IFRS DISCLOSURE IN THE PRESS RELEASES

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Preface

Finally my study comes to its logical end – the thesis. Whereas this thesis is not the first one I have written due to my previous education, it is probably the most challenging one.

Challenging in the way that it closes the chapter of my study of Accountancy and Controlling at the Rijksuniversiteit Groningen, the Netherlands. Both the study and the thesis were the most learning and demanding experiences. Therefore, I would like to express my gratitude to the people who supported me in all my efforts.

In the first place I would like to thank my mother for her support and patience that she

unconditionally had for me whenever something did not happened the way I wanted. Also my girl-friend Leisbeth deserves an enormous thank for her support and distraction when I needed it. Although not directly involved in the study process, my girl-friend’s parents, Ko and Riet, many thanks go to you for your interest about the thesis. Finally, all my friends deserve a great deal of appreciation for their interest and fun that we had together.

I would also like to express my special gratitude to my thesis supervisor Reggy Hooghiemstra. His always helpful comments and willingness to help whenever I encountered difficulties have brought me an additional motivation in writing the thesis.

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Introduction and the main research question

1.1 Introduction

The European Union has been engaged in the complicated task of harmonization since 80’s with the main goal to establish the common market between the member-states. At this point the financial year 2005 has passed and the European listed companies have prepared for the first time their annual accounts according to the International Financial Reporting Standards or IFRS. Judging only from the scope of the change that had to be made by the quoted companies, the adoption of IFRS has been a very complicated process. The European Union consists of 15 member-states and each member-state had its own accounting standards that had to be given up by individual listed companies in order to implement IFRS. Furthermore, even before the actual date by which the first IFRS annual reports were to appear, it was clear that the IFRS adoption would bring some very considerable changes into the financial reporting of involved companies. A lot of information appeared in the financial media about the facts that the IFRS adoption would actually produce other financial outcomes than the users are accustomed to under the local GAAP’s. And more important, these different figures might have significant consequences for the financial markets. As PWC partner Ian Dilks mentioned already in January 2005: “Uncertainty still remains in the capital markets and analysts community as to the impact that IFRS adoption will have on reported figures. Companies must take control of the process of informing interested parties about what the accounting change will mean to them. Adept handling of the IFRS conversion process will boost investor confidence. Conversely, where companies mismanage the process, the capital markets could take an unforgettable view” (www.accountancyage.com).

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1.2 Main research question, sub-questions and motivation.

Bearing in mind the described developments, it is interesting to investigate the situation of disclosure of information about the adoption of IFRS in the press releases in the Netherlands.

Therefore, my main research question is:

Did listed companies inform the users in their press releases about the adoption of IFRS before the actual adoption took place?

Did companies provide more information over time about the adoption of IFRS? In order to answer the main research question, I divided it into a number of sub-questions:

1. Why was IFRS adopted by the European Union and what are the consequences of IFRS for adopting companies?

2. Who are the users of the press releases and what regulations are there for the issuance of press releases? Is information contained in the press releases relevant for their users? 3. Did companies provide the IFRS-related information in their press releases before the adoption date?

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1.3 Structure of the study

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2 The European Union and International Financial Reporting Standards

The development of accounting standards has never been at a halt in the European Union. Before the European Union became a fact, every member-state had been developing its own accounting standards. However, since 1980 the harmonization of accounting standards has increasingly been on the agenda of European countries. Accordingly, the accounting systems of Member States had to be adjusted to reflect the European harmonization. In this chapter I begin with the description of the influence of the European Union on the development of accounting standards. To proceed, I also elaborate on the need for international accounting standards and the consequences thereof for the European companies. Furthermore, I take a closer look at the first-time adoption of International Financial Reporting Standards (IFRS), at the disclosure requirements for the first-time adoption, and in particular at the disclosure requirements of IFRS concerning interim reports. This chapter closes with an overview of scientific research on the effects of IFRS on adopting companies.

2.2 Harmonization of financial reporting within the EU

The European Union was established by the Treaty of Maastricht. Within the EU the European Commission has the authority to implement directives and is the only institution that can initiate new proposals. The new proposals have to go through a long procedure before the Council of Ministers takes a final decision on whether a proposal will be implemented. The approved directives are binding for the member-states and have to be integrated into national legislation of member-states within a certain period of time. Once approved by the Council of Ministers and the European Parliament, the directives do not have therefore direct and immediate consequences for the member-states.

The European Union has a significant influence over the financial reporting of the member-states. The grounds for this influence rest in the Treaty of Rome (1957), when the European Economic Community was established by 6 member-states (van der Tas, 2002). Article 54, paragraph 39 of the Treaty of Rome presents the formal reason for the harmonization of accounting systems across all member-states of the Community, with the aim being to reach an economic equal level playing field within the community (Haller, Kepler, 2002). In this Treaty a number of objectives for the European Economic Community were formulated. One of the main objectives was to establish a common market between the member-states, later extended to an internal market. A number of provisions have been formulated in order to achieve one common-market and which are also relevant for financial reporting within the European Union (van Helleman, van der Tas, 2004):

1. Freedom of establishment

Member-states should recognize legal entities such as undertakings of other member-states. Restrictions on freedom of establishment by nationals of one member-state in the territory of another member-state should be abolished. The abolition applies to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of one member-state established in the territory of another member-state.

2. Freedom of capital

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comparable financial data. Therefore, it can be argued that harmonization plays an important role in providing such information.

3. Free competition

This provision contributes to the common market objective by prohibiting any agreements between undertakings or decisions of associations of undertakings, which may affect trade between the member-states and which result in prevention, restriction or restoration of competition within the common market.

At this point one may pose a question: why is the harmonization of financial reporting so important? Why so much time and effort has been invested into it by the European Union? According to, e.g. van der Tas (2002) and van Hulle (1993), there are two important reasons for international harmonization of financial reporting:

1. Comparability.

Lack of comparability can lead to wrong decision-making by the investors. In attempting to value a foreign company, there is a tendency to look at earnings and other financial data from a home perspective (Radebaugh, Gray, 2002). However, it is possible that higher earnings or better key ratios of one company compared to another are the result of different accounting principles used in the financial reporting. This can eventually lead to a wrong investment decision in case the differences are not taken into account. Even if the investors are aware of accounting differences, these differences complicate the decision-making process and carry extra costs since the annual reports of different companies from different countries have to be adjusted in order to be able to compare them with each other. Therefore, capital markets can be made more efficient by increasing the comparability of annual reports.

