ACCOUNTING FOR BRANDS AND ANALYSTS FORECASTS PROPERTIES

ACCOUNTING FOR BRANDS AND ANALYSTS FORECASTS PROPERTIES

Abstract Under IFRS companies must classify brands as intangible with definite or indefinite useful life. The former are systematically amortized, while the assets classified as being with indefinite useful life have to be tested for impairment annually. The possibility offered by the IAS 38, on one side may improve the quality of the information disclosed underlining strategic implications. On the other side, more managerial discretion may reduce information verifiability. The paper wish to test whether the complexities of accounting for brand required by IAS/IFRS in order to increase the relevance of accounting information is beneficial for investors. We test the relationship between accountability choice and compliance with disclosure requirements and analyst forecast properties: accuracy, dispersion, precision of public and private information. We control for several factors mainly related with company brands, company structure, corporate governance, market conditions and operations that may influence corporate disclosure and brands accountability. In order to verify our hypotheses we manually calculate a disclosure index of the information required by IAS 38 and IAS 36. We analyse brand disclosure of 385 industrial European companies that belongs to the DJ stock 600 with at least 3 analysts from 2005 to 2008. Findings show that the new enriched information environment only partially contribute to increase analysts ability to forecasts earnings. Particularly, whereas the dispersion decreases as a result of the classification the disclosure contribute to generate a noisier informational environment, thus negatively affect the accuracy. The results of this study might be of interest to regulators, investment analysts, and market participants.

Keywords: brands accountability, disclosure compliance, analysts forecast properties

1. Introduction Electrolux - one of the world leading international appliance companies - named by Forbes as global superstar owns 50 brands1. Among them only Electrolux US is classified as a brand with indefinite useful life and, as a consequence, it is tested for impairment yearly. It has been bought in May 2000 and marginally used until 2008, in the meantime other well recognized brands which are still generating flow of revenues, as Zanussi and Rex, were amortized over 10 years of useful life. As a results the classification of brands may creates a mismatch in the income statement between the flow of benefits and the related expenses. Electrolux, is just an example showing how the adoption of IFRS2 deeply modifies, among others, the accounting for intangibles. Differently from GAAPs previously used in the European countries, IAS 38 requires companies to classify intangibles as being with definite or indefinite useful life3 giving managers considerable discretion. The standard suggests (paragraphs from 60 to 63 of Basis for Conclusion of IAS 38) that such distinction between intangibles with definite vs. indefinite useful life aims to obtain a faithful representation of the value of intangibles, thus increasing the relevance of accounting information. Nevertheless, the classification is discretionary and it is still an open issue whether or not it conveys private information thus translating into more transparent earnings. The classification implies two different accounting practices: historical cost for intangibles with definite useful life and fair value for intangibles with indefinite useful life. The implicit discretion due to the classification and the impairment test could convey private information but the departure from historical cost has been severely criticized. Indeed, fair value accounting undermines the reliability of financial reporting (Watts, 2003). To enhance the reliability accounting standards require an extensive

The most important brands owned by Electrolux company are: AEG, Chef, Dishlex, Electrolux, Frigidaire, Kelvinator, Rex, Westinghouse, Zanker, Zanussi, Zoppas. 2 We use IFRS to refer both to the International Accounting Standards issued by the IASC and the International Financial Reporting Standards issued by the IASB. 3 Within a project on business combination the International Accounting Standards Board revised IAS 38 allowing to classify intangible as having definite or indefinite useful life. This revised version should be applied for annul periods beginning on or after 31 march 2004.

disclosure (Ashbaugh and Pincus, 2001) about the classification and the subsequent evaluation of intangibles. As suggest by previous studies (Diamond and Verrecchia, 1991) greater disclosure mitigates adverse selection problems and reduces information asymmetries. Whether the classification of intangible and the enrichment of the information environment increase the ability of analysts to forecast earnings is an unexplored issue. Departing from previous studies (Ernstberger et al., 2008, Beuselinck et al., 2010) that analyzed the aggregate effect of IFRS adoption without examining the implication of specific accounting rule within one single accounting system, this paper seeks to fill this research gap by examining the effects of the classification of intangibles and the related disclosure on the analysts forecast. Evidence with respect to the above issues is extremely timely because standard setters are enlarging the use of fair value and in general managerial discretion. At the same time, quite consistently accounting standards extend disclosure requirements. For this reason, studying whether the disclosure increases the verifiability and thus the relevance of accounting information is critical for regulators, standard setters, investors, managers and directors. Based on the idea that analysts are primary users of accounting information and using a disclosure score which capture the degree of compliance with the IAS 38 (Intangible Assets) and 36 (Impairment Test) the paper tests the impact of classification and disclosure on analyst ability to predict earnings. First, we analyze the effect of intangibles classification and disclosure on analysts error and dispersion, then to understand the mechanism through which accounting information translate into more accurate (or not) analysts forecasts we use the precision of public (h) and private information (s) as in Barron et al. (1998). These measures are based on the assumption that analysts earnings forecasts reflect both public information, shared by all analysts, and private information available only to a specific analyst. To the extent that the classification of intangibles and the related disclosure convey private information the 4

forecast error and dispersion cannot provide unambiguous inference about the information environment. Following Barron et al. (1998) we claim that forecast accuracy and dispersion relate in different ways to common and idiosyncratic components of error in analysts forecast. The authors (Barron et al. 1998, p. 422) show that forecast dispersion reflects only idiosyncratic error. By contrast error in individual forecast reflects both common and idiosyncratic error and error in the mean forecast reflects primarily common error but may also reflect idiosyncratic error that is incompletely diversified away when only a limited number of forecasts exist. Therefore, testing how the accounting and related disclosure about intangibles affect the precision of public and private information provide a straightforward evidence on the mechanisms through which the regulation on intangibles influence analysts behaviour. To do so, we first analyze the impact of intangibles pre and post 2005, distinguishing early adopters from non early adopters, then to deeper the analysis we focus on brands and marketing related intangibles, the class of assets for which the classification is more discretionary. Our sample consists of industrial companies listed in the Dow Jones Stoxx 600 for the period 2003 2008. We hand collect data on the value of brands classified as being with definite or indefinite useful life after the adoptions of the revised IAS 38. In addition, taking into consideration the disclosure requirements of the revised IAS 38 and IAS 36 we hand collect data on the compliance to the mandatory disclosure on brands. We find that the classification of intangibles reduces the dispersion thanks to the increase of the precision of private information. Moreover the disclosure negatively affects accuracy. It is worth to notice that disclosure has a positive impact on h for non-early adopters while for early adopters it has a negative effect. In addition, we analyze the effect of disclosure according to different legal environment, and the findings show that in country with strong legal enforcement (Hope, 2003) disclosure reduces the accuracy and increases the precision of both public and private information. 5

