginning on or after 1 January 2005. As part of implementation, UK companies were required to disclose IFRS/UK-GAAP reconciliations for their 2004 published accounts. This paper examines whether these reconciliations provide new information beyond previously applied GAAP, and whether companies timed the disclosure of this information opportunistically, perhaps to reduce its immediate price impact.

The paper found that earlier announcements are associated with analysts’ pressure, and later announcements with relatively poor results. The former, it is suggested, implies analysts consider IFRS reconciliations to be useful to firm valuation. The latter is taken to suggest that managers believe IFRS reconciliations include price sensitive information, and poorer results are therefore delayed in order to reduce the immediate negative impact on share price.

Differences in Governance Practices Between US and Foreign Firms: Measurement, Causes, and Consequences
Reena Aggarwal, Isil Erel, René Stulz and Rohan Williamson. National Bureau of Economic Research Working Paper 13288.

Firm-level governance attributes are complementary to, rather than substitutes for, country-level protection, evidence collected by this paper has suggested.

The authors compared the governance of foreign firms to that of comparable US firms, and found country characteristics to play an extremely important role in explaining why non-US firms invest less in internal governance than their matching US firm. It was found that investment in firm-level governance is higher when a country becomes more economically and financially developed, and moves to afford better protection to shareholder rights.

It was also found that the difference in governance between a US and non-US firm is strongly related to firm value: firms that invest less in internal governance than their comparable US opposites are worth less.

However, the authors suggest that neither investor protection nor country characteristics completely explain the relation between a firm’s internal governance investment and its value: there is a likelihood, it is argued, that firms typically under-invest in internal governance because to do otherwise would benefit minority shareholders at the expense of the controlling shareholder.

Corporate Social Responsibility (CSR), Company Law and Employees Interest: The Case of Irish Company Law: A Note
Olufemi Amao and Silvana Rendel-Beeri, National University of Ireland – University College Cork – Faculty of Law

As it stands in company law, the duty to safeguard employees’ interests is merely symbolic and practically unenforceable, the authors of this note argue.

The authors examine the trend of accommodating employees’ interests in the context of Irish company law – though also with reference to the UK – and point to research that demonstrates an increasing demand for companies to have higher ethical standards and accountability. The Irish legislator, following this trend, has imposed on directors a duty to have regard to the interests of the company’s employees. However, the authors note, employees have no tools to enforce the duties owed to them.

The authors suggest this gap might be closed by giving Ireland’s director of corporate enforcement power, where a company or director is acting in a manner oppressive to employees, to apply to a court for an order.

Leave a Reply