2. Equivalence of financial information

This aspect concerns companies that are cross-listed on different stock-exchanges or have to deal with different accounting principles. Firstly, when a company is listed in different countries, it has to report under the domestic and foreign accounting principles at the same time. Therefore, either annual accounts have to be reconciled or two sets of annual reports have to be prepared. This does not only mean extra translation expenses, but can lead to different earnings and equity figures, which can be misunderstood by the investors. A good example of consequences of cross-listing and, therefore, reconciliation for a company’s annual reports is Daimler-Benz’ first time listing on New York Stock Exchange. Daimler-Benz was the first German company to be listed in the US in 1993. In order to be listed on NYSE, Daimler-Benz had to comply with the requirements of SEC. The company had to provide a reconciliation of earnings and equity from German GAAP to US GAAP in order to comply with the Form 20-F filing requirement (Radebaugh, Gray, 2002). The reconciliation showed quite interesting results: net income dropped from 602 million DM to a loss of 1,839 million DM under US GAAP and the stockholders equity increased from 18,145 million DM to 26,281 million DM under US GAAP (Form 20-f filed with the SEC). Based on these figures, return on equity (ROE) ratio’s showed quite opposite numbers: from 3.39% under German GAAP to -6.69% under US GAAP. Investors were undoubtedly confused by these disclosures and, no doubt, asked themselves the question: which set of accounting rules produced the correct figure; US GAAP, with a loss of DM 1,839 million or the German rules with a profit of DM 602 million? They probably concluded that neither figure was to be trusted (Flower, 1997).

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As I mentioned at the beginning of this section, the EU has been involved in the international harmonization of accounting and reporting standards since the Treaty of Rome was drawn up. Two European Union Directives have special relevance for the harmonization process within the EU: the 4th and the 7th Directive. The 4th Directive was aimed at harmonizing of the national laws on the accounting regulations of companies. Besides aspects affecting the format and valuation, other main features of the 4th Directive include the requirements to prepare annual accounts, which provide a true and fair view of the company’s assets, liabilities, financial position, earnings, as well as substantial requirements on information that has to be provided by means of notes. The 7th Directive on consolidated accounts determines the identification of groups, scope of group accounts and obligation to prepare, audit and publish group financial statements as well as consolidation-related methods.

In order to reach the harmonization of accounting systems between the member-states of the European Union, the 4th and the 7th Directives had to be implemented into the national laws. The European Commission has stressed that the harmonization pursued through implementation of Directives does not necessarily mean uniformity. Comparability and equivalence of financial information were the main objectives of harmonization (Art 43, 4th Directive).

2.3 Need for international accounting standards and the EU

In the beginning of 1990’s companies were experiencing changed conditions for doing business on the global scale, also influencing the EU policy as a consequence. Trade and investment have grown rapidly relative to economic growth (Haller and Kepler, 2002). Alongside with growth in trade and investment, the globalization of capital markets also took place. The development of global capital markets has created a force for the international harmonization of accounting amongst the companies whose shares were traded on those markets and who had to satisfy the information needs of investors in different countries (Thorell and Whittington, 1994). European multinational enterprises, often named “global players” due to their size and influence, needed to gain access to highly liquid capital markets in order to obtain the capital necessary for financing their global activities. In addition to that, quotation on a foreign stock exchange would bring a number of benefits to a company, such as greater market ability for the company’s shares, increased publicity for the company’s products and less political dependence from its’ domestic market. Further, an ability to get a foothold on foreign capital markets by means of listing could be directly used by the European multinationals as means to improve the relations with foreign governments and customers (Biddle and Saudagaran, 1991).

Haller and Kepler (2002) in their research on financial accounting developments in the EU state that this rapid globalization of doing business went alongside with a strong increase in demand – especially by investors- for internationally accepted financial information useful for decision-making. Moreover, the companies have more and more become conscious that one set of international accounting standards also has a very attractive aspect in terms of efficiency, whereby decreasing the costs of preparation and translation of financial reporting. The need for an efficient, mutually understood and recognized, and identical set of rules for financial reporting in light of globalization was recognized by companies. This has led to the adoption of internationally accepted accounting standards, in the first place by the companies belonging to international groups (Haller, Kepler, 2002).

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GAAP. While the problem faced by Europe's larger companies in internationalizing their financial reports is not new, there has been disagreement on the accounting standards and other requirements which should be met in such reports. This problem is particularly acute for companies which wish to list their securities or raise capital in the United States (Cairns, 1997). The American watchdog SEC (Security and Exchange Commission) did not accepted financial statements that were not prepared according to US GAAP by non-US companies. The reconciliation, however, has a number of disadvantages: not only it is costly, but it reveals remarkable differences between the figures for the profit and equity reported under the two sets of accounting rules, thereby confusing the investors and discrediting the accountants (Flower, 1997).

The European Commission initially sought to persuade the American SEC to support the mutual recognition of European financial statements prepared in accordance with the directives, but the SEC was firmly opposed to such idea (Schuetze, 1994). On way or another, European companies needed the access to US capital market without competitive disadvantage, and their investors needed relevant, internationally accepted, understandable and comparable information. However, the European Union could not surrender the jurisdiction for setting the rules that governed the accounts of major European companies to an outside power over which it had no influence. Establishing own European Accounting Standard Setting Body was not an option either, as it would require legislation and cost a great deal of time (Flower, 1997). In solving this dilemma, the only realistic option open to the EU was to lend its full support to the adoption of International Accounting Standards as the mutually acceptable standards of accounting and disclosure (Cairns, 1997). This way, the European accounting rules would converge with the internationally accepted accounting standards, and both European and US companies would get access to each other capital markets. The European Commission has clearly set out its strategy with regard to co-operation with IASC in 1995 in its’ report “Accounting Harmonization: A New Strategy vis-à-vis International Harmonization” (Commission of European Communities, 1995). In this document, the EC stated that existing accounting rules based on directives did not meet the challenges preparers, users of accounts and standard setters had to face. The accounts prepared according to the Accounting Directives, were no longer acceptable for international capital market purposes (Commission of European Communities, 1995). Rather than revising the Directives or developing a separate set of European accounting standards, the European Commission decided to participate actively in the creation of internationally accepted standards through support of and co-operation with the IASC, thereby taking into account the harmonisation efforts at a broader international level (Commission of European Communities, 1995).

2.4 The first time adoption of IFRS

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Implementation of IFRS has a number of significant consequences for the companies: there is less choice in measurement and recognition, much more information has to be provided to the users and it is almost impossible to deviate from the rules prescribed by IFRS (Bos, 2005). Obviously, the adoption of IFRS is not just a matter of a few "topside" adjustments applied in consolidation and expanded in disclosures (PWC, Worldwatch, 2004). It is a major change, in the first place in the primary basis of accounting and the consolidation rules.