Overall, the paper shows changes in the information environment and analysts behaviour as a consequence of the accounting for brands under IFRS. This paper has many contributions to the accounting literature. First, prior research focus on mandatory adoption of IFRS analyzing the overall effect of IFRS on analysts forecasts (Byard et al. 2008; Horton et al. 2008), showing that forecasts accuracy and dispersion improved after the application of IFRS. Buselinck et al. (2010) shed light on the consequences of IFRS adoption on private and public information. Few papers (e.g. Bachert ,2010; Avallone and Quagli, 2009) focus on specific accounting treatment. At the best of our knowledge none of previous papers analyzed the specific effect of accounting for brands. Moreover, this paper addresses the effect of disclosure, taking into consideration if the extensive disclosure requirements (and related compliance) modify or not through public and private channels the analysts behaviour. Second, since the accounting for brands requires an extensive disclosure our analysis permits to analyze the effect of disclosure on analysts behaviour. It is an unresolved issue to whether financial markets participants are able to effectively apprehend the new information being conveyed and integrate into their decision-making. In other words, the study provides another illustration on how markets integrate and react to new disclosure. Finally, this paper contributes to the analyst literature analyzing the ability of financial analysts to analyze, use and validate financial accounting information. Prior researches have looked at the determinants of analysts forecasts, their impact on markets, the factors moderating such forecasts. The adoption of IFRS and the subsequent accounting for brands may have an impact on analysts work as it implies a different measurement basis for brands with indefinite useful life as well as additional disclosure on the classification and the evaluation.

The rest of the paper is organized as follow. Section 2 details the accounting for brands, highlighting the trade-off between relevance and verifiability. Section 3 analyses previous literature and testable predictions, while section 4 5 take into consideration sample selection and research design and empirical findings respectively. Section 6 concludes.

2. The accounting for brands: the trade-off between relevance vs. verifiability Barth et al. (2001: 85) state that fair value estimate reliability for intangible assets is of particular concern because, in most cases, no market exists for these assets. For this reason, the estimates often are determined by management or appraisers selected by management, exacerbating the potential for estimation error, intentional or unintentional. The accounting for brands4 mainly relies on their classification. Summing up, the brands classified as having an indefinite useful life have to be tested for impairment yearly, while the brands classified as having a finite useful life have to be amortized. Therefore, both the classification and the results of the impairment test could convey critical information in order to forecast future stream of earnings. In fact: the classification conveys the information if a foreseeable limit in the use of intangibles does or doesnt exist, thus revealing private information to analysts and investors5.; the impairment test conveys the information if the future stream of cash associated with an asset exceeds or not its carrying amount. Although the classification and the subsequent accounting treatment could permit to correctly match the cash flow stream associated with the assets and their expenses managers have a lot of discretion. Particularly managers decide: a) whether to classify an intangible as being with indefinite or definite useful life;

4 5

In this paper we call brand all the types of marketing related assets: brands, trademarks, costumer list, etc.. For example, LOreal in its annual reports (2005-2008) points out that all global brands, including LOreal, are classified as brands with indefinite useful life, while local brands are considered as being with definite useful life. According to the annual report such classification is due to the company strategy to operate only with global brands in the near future.

b) if an intangible is classified as being with definite useful life the number of years of useful life; c) if an intangible is classified as being with indefinite useful life the main discretion relates to the calculation of the recoverable amount (the higher between fair value and value in use). Summing up, brands are subject to a very high degree of information asymmetry between preparers and users. Such managerial discretion could reduce the verifiability of accounting information and, as a consequence, potentially relevant information could increase earnings opaqueness instead of transparency because of the lack of verifiability (Watts, 2003). On the benefit side the classification and the related disclosure represents relevant information that could help investors and analyst to make more precise estimations of companies performance. As documented by Barth et al. (2008: 468), limiting managerial discretion relating to accounting alternatives could eliminate a firms ability to report accounting measurements that are more reflective of the firms performance. On the cost side, however, the subjectivity of the estimates required by the accounting for brands implies a low level of reliability. Managerial discretion in the classification and subsequent accounting treatment of brands makes room for opportunistic behaviour which translates into agency costs (Jensen and Meckling, 1976). According to Ewert and Wagenhofer (2005) an attempt to reduce management discretion can be made tightening accounting standards, either eliminating options in the standards, or limiting the impact of judgment by managers (and auditors). They show that tighter accounting standards increase earnings quality. In their view, the decision taken by IASB to eliminate accounting options in several standards could be considered a way to avoid discretion. However, IAS 38 postulates managerial discretion assuming that such discretion conveys private information to investors, thus increasing the relevance of earnings. Moreover, the standard tries to constrain managerial opportunism by requiring an extensive disclosure. Therefore according to IAS 38

and 36, each critical step in the classification and evaluation of brands has to be disclosed (see Appendix 1).

3. Related Literature and Testable Predictions 3.1 Related literature on Adoption of IFRS

The effects of mandatory IFRS adoption have been deeply studied. According to Jermakowicz and Tomaszewski (2006) the findings from these studies offer controversial results about whether IFRS adoption improves accounting quality. In the same vein Hail et al. (2009) suggest that there are controversial evidence on the effects on accounting quality of IFRS adoption around the world. Daske et al. (2008) document that the mandatory adoption of IFRS improves market liquidity measured by bid-ask spreads, while Daske et al. (2009) documents that on average voluntary IFRS adoptions do not affect market liquidity and the cost of capital, while just for serious adopters there are market benefits. Using a sample of firm form 15 countries Beuselinck et al. (2009) find a V-shaped pattern in stock return informativeness around the time of mandatory IFRS adoption. Using a sample of 6.456 firm year observations of 1084 EU firms during the 1995 to 2006 period Li (2010) show that on average the IFRS mandate significantly reduces the cost of equity in those countries where legal enforcement is strong. Whereas previous mentioned studies focus on market aggregates, documenting an indirect impact of IFRS adoption without linking the new standards to users of accounting information, other studies focus on the effects on the users of the accounting standards. Byard et al. (2008) show that IFRS adoption in European countries enhanced analysts forecast accuracy. Moreover, the authors find out that the impact on analysts accuracy increases as the law 9

enforcement is better. In the same vein Brown et al. (2009) document that analysts accuracy and dispersion are significantly smaller after IFRS adoption, while the legal enforcement does not strongly affect analysts accuracy and dispersion. Horton et al. (2008) analyze the impact of IFRS adoption on analysts forecast accuracy, disagreement and volatility of revision showing an improvement in the information environment. Moreover, Beuselinck et al. (2010) document that IFRS adoption results in an increase of the precision of both public and private information. The mixed and controversial results presented above show that the effects of IFRS adoption on the information environment is unclear. Moreover, just few studies, at the best of our knowledge, analyze the incremental impact of specific accounting standards, therefore little is known about the sources of informational effects of IFRS. Using a sample of firms form 7 European countries Bachert (2010) finds out that magnitude of voluntary fair value accounting of non financial assets does not increase accuracy and analyst following. Panaretou et al. (2009) studies the effects of hedge accounting under IFRS on analysts forecasts error and dispersion, showing that for firms that hedge under IFRS accuracy and dispersion are significantly lower. This paper builds on this stream of research and following Bachert (2010) examines whether the accounting for brands has an impact on accuracy, dispersion and on the properties of information contained in analysts forecasts, capturing the incremental effect of specific accounting standards on the information environment of analysts, thus enhancing our understanding of the informational effects of IFRS.

3.2

Related research on the effect of disclosure on public and private information 10

As we mention the accounting for brands under IFRS relays on extensive disclosure requirements. How disclosure affects the analysts behaviour has been deeply debated. There are two opposite view on the relation between public and private information. On one hand (Verrecchia, 1982) one view posits for a substitute relationship between public and private information. The underlying idea is that an increase on public available information reduces the need of costly private inquiry. The opposite view predicts a complementary relationship between public and private information (Kim and Verrecchia, 1994, 1997). The idea is that as the public information increases the cost of analysts forecasts decreases, thus increasing the supply of forecasts. Moreover, analysts may react differently to the same information because of their different backgrounds. As stated by Yang (2010), the private information contained in the analysts forecast is not a natural outcome of IFRS adoption, since analysts need to expand more effort on gathering processing and analyzing the information which has higher quality but needs to produce new private information. If analysts spend more time on idiosyncratic information discovery, then they need to reduce the number of firms they cover. As a consequence, public and private information complement each other. The empirical findings tend to confirm a complementary relationship. Barron et al. (2002a) show that the precision of private information increases around earnings announcement. In the same vein Shaw and Byard and Shaw (2003) document that as the quality of disclosure increases the precision of both public and private information increase as well.

3.3

Testable predictions

This paper aims to test the impact of the classification of brands and the related disclosure on accuracy, dispersion and properties of analysts forecasts.

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The classification of brands should reveal private information about the existence or not of a foreseeable limit in the use of a brand. The information is potentially relevant but the managerial discretion and the subsequent lack of verifiability could negatively affect the relevance of the information. Whether the classification reveals private information is an open issue never tested empirically. Ewert and Wagenhofer (2005) show that tightening accounting standard improves the quality of reported earnings. Under this perspective, the discretionality left to the preparer of the annual report could decrease the quality of reported earnings, thus reducing accuracy and increasing dispersion of analysts forecasts. According to Li (2010), enhanced information comparability subsequent to the mandatory adoption of IFRS can reduce the cost associated with investors using information and, in turn, reduce information asymmetry and/or estimation risk. Discretionary options can reduce comparability of financial information across firms, especially for firms located in different countries. Summing up, we are unable to state formal hypotheses on the effect of the classification on brands on accuracy and dispersion of analysts forecasts and on the precision of common and private information.

The mandatory disclosure on the brands classification and on the subsequent accounting treatment is purposely thought in order to constrain managerial discretion and opportunism. This represents a typical feature of IFRS. Whereas rule based accounting standards try to reduce as much as possible managerial discretion, IFRS, being principle based standards, rely on disclosure to reduce managerial opportunism. IFRS typically require greater disclosure than local accounting standards (Ashbaugh and Pincus, 2001). The estimation risk literature posits that companies with higher disclosure levels have lower forward looking betas (Lambert et al., 2007). Consistent with the idea that IFRS increases transparency, we argue that the informational environment will improve. Because of the more detailed disclosure requirements the information shared by all analysts increases.

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Nevertheless, IFRS does not constraint the acquisition of private information. In addition, the adoption of IFRS requires analysts to get familiar with the new standards and also the analytical skills and efforts of individual analyst could play a role in enhancing private information. Whether the mandatory disclosure conveys information, limits managerial discretion and leads to an improvement in public and private information is far from being clear. Song et al. (2010) find that investors discount less reliable fair values possibly due to information asymmetry and moral hazard problems. Ashbaugh and Pincus (2001) and Brown et al. (2009) show that adoption of IFRS improves analysts forecast accuracy. Summing up, we are unable to state formal hypotheses on the effect of disclosure on accuracy and dispersion of analysts forecasts and on the precision of common and private information.

4. Sample and research design 4.1 Sample

The initial sample consists of all the companies that belong to the Dow Jones Stoxx 600 Europe at the end of 20086. The choice of the sample depends on the fact that even if European countries maintain significative differences in many aspects (under this aspect each country can be considered a specific legal environment) the European Union has adopted a strategy aiming at the convergence among accounting procedures of the different companies in different countries. This strategy deployed in the adoption of IFRS for each global player. The regulation (EC) No 1606/2002, in fact, stated that for each financial year starting after 1 January 2005 companies governed by the law of a Member State should prepare their annual report in conformity with IFRS. Listed companies have been required to use those IFRS approved for use by the European Union.

6 Dow Jones Stoxx 600 Europe index is constituted by most liquid stocks in the European markets. It covers the following
states: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg, Holland, Norway, Portugal, Spain, Sweden, Switzerland and United Kingdom.

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Excluding 147 financial companies and 68 non-financial companies followed by less than 3 analysts, we collect accounting information and analysts forecast properties for 385 companies. Among these, 212 firms (778 firm-year observation) report brands amount greater than zero in the financial statement. Using our proxies for the precision of public and private information, variation in EBITDA and market to book ratio we winsorized the sample at 1%.