Relevant standard for the first-time adoption, IFRS 1, was issued by the IASB on 19 June 2003. IFRS 1 is effective for the periods beginning at least on or after January 2004. The objective of the standard is to set out the procedures that an entity must follow when it adopts IFRS for the first time (Deloitte, A first-time adoption – guide to IFRS 1, 2004). The standard ensures that the financial statements contain high quality information that is transparent and comparable, and can be generated at a cost that does not exceed the benefits to users. The standard applies to an entity that, for the first time, makes an explicit and unreserved statement that its general purpose financial statements comply with IFRS (Deloitte, A first-time adoption – guide to IFRS 1, 2004). The main feature of IFRS 1 is a full retrospective application of all Firs in force at the closing balance sheet date for the first IFRS financial statements (PWC, Adopting IFRS 2004). The general principle is that the (first time) financial statements should be prepared on the basis that the entity had always applied IFRS. However, as it may be difficult, expensive or impossible to rigidly apply this principle, the standard contains some important exceptions and exemptions to the basic measurement principles of some other IFRS (Scott, 2005).

Most European listed companies will have to apply IFRS 1 when they switch from the local GAAP to IFRS. The first time adoption of IFRS has a number of requirements that the companies have to follow:

* Accounting policies

An entity shall use the same accounting policies in its opening IFRS balance sheet and throughout all periods presented in its first IFRS financial statements (IFRS 1, art.7). In case the accounting policies that an entity uses in the opening IFRS balance sheet differ from those that it used for the same date using its previous GAAP, the resulting adjustments should be recognised directly in the retained earnings (IFRS 1, art.11).There are significant disclosure requirements relating to changes of accounting policies on transition to IFRS (Deloitte, First time adoption, Guide to IFRS 1).

* Prepare the opening Balance Sheet for the first period reported under IFRS

The opening Balance Sheet is a first point from which a subsequent accounting under IFRS will take place. The opening Balance Sheet should be prepared at the transitional date (IFRS 1, art.6). When a company prepares its first IFRS financial statements for the year ending 31 December 2005, the transitional date is 1 January 2004 and the opening IFRS Balance Sheet must be prepared at that date. This has to be done due to the requirement of IFRS that comparable information should be presented for at least a period of one year (Deloitte, First time adoption, guide to IFRS 1). The opening Balance Sheet does not need to be published in the first IFRS financial statements (IFRS 1, art.6). For example, a company which in 2005 applies IFRS for the first time and provides comparable figures over a period of one year, needs to prepare a opening Balance Sheet at 1 of January 2004. This opening Balance Sheet does not need to be published, however, explanations about the differences in assets and reported earning should be compulsory provided.

* Apply exemptions

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exceed the benefits in certain instances. IFRS 1 provides therefore ten optional exemptions to the principle of retrospective application. Moreover, the IASB has assessed that the retrospective application of change in accounting policies in certain situations can not be performed with sufficient reliability. Therefore, IFRS 1 contains four mandatory exemptions to the general principle of retrospective application (Deloitte, First time adoption, Guide to IFRS 1)

2.4 Disclosure requirements of IFRS

It is evident from the previous section, that first-time adoption of IFRS is a time-consuming and complicated process. Furthermore, the companies have to go through a number of stages in order to implement this change in the financial reporting system. As my study focuses on question whether adopting companies provide voluntary disclosure on the consequences of IFRS on their financial position, it is essential to illustrate what information about IFRS companies mandatory have to provide as part of their disclosure. Only by recognising the information that must be provided - the minimum disclosure, can one be able to investigate if extra information is disclosed in the annual reports.

IFRS 1 requires disclosures that explain how the transition from previous GAAP to IFRS affected the entity's reported financial position, financial performance, and cash flows (IFRS, art 38). This includes:

1. Reconciliations of equity reported under previous GAAP to equity under IFRS both at the date of the opening IFRS balance sheet and the end of the last annual period reported under the previous GAAP (IFRS 1, art.39, a).

2. Reconciliations of profit or loss for the last annual period reported under the previous GAAP to profit or loss under IFRSs for the same period (IFRS 1, art 39,b).

3. Explanation of material adjustments that were made, in adopting IFRSs for the first time, to the balance sheet, income statement, and cash flow statement (IFRS 1, art.40).

4. If errors in previous-GAAP financial statements were discovered in the course of transition to IFRSs, those must be separately disclosed (IFRS 1, art.41).

5. If the entity recognised or reversed any impairment losses in preparing its opening IFRS Balance Sheet, these must be disclosed (IFRS 1, art 39,c).

As topic of my research relates to the press releases, and press releases mostly appear together with interim reports, it is vital to understand what IFRS 1 requirements are there for the interim reporting. To begin with, most securities regulations require that listed companies disclose interim reports on the half-year or quarterly basis. In the Netherlands, in particular, article 29 of the Fondsenreglement stipulates that listed companies must mandatory disclose their half-year financial figures. The half-year reports should be quite extensive in information disclosure, whereas quarterly reports are smaller in size but should also provide sufficient financial information. IFRS 1, however, does not require an entity to publish interim reports. Therefore, IFRS does not require that an entity publish interim reports in compliance with IAS 34 Interim Financial Reporting (Deloitte, First time adoption, Guide to IFRS 1). An entity can however elect to prepare interim reports under IAS 34. In case entity presents an interim financial report under IAS 34 Interim Financial Reporting for the part of the period covered by its first IFRS statements, the entity shall satisfy the following requirements in addition to the requirements of IAS 34 ( IFRS 1, art.45):

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a) its equity under previous GAAP at the end of that comparable interim period to its equity under IFRS at that date, and

b) its profit and loss under previous GAAP for that comparable interim period (current and year-to-date)to its profit and loss under IFRS for that period.

2. Furthermore, in addition to the above-mentioned reconciliations, an entity first interim financial report under IAS 34 for part of the period covered by its first IFRS financial statements shall also include the following reconciliations:

* equity reported under previous GAAP to equity reported IFRS at the date of the opening balance sheet and the end of the last annual period reported under previous GAAP(IFRS 1, art.39, a)

* profit and loss for the last annual period in which the previous GAAP was applied to profit and loss under IFRS for the same period (IFRS 1, art 39,b)

IAS 34 requires minimum disclosures, which are based on the assumption that users of interim financial report also have access to the most recent annual financial statements. However, IAS 34 also requires an entity to disclose “any events or transactions that are material to an understanding of the current interim period”. Therefore, if a first-time adopter did not, in its most recent annual financial statements under previous GAAP, disclose information material to an understanding of the current interim period, its interim financial report shall disclose that information or include a cross-reference to another published document that includes it (IFRS 1, art. 46).