4.2

Research Models

Our research strategy consists of two steps. First, we test whether the possibility to classify intangibles as being with definite or indefinite useful life affects analysts forecasts properties. To do so, we regress analysts forecasts properties on the level of intangible assets (excluding goodwill) (IntangiblesTA) using data from 2003 to 2008. In addition, we include the interaction between IntangiblesTA and a dummy variable that assume the value 1 after the adoption of the revised IAS 38 in 2005 in order to isolate the effect of the accounting standard. We use an OLS model using White (1980) heteroscedasticity consistent t-statistics to correct for interdependencies within the data. We use the following multivariate model: Analystt+1 = + 1 IntangiblesTA t + 2 IntangiblesTA t * POSTt + 2 POSTt + 1 Early_Adopter + 2 Listing_Status t + 3 IndependentsAudit t + +4 Sizet + 5 Leverage + 6 NEt + 7 M/Bt + 8 Goodwill t +9 OCFTotal Assets t + 10 R&DOperatingExpenditure t + 11 EBITDA t + + 12 Enforcement + t t Yearst + t t Industriest + Where: Analyst IntangiblesTA POST = Accuracy, dispersion, h and s as in Barron et al. 1998 = The proportion of indefinite useful life brands on total assets = Dummy variable taking the value of 1 if t>2005 (1)

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Early_Adopter Listing_Status IndependentsAudit Size Leverage NE M/B Goodwill OCFTotal Assets R&DOperatingExpenditure EBITDA Enforcement Year dummies Industry dummies

= Dummy variable taking the value of 1 if the company adopt IFRS before 2005 = Dummy variable taking the value of 1 if the company is listed in US = The proportion of independents in audit committee = Natural logarithm of total assets = Debt over Equity = Number of analyst following the company = Market value of equity over book value of equity = Variation in goodwill = Operating cash flow over total assets = Research & development expenses over operating expenditure = Variation of EBITA = Legal enforcement scores from Hope2003 = Year dummies = Industry dummies

If the classification conveys private information thus enhancing analysts ability to forecast earnings we should expect that the coefficient 2 will be positive and significant. The second step focuses its attention on the extension of the intangible classified as being with indefinite useful life and the related disclosure. The empirical tests are carried out using companies listed in the Dow Jones Stoxx 600 Europe from 2005 to 2008 that have accounted brands . We use an OLS model, White (1980) heteroscedasticity consistent t-statistics are calculated in order to correct for interdependencies within the data. We use the following multivariate model: Analystt+1 = + 1 IndefiniteTotal Brands t + 2 Disclosuret + + 1 Brands=Firm name t + 2 BrandsTotal Assets t + 3 Loss t + + 1 Early_Adopter + 2 Listing_Status t + 3 IndependentsAudit t + +4 Sizet + 5 Leverage + 6 NEt + 7 M/Bt + 8 Goodwill t +9 OCFTotal Assets t + 10 R&DOperatingExpenditure t + 11 EBITDA t + 15

+ 12 Enforcement + t t Industriest +

(2)

Where: Analyst IndefiniteTotal Brands Disclosure Brands=Firm name BrandsTotal Assets Loss Early_Adopter Listing_Status IndependentsAudit Size Leverage NE M/B Goodwill OCFTotal Assets R&DOperatingExpenditure EBITDA Enforcement Year dummies Industry dummies = Accuracy, dispersion, h and s as in Barron et al. 1998 = The proportion of indefinite useful life brands on total brands = Disclosure index = Dummy variable equal to 1 if the company owns a brand equal to the firm name = The proportion brands on total assets = Dummy variable equal to 1 if 1 if the company reported a loss due to brand impairment = Dummy variable equal to 1 if the company adopt IFRS before 2005 = Dummy variable equal to 1 if the company is listed in US = The proportion of independents in audit committee = Natural logarithm of total assets = Debt over Equity = Number of analyst following the company = Market value of equity over book value of equity = Variation in goodwill = Operating cash flow over total assets = Research & development expenses over operating expenditure = Variation of EBITA = Legal enforcement scores from Hope2003 = Year dummies = Industry dummies

4.3

Dependent Variables

Our research strategy is focused on accuracy and dispersion of analyst forecast and on the properties of analyst forecasts as in Barron et al. (1998; 2002b).

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Accuracy (accurnk_n) is the ranked absolute value of the median EPS estimated by analysts minus the reported EPS standardized over the stock market price at the end of the year and divided by the number of companies in the industry. Dispersion (disprnk_n) is the ranked standard deviation of EPS analysts forecast estimates over the stock market price at the end of the year and divided by the number of companies in the industry. As discussed in Barron et al. (2002a) the changes in dispersion and accuracy could reflect both the commonality of information among analyst but also the precision in individual analyst forecasts. For example, whereas the release of an information (i.e. earnings announcement) will results in a decrease of dispersion, the results could be interpreted as showing that new information reduces uncertainty and increases the commonality of information among analysts. However, Barron et al. (1998) show that forecasts dispersion reflects not only the commonality of information among analyst but also the precision in individual analysts forecasts. As new information is released the precision of forecasts increase over time irrespective of whether or not that information is common or idiosyncratic. As a consequence, to understand whether the accounting for brands and the related disclosure trigger significant common or idiosyncratic information we rely on analyst forecasts properties as originally developed by Barron et al. (1998). The method is widely used in literature (Beuselink et al. 2010). According to this model each analysts observes two signals about future earnings: a common knowledge shared by all analyst and a private signal available only to an individual analyst. Analyst will make forecast of future earning based on the common and idiosyncratic knowledge. Although the precision of public and private information (h and s respectively) cannot be calculated for an individual forecast, Barron et al. (1998) show that with multiple forecasts h and s can be measured

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by using the information in the aggregated forecast properties: accuracy and dispersion. Particularly under the assumption that s is identical across analyst Barron et al. (1998) show that:

h 1 [(1 ) D SE ]2 N

SE

D N

D s 1 [(1 ) D SE ]2 n

Where D is the dispersion of analyst forecasts for a firm, SE is the squared error in the mean forecasts and N is the number of analyst. To provide an empirical proxy for such properties, we substitute realized dispersion and squared error in the mean forecasts for the expected dispersion and error used in the Barron et al. (1998) model. We standardized both dispersion and SE on stock market price at the year end.