There are also a number of requirements to the explanatory notes that should be provided with the Balance Sheet, Profit and Loss account and the Cash Flow Statement. These requirements are specified in detail in IAS 1. In short, the notes must be presented in a systematic manner and must disclose the accounting policies adopted in the preparation of the financial statements. The notes must also disclose any additional information required by IFRS that is not presented in the primary statements, but is relevant for users to understand those statements.

2.5 Effects of IFRS on adopting companies

Taking the above-mentioned into consideration, one can conclude that adoption of IFRS is not an easy task to fulfil. The technical side of the adoption process can and will present a major challenge for adopting companies. However, the benefits of IFRS should outweigh the costs, otherwise no entity will engage in such a time-consuming and expensive activity.

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the benefits of IAS, the motivation of adoption of IAS by companies could also become more visible. Secondly, the institutional characteristics of jurisdictions that choose to adopt these standards are interesting. With a better understanding of the legal and economic factors that determine the demand for IFRS, standard setters might be able to promote IFRS more effectively to countries that do not employ IFRS (Hope et al., 2005). To sum up, the decision to adopt IFRS can be made either at the firm level (if IFRS are one of the reporting standards firms are allowed to choose from) or at the country level - if IFRS are mandated to be followed as nation-wide reporting standards (Hope et al., 2005). Consequently, the effects of IFRS can also be seen from two perspectives – institutional and firm-level.

Hope, Jin and Kang (2005) studied the association between adopting of IFRS and certain institutional factors using bonding theory1_{. On the sample of 38 countries, they examine the}

role of investor protection, law enforcement, and stock-market access in the adoption decision. The authors document a significant negative association between the adoption of IFRS and investor protection or law enforcement. Countries with weak shareholder protection (weak law enforcement) are more likely to adopt IFRS than the countries with strong shareholder protection. This is consistent with the view that countries with weak shareholder protection bond themselves to superior accounting standards in order to access international investors or markets (Hope et al., 2005). However, countries that already have relatively strong investor protection mechanisms in place might view little incremental net benefits from IFRS adoption (Hope et al, 2005).Further, evidence was found that countries providing better access to their stock-markets for international investors are also more likely to adopt IFRS.

A study by Renders and Gaeremynck (2005) suggests quite opposite results concerning the association between the investor protection laws and adoption of IFRS. The authors have investigated a number of European companies that were allowed to adopt IFRS in 2001 from the point of view of company insiders. Adoption of IFRS leads to costs for company insiders, namely less managerial discretion and smaller private benefits due to increased disclosure requirements and less accounting choices. Companies will refrain from adopting IFRS early on because of opportunistic behavior by management in countries with weak investor protection (Renders, Gaeremynck, 2005). Strong laws protecting investors in contrast lower private benefits of control, thereby reducing the costs of switching to IFRS for insiders. Therefore, IFRS adoption is positively related to investor protection laws (Renders, Gaeremynck, 2005). A study by Dumontier and Raffournier (1998) has investigated the reasons why companies voluntary comply with IAS in Switzerland. Switzerland is particularly interesting because this country is characterized by a low level of accounting regulation and relatively high accounting permissiveness, which makes compliance with IAS especially costly due to additional disclosure and renunciation of considerable discretion of accounting practices (Dumontier and Raffournier, 1998). Authors suggest that by knowing the characteristics of voluntary adopters of IAS, it might be possible to answer the question of which companies are more or less likely to adopt IAS. A voluntary adoption of IAS is more likely by companies with the following characteristics: listing on the foreign stock exchanges, international (operate internationally), larger in size, have a Big – 6 (now Big- 4) firm as auditor and possess considerable ownership diffusion. No evidence has been found on leverage, profitability and capital intensity.

A number of studies have been conducted on the consequences of voluntary adoption of IFRS at the firm-level. El-Gazzar (et.al 1999) has conducted an interesting study on the grounds for

1_{Bonding theory states that cross-listing on a US stock-exchange commits the listing firm to}

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multinationals to comply with IAS (1999). He found that firms are motivated to voluntary adopt IAS in order to enhance their exposure to foreign capital markets, to improve customer recognition, to secure foreign capital and to reduce political costs of doing business abroad (El-Gazzar, 1999).

One of much advertised benefits of more transparent financial reporting is a lower information asymmetry2_{. Cuijpers and Buijink (2005) examined the annual reports of 133 European early}

adopters of either IAS or US GAAP in the book year 1999. An early adoption of IAS can be viewed as a commitment to an increased disclosure, as disclosure requirements of IAS are broader and stricter than any other local GAAP. The researchers argue that firms voluntarily adopt IAS if they expect net benefits of the adoption to outweigh the costs. Their hypothesis is as follows: if increased disclosure makes financial statements more informative to the capital markets participants, the information asymmetry is then expected to decrease. A possibility of lower information asymmetry for the companies that had adopted IAS has been tested by examining a several proxies of information asymmetry: lower cost of capital, increased analysts following and whether adoption of IAS influences uncertainty about the company among analysts and investors.

An adoption of IAS should reduce a firm’s cost of equity capital, because the increased disclosure and stricter measurement rules of IAS are expected to reduce information asymmetry, which in turn leads to lower transaction costs and increased market liquidity (Cuijpers, Buijink, 2005). However, no evidence was found of any direct benefits of non-local GAAP (IAS) adoption in terms of lower cost of capital. A possible explanation for this finding is that firms need time to be able to fully comply with the requirements of IAS, as well as users of financial statements need time to learn to interpret these statements.

Cuijpers and Buijink also argue that if analysts are primarily information intermediaries, an increase in disclosure is expected to lead to an increase in number of investors, and consequently to an increase in firm’s analyst following, because the investors would require more analysts’ services. Moreover, as IAS or US GAAP increase international comparability of financial statements, the adopters of either GAAPs should also attract an increasing number of international analysts. Besides, larger companies or companies listed on more exchanges should attract higher level of analysts following due to their larger public exposure. A strong evidence of extended analysts following of adopters of IAS was indeed documented by the researchers.

The third proxy that has been tested is the one of reduced uncertainty among analysts about a company adopting IAS. Adoption of IAS or US GAAP typically reduces the choice of accounting measurement rules that can be used compared to local GAAP (Ashbaugh and Pincus, 2001). Therefore, adoption of either GAAP’s should lead to more homogeneous beliefs about a firm, because differences in interpretation of accounting information by analysts and investors are reduced (Cuijpers, Buijink, 2005). On the other hand, as IAS is quite new for financial analysts and investors, the financial information provided by annual reports might be harder to interpret, causing higher uncertainty. Cuijpers and Buijnk apparently found that uncertainty was higher for firms using non-local GAAP (IAS or US GAAP) than for firms using local GAAP.

2 _{Information asymmetry creates costs by introducing adverse selection into transactions between buyers and}

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An alternative research on consequences of adopting a non-local GAAP (IAS or US GAAP) in light of increased disclosure and lower information asymmetry has been conducted by Leuz and Verrecchia (2000) on a number of German companies. As disclosure levels under German GAAP have been criticized as relatively low, a number of German firms have switched to either IAS or US GAAP in attempt to overcome this criticism. Again, due to more extensive disclosure requirements of either reporting systems, such a switch is thought to represent a commitment to increased disclosure. Therefore, firms that have made such a switch should theoretically enjoy measurable economic benefits in the form of a lower information asymmetry component of the cost of capital.

Three proxies for the information asymmetry have been tested: the bid-ask spread, trading volume and share price volatility. The hypothesis was that a switch to international reporting regime leads to a lower bid-ask spread, more trading volume and less share price volatility3_.

The authors found that adoption of IAS has resulted in lower bid-ask spreads and higher trading volume of firms’ shares. However, no evidence of negative association or reduction of share price volatility has been documented.

2.6 Summary

The European Union has taken on the uneasy task of harmonization since 80’s with the goal to establish a common market between the Member States. Three provisions were especially relevant for that goal: freedom of establishment, freedom of capital and freedom of competition. Comparability and the equivalence of the financial information were recognized as the benefits of harmonization. Meanwhile, globalization of capital markets has also created demand for internationally accepted financial information. An important issue that influenced the course of events was the American capital market, mainly due to its size, liquidity and unwillingness to accept non-US GAAP financial statements. Because the EU could not surrender its jurisdiction to the United States for setting up rules that could influence the financial reporting of major European companies, its decision was to support the adoption of International Financial reporting Standards. The European listed companies are required to use IFRS since 2005. Adopting companies had to apply the relevant standard IFRS 1 in order to implement IFRS for the first-time. The first-time adoption appeared to be a complicated process, also due to broad disclosure and reconciliation requirements. The disclosure of relevant for the research question interim reports is also quite extensive, including reconciliation of equity and profit and loss account for the relevant periods.

The effects of adopting IFRS have been studied based on “early adopters” even before the actual adoption has been made mandatory for listed companies in the EU. From the institutional perspective, the “early adopters” have been studied using bonding theory and from the point of view of company insiders. The results of these two studies are quite different. Study based on bonding theory suggests that there is a negative association between the adoption of IFRS and investor protection or law enforcement. However, a positive association between the adoption of IFRS and investor protection laws was found when investigated from a point of view of company insiders. Furthermore, larger, internationally operating companies that are listed on the foreign stock exchanges are believed to likely adopt IFRS.

3 _{Bid-ask spread is commonly thought as a measure of information asymmetry explicitly. Bid-ask spread deals}

with the adverse selection problem that is present in environment with information asymmetry. Less information asymmetry implies less adverse selection, which in turn means a smaller bid-ask spread.

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3 Value of press releases

Annual reports and press releases are issued by the companies for a reason. The disclosure of such information is needed by the users, in the first place for decision-making purposes. The first question I try to answer in this chapter is than: who are the users of information provided by companies and how do they use the information? To proceed, I shall investigate how the users value the information disclosed in the press-releases. If it is of any value, than release of that information would cause the stock-exchange prices to change. Furthermore, as my study concerns European listed companies, I describe the legal base that governs the information disclosure in the European Union.

3.2 Users of annual reports

In the course of its development, financial reporting has historically witnessed a major change of its’ principal users, shifting gradually from owners of companies to those with direct financial investments. In recent years, there has also been an increasing acknowledgement that finance providers such as shareholders, bankers, lenders and creditors are not the only group affected by the operations of a corporation. Therefore, there is an obligation to report to a wider audience, which includes employees, trade unions, consumers, government agencies and the general public (Radebaugh, Gray, 2002).

Companies provide their annual reports with a specific goal. This goal is to serve primarily those users who have limited ability, authority or resources to obtain information and who rely on financial statements as their main source of information. However, in order to make informed decision about a company, an ability to actually process and analyze financial information is essential. Users with such abilities are referred in the accounting literature as being “reasonably informed”. Despite of more than 100 years history of information disclosure the way we know it today, only recently attempts have been made to assess the above-mentioned ability of users of financial information to utilize it for their needs. Radebaugh and Gray inform about a growing evidence that annual reports are neither read not understood by considerable percentage of those whom they are supposed to inform, especially the layperson investor. The majority of stakeholders attend at least to some degree to the services of investment analysts ( Room, 1997). A study on how private shareholders use the annual reports by Lee and Tweedie (1975,1976) indicates that 11% of respondents even completely outsourced their investment decisions to the investment firms. Therefore, direct users of annual reports appear to be investment analysts who have the skills and experience to analyze the financial information. The analysts do what they are supposed to do best in the first place – provide a sound financial advice to those who need it and get paid for it. Again, the fact is that many investors and shareholders do not make investment decisions by themselves, but rely on advice of analysts instead.

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investment analysts use. Annual reports are recognized as critical, but not sufficient source of information. Direct contacts with the management and interim reports function as important second source of information.

Investment analysts employ all the parts of annual reports; however they assign different importance to different parts. One can suggest that the degree to which different parts of annual reports are read is strongly related to the importance of those parts to the readers. The parts of annual accounts that contain less information value are much likely to receive less attention of users and, all the way around, the most important parts will receive the most attention. Vergoossen found that investment analysts ranked consolidated income statement first, followed by the consolidated balance sheet and the notes to the financial statements. The auditor’s report and the report of supervisory board have the lowest ratings

A similar research eight years later by Blij (2001) has produced similar, but not completely identical conclusions. His most important conclusion is that investment analysts still make a frequent use of annual reports. Annual reports are still important, but not the only one source of information. Annual reports provide accurate, but not timely information. Timely information is needed to be able to predict future developments. In order to be able to forecast future developments and distinguish present trends within a company, investment analysts make use of their contacts with the management, quarterly reports and financial press throughout the year. Therefore, direct contacts with the management are considered a information source number one, followed by annual reports. Concerning the actual usage of annual reports by investment analysts, there is also an interesting new development to report. The notes have been recognized by investment analysts as the most important part of annual report. Compared to the study by Vergoossen (1993), the notes have gain the importance, pushing consolidated income statement and consolidated balance sheet to the second and third places, respectively.