4.4

Research variables

Our main research variables relate to intangibles, brands and the related disclosure. First, we consider the value of intangibles excluding goodwill (IntangiblesTA) over time. IAS 38 allows the classification of all specific intangibles therefore in our first step of analysis we use the amount of intangibles to tests whether the classification improves the information environment or not. To deepen the analysis we consider as research variables the proportion of brands with indefinite useful life on the total amount of brands (IndefiniteTotal Brands). Thus, this index ranges from 0, all the brands have definite useful life, to 1, all the brands have indefinite useful life. We calculate a disclosure index, Disclosure, based on IAS 38 and IAS 36 requirements. As already discussed, brands useful life (definite or indefinite) and the presence of impairment loss, or reversal, 18

involve different information. In order to have comparable measure the disclosure index ranges from 0 (no compliance) to 1 (full compliance) depending on the amount of information that each firm discloses. Based on the grid reported in Appendix 1 we hand collect disclosure data from the notes to the financial statement and assign a score equal to 1 if the information is disclosed and 0 otherwise. It is important to notice that in some cases (see Appendix 1) the standards only encourage the disclosure of certain information. The requirement and the presence of such voluntary information are excluded from our disclosure index.

4.5

Control Variables

Following previous studies models (1) and (2) include several controls. First, we control for the variation in goodwill, Goodwill, that may strongly affect the amount of intangibles due to acquisitions. Secondly, in model (2) we control for three different aspects related with company brands: importance of brands, relevance of brands as assets, brands losses. In particular, Brands=Firm name is equal to 1 if the company owns a brand equal to the firm name; such variable indicates the importance of brands included in the financial statements. BrandsTotal Assets proxies the relevance of brands respect to the total amount of assets. Loss indicates if the company reported a loss due to brand impairment. In addition, we identify those companies that adopt IFRS before 2005, Early_adopt. We also control for corporate governance effects including the proportion of independents in audit committee, IndependentsAudit, in our models. Previous studies (Zhang 2006) have shown that company size affects the information environment, therefore we include in our models company size (Size), measure as the natural logarithm of total assets. Moreover we add Leverage (Debt over Equity), analysts following (NE) and market to book value (M/B) as controls. 19

Additionally, we include the operating cash flow scaled over total assets (OCFTotal Assets) as a proxy for performance. Following Busealink et al. 2010 we control for the intensity or Research and development activities (R&DOperatingExpenditure as Research & development expenses over operating expenditure) and the variation of EBITDA(EBITDA). Finally, we include country effects measured by legal enforcement score from Hope (2003), Enforcement, year and industry dummies. In order to isolate possible other legal enforcement effects, we identify those companies that are cross listed in the US, Listed_US.

For a complete list of all variable see Table 1.

PLEASE INSERT HERE TABLE 1

5 5.1

Empirical results Descriptive statistics

Table 2 provides descriptive statistics of our research and control variables. In particular, Panel A refers to the period 2003-2008 while Panel B refers to the period 2005-2008. The amount of intangibles is, on average, the 6.3 % of total assets and it goes from 0% (p5) to 27% (p95). On average one third of the brands are classified with indefinite useful life and brands counts for 5 % of the total assets, for the 8% of the non-recurring assets7, and for the 26.5% of intangibles8. The

Untabulated results shows the proportion between brands value and non-recurring assets ranges from 0.2% (p5) to 38.7% (p95). 8 Untabulated results shows the proportion between brands value and intangibles ranges from 0.6% (p5) to 60.2% (p95).

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impairment test generates losses in one fifth of the cases with no significant differences among brand useful-life classification (two-sample t test has a p-value equal to 0.86). As can be seen from Table 2, panel B, European companies are not fully compliant with standards disclosure requirements. On average only 67.9% (median is 71.4%) of the information is disclosed. In particular, only for 117 observations the disclosure score is equal 1. Moreover, there are only 13 firms over 212 that disclose all the information for all the years analyzed. Untabulated results show that the amount of information disclosed is increased the year after the first adoption of IFRS and remained stable from 2006 to 2008 (62.0 %, 69.3%, 69.5% and 69.7% in the annual report of 2005, 2006, 2007 and 2008 respectively)9. It is worth to add that disclosure compliance is significantly negatively correlated with the proportion of brands with indefinite useful life on the total amount of brands (-0.42)10.

PLEASE INSERT HERE TABLE 2

Concerning our dependent variables, Figure 1 shows the variation of accuracy and dispersion of analysts forecast and the precision of public and private information over time using median values11. As expected, accuracy strongly decreases with the beginning of the financial crises while dispersion strongly increases in 2009. In line with Beuselinck et al. (2010) results, Figure 1 shows that IFRS

The amount of information related to brands accountability disclosed by European companies in 2006 is statistically higher that the amount of information disclosed in 2005 (two-sample t test has a p-value equal to 0.026 and 0.013 for two tail and one tail test respectively). Disclosure compliance in 2006 is not statistically different from 2007 (0.85 two tail t-test) and 2008 (0.87 two tail t-test). There is no statistically difference from disclosure compliance between 2007 and 2008 (0.73 two tail t-test) 10 We also test the negative relationship between disclosure and brand classification in other tree ways finding always a very strong statistically significant negative difference. First, we run the t-test and the Wilcoxon rank-sum test using only those firms with all brands classified with definite or with indefinite useful life. Second, we differentiate the companies in two samples using a dummy that it is equal to 1 if the proportion of brands with indefinite useful life is greater than 5% and 0 otherwise. Third, similar to point 2, we use a dummy equal to 1 if the proportion of brands with indefinite useful life is greater than 95% and 0 otherwise. 11 As reported in models (1) and (2) we analyse the impact of our independent variables at year t on analysts forecast at year t+1.

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adoption has overall increased the precision of public information and decreased the precision of private information.

PLEASE INSERT HERE FIGURE 1

5.2

Multivariate analysis

The multivariate analysis consists of two steps. First, we test the impact of intangibles on accuracy, dispersion and properties of analysts forecasts. Second, we regress our research variables on the properties of analysts forecasts. Table 3 and Table 4 refer to the first step (model (1)), while Table 5 and Table 6 refer the second one (model (2)). We estimate the coefficients of model (1) for the full sample (columns (1) and (4) of Table 3 and Table 4), for the subsample of those companies that adopt IFRS for the first time before 2005 (columns (2) and (5) of Table 3 and Table 4) 12 and for the subsample of those companies that adopt IFRS for the first time for the fiscal year 2005 (columns (4) and (6) of Table 3 and Table 4). Columns (1), (2) and (3) of Table 3 shows that the level of intangibles assets over total assets (IntangiblesTA) has not a significant impact on accuracy of analysts forecasts. In addition, there is no difference between the subsample of 54 early adopters of IFRSand the subsample of 158 companies that adopt IFRS for the first time in 2005. It is worth to notice that the adoption of IFRS did not improve accuracy in our subsamples. Columns (4), (5) and (6) of Table 3 shows that the level of intangibles assets over total assets after the mandatory adoption of IFRS in 2005 (IntangiblesTA*POST) has a negative significant impact on dispersion of analysts forecasts (t=-2.39, t=-2.13, t=-1.98 for columns 4, 5 and 6 respectively). In

12

The models used in columns (2) and (5) of Table 3 and Table 4 differs from model (1) for the absence of industries dummies due to the low number of companies included in the models. Untabulated results using models that include industries dummies correcting and non correcting t-statistics for interdependencies within the data are qualitatively the same.