3.2 Value relevance of press releases

As my main research question concerns disclosures of companies by means of press releases about the effects of adopting IFRS over the financial year 2005, it is important to understand how relevant is this information for the users of the financial reports. In other words, what is the value relevance of press releases concerning the effects of IFRS? Otherwise stated, do capital markets react on the publication of this kind of information?

According to Kim and Verrecchia (1992) earnings announcements actually fall under the broader range of disclosures. Firstly, this range includes disclosures that provide data that can not be obtained alternatively. Secondly, they provide information that may lead to different interpretation of a firm’s performance. This characterization is sufficiently broad to include earnings announcements, management and analysts’ forecasts and other summaries of detailed financial accounting statistics (Kim, Verrecchia, 1992). Consequently, value relevance of press releases can be compared to value relevance of earnings announcements due to the fact that press releases fall under the above-mentioned characterization of disclosures.

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Beaver (1968) has studied the information content of earnings announcements based on the investors reactions to earnings. Earnings announcements were said to have information content (value–relevant) if they led to a change in investors assessments of distribution of future returns, such as that there is a change in equilibrium value of current market price (Beaver, 1968). He also found that the behavior of the price changes on the stock market supports the contention that earnings reports possess information content.

Ball and Brown (1968) and Beaver (1968) provided compelling evidence that there is information content in accounting earnings announcements (Kothari, 2001).Their findings are mutually supportive with respect to the information content of earnings reports.

A number of studies have reviewed the value relevance from another perspective than correlation of earnings announcements and stock prices. Kim en Verrechia (1992) investigated the value relevance of earnings announcements, which act as a source of information to certain traders who in turn process earnings announcements into informed judgments and bear the costs of this activity. The authors argue that earnings announcements may cause more information asymmetry at the time of announcement, greater bid-ask spread, decrease in marker liquidity and increase in trading volume. Based on these results, one can state that earnings announcements are value relevant. Research by Acker, Stalker and Tonks (2000) examines whether spreads change significantly around earnings announcements. The authors’ imply that moment of earnings announcements is the time when one would expect unobservable information asymmetries to be most pronounced. The results of their research back up Kim and Verrecchia’s ideas about the behavior of bid-ask spreads.

Analytical work of Kim and Verrecchia also implies that the variance of price change is positively related to the precision of the announcement news, and inversely related to the quality of the pre-announcement information. Further research by Mohammed and Yadav (2002) on association between volatility shifts around earnings and divided announcements, the amount of pre-announcement information, and the precision of the announced news confirms the findings of Kim and Verreccia. Mohammed and Yadav (2002) documented that the amount of information and the precision of the announcement is likely to influence investor’s trading decisions around future earnings, thereby confirming that announcements are value relevant.

3.3 Stock-exchange regulations and publication of information by quoted companies

In this study quoted companies form the research population. Quoted companies become a subject to a number of rules and regulation from the moment a company decides to become listed on the stock exchange. Because my project deals directly with information disclosure in the press releases, it is necessary to provide an overview of legal regulations that govern the disclosure of this information. This overview will provide a legal platform that mandates listed companies to disclose the information and therefore relevant for my research.

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report and a statement of the responsible person from the issuer verifying the accuracy of the financial statements and the management report (Council Directive 2004/109, art 4(1)).The Transparency Directive as proposed would have required quarterly reporting, but as adopted it only requires half-yearly reporting. However, the Transparency Directive has as its basis continuous rather than periodic reporting, and has provisions requiring interim management statements about material events, therefore disclosures may have to be made more frequently than half-yearly (Council Directive 2004/109, art.6). In other way, disclosure requirements have been made stricter .

In the Netherlands Wet toezicht effectenverkeer 1995 (Wte) specifies legal requirements for Dutch listed companies. The supervisory body AFM (Autoriteit Financiele Markten) act as regulatory institution on behalf of Dutch Minister of Finance. Dutch Securities Law (Wte) also permits Dutch stock exchange Euronext Amsterdam to function of the self-regulating basis. The requirements for listed companies are stipulated in Fondsenreglement (stock exchange regulation) which is in use at Euronext Amsterdam. Article 28(h) of the Fondsenreglement is especially relevant for my study. Article 28(h) of Fondsenreglement provides a requirement for listed companies to immediately make public any information or event that might have an influence on the quotation of the securities of company in question. In other words, any price-sensitive information must be immediately disclosed.

The supervisory body AFM has been recently (October 2005) given more authority. This development is in line with the adoption of the Market Abuse Directive. As of October 1, 2005 the Market Abuse Directive is incorporated in the Netherlands into the Wte 1995 and the Market Abuse Decree. The aim of this Directive is to sharpen, expand and harmonize the existing European regime and to ultimately achieve improved protection for market integrity within Europe (www.afm.nl). The Market Abuse Directory is based on the theory that the prohibitions against insider dealing exist because they interfere with market transparency (Council Directive 2003/6). Therefore, issuers must inform the public as soon as possible of inside information concerning the issuer. An issuer may delay the publication of inside information in case such omission would not be likely to mislead the public and provided that the issuer is able to ensure the confidentiality if that information ( Council Directive 2003/6, art.6(3)). Following the implementation of this Directive, the supervision of the publication of price-sensitive information by listed companies (previously dictated by rule 28h of the Fondsenreglement) is transferred from Euronext Amsterdam to the AFM. The AFM will therefore act as efficient and independent institution, which can co-operate with the same institutions from other Member-states and, among other things, ensures timely publication of price-sensitive information.

3.5 Summary

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press releases contain information that is value-relevant, causing stock market quotations to change. Later studies of value relevance of earnings announcements from perspective of its relation to information asymmetry, bid-ask spread, market liquidity, trading volume and volatility shift have also indicated that earnings announcements are value relevant

(consequently, so are press releases).

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4 Research design

The first chapter of this study specifies the main research question. To be precise, the research question was: do listed companies provide information about the IFRS in their press releases? In the second chapter current situation in the European Union concerning financial reporting developments has been discussed. Furthermore, adoption of IFRS, the requirements and effects whereof for adopting companies have been described, and users of annual reports, the value relevance and the relevant legislation of the press releases have also been elaborated upon. In this chapter I provide description of research sample together with characteristics of selected companies. Furthermore, I describe the research technique and the concrete research categories that have been used in order to receive an answer to the main research question.