22

particular, while the results in columns (4) and (6) may be due to the mandatory adoption of IFRS in Europe the results in column 5 shows that the new IAS 38 has a significant effect in reducing dispersion. In addition, it seems that there is no difference between the two subsamples (early adopters vs. non early adopters).

PLEASE INSERT HERE TABLE 3

Columns (1), (2) and (3) of Table 4 shows that the level of intangibles assets over total assets (IntangiblesTA) has not a significant impact on the precision of common information (h). Nevertheless, results shows that the mandatory adoption of IFRS in 2005 (POST and Early adopter in column (1)) improves the precision of common information. It seems (table 4, column (2)) that the introduction of the revised IAS 38 had not a improve the precision of common information. Columns (4), (5) and (6) of Table 4 shows that the level of intangibles assets over total assets after the adoption of the new IAS 38 in 2005 (IntangiblesTA*POST) has a positive significant impact on the precision of private information (t=3.09, t=1.87, t=-2.79 for columns 4, 5 and 6 respectively). This implies that the decrease in dispersion after 2005 (see Table 3) is due to an higher precision of private information on intangible assets. It is worth to notice that such strong positive effect is related to intangibles assets. Indeed, the overall effect of the adoption of IFRS has strongly decreases the precision of private information and increases the precision of common information.

PLEASE INSERT HERE TABLE 4

23

Columns (1) and (3) of Table 5 show that as the value of brands with indefinite useful life increases the dispersion decreases. Column (4) underlines that the effect on dispersion in mainly due to the classification introduced by IAS 38. Concerning the compliance with IFRS disclosure requirements, results show that disclosure on brands, Disclosure, significantly decreases accuracy(columns (1) and (2)) and there is no effect on dispersion.

PLEASE INSERT HERE TABLE 5

Summing up, while brand accountability choice reduces dispersion; disclosure reduces accuracy. Giving managers the discretion of assessing brands useful life between definite and indefinite may be read both as a success and as a failure of the standard. On one side the accounting principles may have achieved more homogenous assessment of companies values. On the other side, it seems that the disclosure related to the classification of brands may negatively influence the ability of market agents to forecast earnings. Therefore, it is important to understand if the difference between analysts estimates and actual earnings is generated by public or private information.

Models (1) and (3) of Table 6 shows that brand accountability choice (IndefiniteTotal Brands) has a very different effect on the precision of public information respect the precision of private information. Particularly, IndefiniteTotal
Brands

has not statistically significant impact on h; while the effect on s is

statistically negative (t = 0.45 and t=-2.18 respectively). These results may support the fact that the standards is perfectly doing is job providing two accounting methods for brands without generating significant effects for one respect the other. At the same time, allowing fair value for brands accountability seems to decrease precision of private information. Nevertheless, if the effect of the accounting choice on the precision of private information is significantly different between the 24

companies that adopt IFRS before 2005 respect those that adopt IFRS for mandatory reasons. In particular, the significant negative effect of IndefiniteTotal Brands on the precision of private information (t=-2.18 and t=-2.76 in columns (3) and (4) respectively) may due to the first IFRS application or to a strong preference by analysts for continuity with previous practise that may be guarantee if managers classify brand with definite useful life. On the contrary, for companies that early adopt IFRS, it seems that analyst believe more on brands when classified with indefinite useful life rather definite useful life. Indeed, the significant positive effect of IndefiniteTotal Brands on s (t=2.48) in column (4) underlines that under the revised IAS 38 the classification increases the precision of private information. The fact that the classification choice allowed by the revised IAS 38 has an effect mainly on analysts interpretation of information rather than its usage, it is confirmed also by the role of disclosure on h and s. Models (1) and (3) in Table 6 shows that disclosure (Disclosure) has no effects on h and s. However, when we isolate the effect of the revised IAS 38 on those companies that early adopt IFRS, disclosure significantly decreases the precision of common information (t= -2.45 for Disclosure*POST in column 2). In other words, it seems that disclosure requirement may be interpreted differently by analysts. It is worth to notice that the significance of the coefficient of Disclosure in column (2) (t=1.93) combined with a strong negative effect of disclosure on h for early adopter may due to the fact that for non early adopters our disclosure index might proxy company overall disclosure.

PLEASE INSERT HERE TABLE 6

Summing up, it seems that market agents, in general, react properly (i.e. without different behaviours) to managerial discretion on brands useful life. In addition, the improvement on dispersions may be due to more compliance with disclosure requirements combined with a similar assessment of private 25

information wrapped under corporate disclosure. This may implies that there is still a lack of information in the requirements.

5.3

Additional analysis

The result on the relationship between accounting for brands choice and the relative disclosure and the precision of public information may be unexpected and it needs additional analysis. Therefore, we investigate the role of disclosure conditional to the institutional environment adding the interaction between legal enforcement and the proportion of brand with indefinite useful life

(Enforcement*Indefinite) and disclosure (Enforcement*Disclosure). As can be seen from Table 7, legal enforcement catalyzes the effects of disclosure. In particular, model (3) shows that high disclosure in countries with high legal enforcement statistically strongly increases the precision of public information (t=3.25).

PLEASE INSERT HERE TABLE 7

5.4

Robustness checks

We test the robustness of our findings and results remain qualitatively the same in all the following cases. First of all, we repeat our analyses using no-ranked accuracy and dispersion. Secondly, we add the interaction between brands accountability choice and disclosure in model (2). Concerning the controls related with company brands we exclude the variable Brands=Firm name in one case and we substitute BrandsTotal Assets with the proportion of brands on non-recurring assets. We also test another corporate governance variable which measures the proportion of independent members in the board in both models. 26

In addition, we run model (1) and (2) changing companies structure variable capturing leverage with the proportion of long-term debt on equity and market-related effects using the natural logarithm of number of estimates. Moreover we tested if using the variation of EPS or EBIT instead of EBITDA makes any significant changes on our findings. Concerning industry effect we try using only R&DOperatingExpenditure excluding industry dummies and vice versa. Khurana and Raman (2004) document that Big 4 auditors increase financial reporting credibility, in the same vein Teoh and Wong (1993) suggest that auditors reputation lends credibility to the financial reporting, therefore we include Big 4 as control. It is a dummy variable taking the value of 1 if the auditor is one of the Big4 (PWC, KPMG, Deloitte and Ernst & Young). Nevertheless, this variable has a low variability, 97% of the companies has a Big 4 auditor; therefore we exclude it from our tabulated results. Untabultated results that include Big 4 are consistent with those presented in the paper. We also test using country dummies instead Hope (2003) enforcement index. Finally, we control if a proxy of investor fear (VIX)13, excluding year dummies, may change our results.

Conclusions

This paper is focus on the accounting for brands and the related disclosure required under the IFRS (IAS 38 and IAS 36). In particular, this paper investigates whether brand accountability and disclosure enhance earnings timely and transparency or managerial opportunism. In order to verify that, this paper analyzes the effect of accounting for brand and the related disclosure on the ability of analysts to correctly forecast earnings. More precisely, whether accuracy, dispersion and the properties of analysts forecast, precision of public (h) and private information (s) as in Barron et al. (1998), depends

13

The average of daily closing value of the Chicago Board Options Exchange Volatility Index during the year.

27

on the proportion of brands with indefinite useful life on the total amount of brands (IAS 38) and on disclosure compliance with IAS 38 and IAS 36. After controlling for factors mainly related with company brands, company structure, corporate governance, market conditions and operations, we find that the classification of intangibles reduces the dispersion via the increase of the precision of private information. Furthermore, the disclosure negatively affects accuracy. It is worth to notice that disclosure has a positive impact on h for non-early adopters while for early adopters it has a negative effect. In addition, we analyze the effect of disclosure according to different legal environment, and the findings show that in country with strong legal enforcement disclosure reduces the accuracy and increases the precision of both public and private information. Overall, the results show that the new enriched information environment only partially contribute to increase analysts ability to forecasts earnings. Particularly, whereas the dispersion decreases as a result of the classification the disclosure contribute to generate a noisier informational environment, thus negatively affect the accuracy.

28

References

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Ewert, R.; Wagenhofer, A. (2005) Economic Effects of Tightening Accounting Standards to Restrict Earnings Management, The Accounting Review, 80 (4), pp. 1101 1124 Hail, L.; Leuz, C.; Wysocki, P. D. (2009) Global Accounting Convergence and the Potential Adoption of IFRS by the United States: An Analysis of Economic and Policy Factors. Working Paper, Available at SSRN: http://ssrn.com/abstract=1357331 Hope, O.K. (2003) Disclosure Practices, Enforcement of Accounting Standards, and Analysts Forecast Accuracy: An International Study, Journal of Accounting Research, 41 (2), pp. 235 271 Horton, J.; Serafeim, G.; Serafeim, I. (2008) Does Mandatory IFRS Adoption Improve the Information Environment? Working Paper, Available at SSRN: http://ssrn.com/abstract=1264101 Jermakowicz, E. K.; Tomaszewski, S.G. (2006) Implementing IFRS from the perspective of EU publicly traded companies, Journal of International Accounting, Auditing and Taxation, 15 (2), pp. 170-196 Kim, O.; Verrecchia, R. E. (1994) Market liquidity and volume around earnings announcements. Journal of Accounting and Economics, 17 (1-2), pp.41-67 Kim, O.; Verrecchia, R. E. (1997) Pre-Announcement and Event-Period Private Information, Journal of Accounting and Economics, 24 (December), pp. 395-419 Lambert, R., Leuz, C., Verrecchia, R. (2007), Accounting information, Disclosure, and the Cost of Capital, Journal of Accounting Research, 45 (2), pp. 385 420. Li, S. (2010), Does Mandatory Adoption of International Reporting Standards in the European Union Reduce the Cost of Equity Capital?, The Accounting Review, 85 (2), pp. 607 636. Byard, D and Shaw, K.. (2003) Corporate disclosure quality and properties of analysts information environment. Journal of Accounting, Auditing and Finance, Summer, pp. 335-378. Song, C.J., Thomas, W.B., Yi, H. (2010), Value Relevance of FAS No 157 Fair Value Hierarchy Information and the Impact of Corporate Governance Mechanisms, The Accounting Review, 85, (4), pp. 1375 1410. Verrecchia, R. (1982) The Use of Mathematical Models in Financial Accounting, Journal of Accounting Research, 20 (Supplement), pp. 1-42 Watts, R. L. (2003) Conservatism in Accounting Part I: Explanations and Implications. Accounting Horizons, 17 (3): 207-221 White, H. (1980) A heteroscedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroscedasticity, Econometrica, 48, pp. 817838. Yang, Y.C. (2010), Mandatory IFRS Reporting and Analysts Information, working paper, www.fma.org/NY/Papers/YCYangIFRS Jensen, M. C. and Meckling, W. H. (1976) Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics, 3 (4), pp. 305-360. 30

Zhang, A. F. (2006) Information Uncertainty and Stock Returns, The Journal of Finance, 61 (1), pp. 105137. Brown, Philip R., Preiato, John P. and Tarca, Ann (2009) Mandatory IFRS and Properties of Analysts Forecasts: How Much Does Enforcement Matter? UNSW Australian School of Business Research Paper No. 2009 ACCT 01. Available at SSRN: http://ssrn.com/abstract=1499625 Panaretou, A., Shackleton, M., Taylor , P. (2009), Corporate Risk Management and Hedge Accounting, working paper, Available at: http://www.efmaefm.org

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APPENDIX 1

Brands with definite useful life Useful life or amortisation rates Amortization method Gross carry amount Accumulated amortization beginning of the period Accumulated amortization end of the period Items Reconciliation Only for MATERIAL brands with DEFINITE useful life Material-amount Material-residual life Brands with indefinite useful life If the brand have indefinite Brands name Factors for indefinite Amount Fair value Vs Value in use Assumption for recoverable amount Impairment loss Amount Item Segment Circumstance Fair value Vs Value in use Assumptions Fair value Vs Value in use Assumptions Reversal of impairment loss Amount Item Segment(s), if segmental information is reported Circumstance Fair value Vs Value in use Assumptions Only for Non-MATERIAL brands with DEFINITE useful life Voluntary Voluntary Only for MATERIAL brands with INDEFINITE useful life Voluntary if the brand is not material Voluntary if the brand is not material