4.2 Sample description

In order to investigate the main research question, I have selected a research sample. This sample consists of companies listed on the AEX stock exchange. The research sample includes listed companies due to two reasons. Firstly, as described in the previous chapters, listed companies are required to report under IFRS. Therefore, needed for my study information could be obtained from these companies’ reports. Secondly, listed companies are not only economically important due to their size and influence, but they also represent entities that are subjects to increased attention from stakeholders.

As a starting point for the selection Reach database has been consulted. Reach database contains corporate information elements from the annual reports of Dutch top companies, such as sales, number of employees and balance totals. In the database, a selection of top-5000 companies has been made on the basis of turnover and total number of employees. From these companies a sample of 25 companies has been selected. The research sample consists of companies representing the following industries: industry/trade, banking and insurance companies. This choice is justified by the fact that this study concentrates on the question whether IFRS-related information is available in the press releases and therefore no specific exclusions (for example of financial institutions or insurance companies) had to be made from the research sample. To proceed, list of companies from the Reach database has been adjusted in order to not only include the companies with the highest turnover, but also to produce a sample that represents all above-mentioned industries. The overview of the companies included in the research sample with annual and relevant quarterly sales figures is included in the Appendix 1.

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Also, it is worth mentioning that not all annual reports for financial year 2005 were available at the time when the research sample was selected. However, as only quarterly press releases are studied, this does not present a problem.

4.2.1 Research technique and content analysis categories

Content analysis as research technique has been often used to assess accounting and social disclosures of organizations. Content analysis is a method of codifying the text (or content) of a piece of writing into various groups (or categories) depending on selected criteria (Weber, 1988). Other definition specifies that content analysis is a research technique that enables the researcher to make quantifiable inferences based upon narrative documents (Hooghiemstra, 2003). In order to assess whether such information is provided in the press releases content analysis will be applied. To be more specific, press releases are content-analyzed with the aim to establish whether listed companies disclose information about the effects of adopting IFRS. In order to perform the content analysis, a coding sheet has been developed .In this sheet I have included 4 coding categories. Every press release (in total 50 press releases) was carefully read, analyzed and then coded. Each time when text of a press release contained information related to one of the categories, a positive score (1) was recorded. In case no information relating to a coding category was found, a negative score (0) was recorded. Therefore, each coding category can contain either a number positive scores or only one negative score, which means that no information relevant to that specific category has been found.

As it was described in chapter 2, quoted companies are mandated to prepare their consolidated annual accounts according to IFRS from 2005 on. Furthermore, the first-time adoption of IFRS is quite complex and far-reaching process. The relevant standard IFRS1 requires companies to prepare an opening balance not later than at the 1st of January 2004, reconciliations of equity, profit and loss, explanation of material adjustments are also compulsory, to name the most important. Another issue worth considering is that companies do not switch over to IFRS within a short period of time. Therefore, in view of such a significant change, one can assume that companies should inform the investors about the upcoming changes. Consequently, in view of described above, my first coding category is:

Are there any references provided in the press releases concerning the adoption of IFRS?

The second research category relates to the consequences of IFRS for adopting entities. Jong and Roelofsen (2005) state that change for IFRS is a very complex en technical process, consequences of which are difficult to predict for the future financial reporting. This future financial reporting shall not contain comparing figures from previous years. Therefore an extra analysis will be needed in order to determine whether changes in accounting figures can be attributed to economical processes within a company or merely to implementation of IFRS. Furthermore, IFRS contains possibilities to choose between various valuation methods, which also has effect on the accounting figures. Jong and Roelofsen also point out that the main users of annual report (analysts and investors) do not have sufficient knowledge of IFRS, let alone possible effects of it. In context of my research, this translates to the question whether press releases contain references to effect of IFRS on the following elements of financial reporting: key ratio’s, profits, earnings, sales, earnings per share, costs. Therefore, the second coding category is:

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As I described in the chapter 3, investment analysts regard profit and loss as one of the most important elements of annual reports. In opinion of analysts, profit and loss account which fluctuates considerably from year to year represents a negative trend. Profit and loss accounts with high volatility are considered of lower value, which in turn can cause lower stock market quotations (Jong, Roelofsen, 2005). One of most often predicted consequences of adopting IFRS is that profit and loss account will contain different figures than under previous GAAP. These different figures are mostly caused by the use of fair value accounting, as required by IFRS. Use of fair value accounting suggests that adjustments of the balance sheet reflecting fair value valuations have to be absorbed in the profit and loss account. The most important standards that would have an impact on the profit and loss account are IAS 39 (financial instruments), IAS 2 (personnel options) and IAS 36 (goodwill). These standards are new and represent developments which analysts and investors do not have experience with. This brings me to a third coding category:

Are there references of effects of fair value accounting ( IAS 39, IAS 2, IAS 36) in the press releases?

The last coding category relates to the characteristics of the information presented in the press releases over the adoption of IFRS. The characteristics of information may have two characteristics: qualitative or quantitative. Quantitative dimension refers to the cases when information in the press releases is presented in quantitative terms (e.g. increase/decrease of sales by 10%). Qualitative dimension relates to the cases when an opinion is expressed about certain developments (e.g. drastic increase of profits, considerable decrease of costs). Also, companies might provide not only pure quantitative or qualitative information, but combine the two. In this case, a separate “qualitative and quantitative” dimension will be coded. Therefore, the fourth coding category is:

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5 Findings

In this chapter I shall describe the results of content analysis coding that I have performed on the press releases of the 4th quarter of financial year 2004 and the 1st quarter of 2005. In total, as I mentioned in the previous section, the press releases of 25 companies have been studied. I have been able to obtain the press releases directly from the web sites of the companies. However, for a number of companies quarterly press releases could not be obtained, as these companies do not issue them. For such companies half-year press releases have been used. Furthermore, a number of companies does not provide information about adoption of IFRS in the press releases, but instead refer to additional IFRS press releases on another date. In that case, these additional IFRS releases have also been obtained and coded. Also, it’s worth mentioning that during the coding one company (ASML) from the research sample appeared to report under the US GAAP. Therefore, no information about the adoption of IFRS has been provided by this company.

Every press release has been coded according to 4 coding categories that have been described in the research design section of this study. In the rest of this section I shall elaborate on the coding results per quarter and per coding category. The outcomes of coding for relevant coding categories from the first quarter of 2004 and the last quarter of 2005 will be compared. Based on the results of the comparison, conclusion will be drawn.

5.2 Findings

5.2.1 Coding results of coding category 1: references in the press releases concerning adoption of IFRS.

Comparing the coding results for the coding category 1, the following conclusions can be drawn. In total, the number of companies within the research sample that referred to IFRS in their press releases has increased by 53% in the 1st quarter of 2005 as compared to the 4th quarter of 2004 (see table 5.1)

Quarters N N score % Count category Total count %

count 4th Quarter 2004 25 15 60% 64 332 19% 1st Quarter 2005 25 23 92% 215 1052 20%

Variance 53% 32% 1%

Table 5.1 Coding results for coding category 1: References to IFRS

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5.2.2 Coding results of coding categories 2 and 3: reference to the effects of IFRS and IAS’s on the outcomes of the financial reporting

As described in the previous chapter, the second and the third coding categories relate to the effects of respectively adoption of IFRS and application of IAS’s on the accounting figures of reporting companies. To be precise, the coding category 2 handles the effects of IFRS on the balance sheet, profit and loss account, equity, sales, earnings and key financial ratio’s. The coding category 3 relates to the effects of fair value accounting, namely International Accounting Standards (IAS’s) on the profit and loss accounts of companies. As these coding categories are rather similar in the way that they both relate to the effects of the new standards on the financial reporting of companies, I shall provide a common overview of coding results for both categories. Therefore, in this section the coding results are described for the following question (coding categories):

Are there references to the effects of IFRS and fair value accounting (IAS’s) on the outcomes of financial reporting?

The coding category 1 indicated that respectively 15 and 23 companies have made references to the adoption of IFRS in the press releases of the 4th quarter of 2004 and the 1st quarter of 2005 (out of sample of 25 companies). Furthermore, 12 companies in Q4 of 2004 provided both information about the future adoption of IFRS and the effects of it on accounting figures. In Q1 of 2005, 22 companies contained in their press releases information related to the both coding categories (see table 5.2).

Quarters N N score % Count

categories Total count

% count 4th Quarter 2004 15 12 80% 167 332 50% 1st Quarter 2005 23 22 96% 491 1052 47%

Variance 16% -3,6%

Table 5.2 Coding results for coding categories 2 and 3: Effects of IFRS and IAS’s on the financial figures

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5.2.3 Coding results for the coding category 4: qualitative/quantitative information regarding adoption of IFRS

As coding categories 2 and 3 indicated, 12 companies in the 4th quarter of 2004 and 22

companies in the 1st quarter of 2005 provided information in the press releases about the effects of IFRS on the accounting figures. Respectively, out of these companies 11 and 22 have

provided qualitative and quantitative information about the effects of IFRS (see table 5.3).

Table 5.3 Coding results for coding category 4: Qualitative and Quantitative characteristics of IFRS in the press releases

In the 1st quarter of 2005 8% more companies than in the 4th quarter of 2004 disclosed information both about the effects of IFRS and qualitative/quantitative characteristics of those effects. The breakdown and analysis of recorded for the coding category 4 coding results is as follows: in the 1st quarter of 2005 30% more quantitative information was provided than in the 4th quarter of 2004. However, companies have disclosed 20 % less qualitative information in the Q1 of 2005 than in the Q4 of 2004; the share both of quantitative and qualitative information remained practically unchanged in both quarters (difference of 1%). The relative share of companies providing no qualitative and quantitative information at all about effects of IFRS has decreased by 8% in the Q1 of 2005. Furthermore, of all information elements about the adoption of IFRS, 33% related to the qualitative and quantitative information elements in the 1st quarter of 2005, as compared to 31% in the 4th quarter of 2004. This change of 2% also represents a slight increase in the value companies attach to qualitative and quantitative information.

5.3.4 Summary of coding results analysis

To complete the analysis of coding results, I shall discuss s the total picture of information disclosure over IFRS in the press releases of the 4th quarter of 2004 and the 1st quarter of 2005. To begin, it is clear that companies provided considerably more information in the Q1 of 2005 than in the Q4 of 2004. On the total level, within the research sample significantly more companies referred to IFRS in the 1st quarter of 2005 (increase of 53%). This trend to disclose more information about the adoption of IFRS is also clearly visible within the sample for each studied quarter. The analysis shows that as compared to the 4th quarter of 2004, in 1st quarter of 2005 the number of companies referring to IFRS increased by 32%. Moreover, the number of companies disclosing the effects of IFRS and IAS’s on the accounting figures has also increased by 16%. However, the number of companies providing quantitative and qualitative information about the adoption of IFRS has only increased by 8%. This slight increase can be explained as follows: qualitative and quantitative information is related to the disclosures about the effects of IFRS on the accounting figures. If companies provide disclosure about the effect of IFRS, they also supplement it at the same time by qualitative and quantitative information. Therefore, an increase in the amount of IFRS-effects related disclosure also means an increase in amount of quantitative and qualitative information elements. Furthermore, as can be seen from the breakdown of qualitative and qualitative characteristics of information, companies clearly provided more quantitative (30% increase) and less quantitative information in the 1st

Breakdown

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6 Summaries, conclusions and limitations

6.1 Summaries and conclusions

In this study I have attempted to answer the following research questions:

Did listed companies inform the users in their press releases about the adoption of IFRS before the actual adoption took place?

Did companies provide more information over time about the adoption of IFRS?

In order to arrive at the answer to the main research questions, a number of sub-questions had to be attended to. I shall describe the answers to the sub-questions and the overall conclusion in the rest of this section.

The first sub-question was:

Why was IFRS adopted by the European Union and what are the consequences of IFRS for adopting companies?

Firstly, the harmonization within the European Union and globalization of capital markets created the need for internationally accepted financial information. After failed negotiations with the US capital markets authorities about the admission of non- US GAAP financial statements, the European Union has decided to support the adoption of IFRS. The European listed companies are required to use IFRS since the financial year 2005. The first-time adoption of IFRS has proven to be a difficult task to complete. The adoption of IFRS is time-consuming and complicated process, and includes extensive disclosure requirements. Also, the disclosure of relevant for these research interim statements is quite extensive, including reconciliation of equity and profit and loss for relevant periods. The effects of IFRS on adopting companies have been studied on so-called early adopters. The early adopters are the companies that had voluntarily adopted IFRS even before it became a mandatory standard for listed companies in the EU. The overall conclusion is that companies that adopt IFRS are committed to extensive levels of disclosure and enjoy economical benefits as result of lower information asymmetry. The IFRS adopters enjoy lower bid-ask spreads and their shares are traded more often. However, evidence has also been found that share price volatility of IFRS adopters is not lower that for non-adopters and uncertainty among analysts and investors is also higher for these companies.

The second sub-questions were related the following questions:

Who are the users of the press releases and what regulations are there for the issuance of press releases? Is information contained in the press releases relevant for their users?