Voluntary if the brand is allocated in a Cash Generating Unit Only for MATERIAL brands with DEFINITE useful life

32

FIGURE 1

Accuracy and Dispersion over time

2004 0 -0,001 -0,002 -0,003 -0,004 -0,005 -0,006 -0,007 -0,008 -0,009 -0,01 Accuracy Dispersion 2005 2006 2007 2008 2009 0,009 0,008 0,007 0,006 0,005 0,004 0,003 0,002 0,001 0

h and s over time

2004 0,4 0,3 0,2 0,1 0 -0,1 -0,2 h s
h

2005

2006

2007

2008

2009 16 14 12 10 8 6 4 2 0

Variables description in Table 1 Median values among the companies included in the analysis.

33

Dispersion

Accuracy

Table 1. Variables definitions Variable Description Minus the absolute value of the median EPS estimated by analysts minus the reported EPS Accuracy t+1 standardized over the stock market price at the end of the year Ranked absolute value of the median EPS estimated by analysts minus the reported EPS Accurnk_n t+1 standardized over the stock market price at the end of the year and divided by the number of companies in the industry. The standard deviation of EPS analysts forecast estimates over the stock market price at the Dispersion t+1 end of the year The ranked standard deviation of EPS analysts forecast estimates over the stock market price Disprnk_n t+1 at the end of the year and divided by the number of companies in the industry. h t+1 Precision of public information Precision of private information s t+1 IntangiblesTA POST Goodwill Early_adopt IndefiniteTotal Brands Disclosure Brands=Firm name BrandsTotal Assets Loss IndependentsAudit Size Leverage NE M/B OCFTotal Assets R&DOperatingExpenditure EBITDA Enforcement Year dummies Industry dummies The proportion of intangibles (goodwill excluded) on total asset = 1 if Year>=2005 = 0 otherwise Variation of goodwill = 1 if the company adopt IFRS before 2005 = 0 otherwise The proportion of indefinite useful life brands on total brands Disclosure index = 1 if the company owns a brand equal to the firm name = 0 otherwise The proportion brands on total assets = 1 if the company reported a loss due to brand impairment = 0 otherwise The proportion of independents in audit committee Natural logarithm of total assets Debt over Equity Number of analyst following the company Market value of equity over book value of equity Operating cash flow over total assets Research & development expenses over operating expenditure Variation of EBITA Legal enforcement scores from Hope2003 Year dummies Industry dummies

34

Table 2. Descriptive statistics PANEL A from 2003 to 2008 Variable N Accuracy t+1 1184 Dispersion t+1 1184 h t+1 1184 s t+1 1184 IntangiblesTA 1184 POST 1184 Goodwill 1184 IndependentsAudit 1184 Listing_Status 1184 Size 1184 Leverage 1184 NE 1184 M/B 1184 OCFTotal Assets 1184 1184 R&DOperatingExpenditure EBITDA 1184 Enforcement 1184 Variables description in Table 1 PANEL B from 2005 to 2008 Variable N Accuracyt+1 728 dispersion t+1 728 728 h_win t+1 s_win t+1 728 IndefiniteTotal Brands 728 Disclosure 728 Brands=Firm name 728 BrandsTotal Assets 728 Loss 728 Goodwill 728 728 IndependentsAudit Early_adopt 728 Listing_Status 728 Size 728 Leverage 728 NE 728 M/B 728 728 OCFTotal Assets R&DOperatingExpenditure 728 EBITDA 728 Variables description in Table 1

mean -.013 .008 0.303 27.611 0.063 0.682 0.421 0.821 0.391 15.780 0.619 18.078 3.234 0.104 0.028 0.101 -0.606

sd .039 .014 6.192 46.097 0.086 0.466 1.767 0.312 0.488 1.394 0.160 8.192 2.849 0.059 0.056 0.614 1.583

p5 -.041 .001 -7.665 0.203 0.000 0.000 -0.359 0.000 0.000 13.652 0.347 6.000 0.830 0.020 0.000 -0.600 -3.550

p25 -.011 .002 -0.526 3.050 0.008 0.000 -0.066 0.667 0.000 14.716 0.525 12.000 1.600 0.067 0.000 -0.048 -1.320

p50 -.005 .005 0.121 9.225 0.028 1.000 0.031 1.000 0.000 15.716 0.622 17.000 2.565 0.096 0.007 0.094 -0.390

p75 -.002 .008 1.122 28.154 0.081 1.000 0.251 1.000 1.000 16.796 0.713 23.000 3.920 0.131 0.028 0.255 1.160

p95 -.0003 .020 8.741 129.100 0.269 1.000 1.941 1.000 1.000 18.230 0.881 33.000 8.010 0.222 0.144 0.865 1.160

mean -.013 .008 0.874 23.747 0.334 0.679 0.856 0.050 0.183 0.518 0.825 0.257 0.390 15.907 0.612 18.911 3.105 0.102 0.029 0.100

sd -.045 .0191 5.789 38.462 0.440 0.252 0.352 0.079 0.387 1.793 0.301 0.437 0.488 1.351 0.156 8.185 2.602 0.057 0.058 0.529

p5 -.039 .001 -5.437 0.211 0.000 0.250 0.000 0.001 0.000 -0.266 0.000 0.000 0.000 13.849 0.351 7.000 0.770 0.021 0.000 -0.478

p25 -.011 .002 -0.414 3.061 0.000 0.500 1.000 0.007 0.000 -0.013 0.667 0.000 0.000 14.866 0.522 13.000 1.575 0.065 0.000 -0.060

p50 -.005 .004 0.181 9.067 0.000 0.714 1.000 0.021 0.000 0.076 1.000 0.000 0.000 15.828 0.616 18.000 2.570 0.093 0.007 0.099

p75 -.002 .009 1.320 24.737 0.952 0.857 1.000 0.055 0.000 0.353 1.000 1.000 1.000 16.906 0.704 24.000 3.850 0.128 0.028 0.252

p95 -.0002 .020 10.416 107.971 1.000 1.000 1.000 0.231 1.000 2.422 1.000 1.000 1.000 18.350 0.848 34.000 7.370 0.212 0.166 0.739

35

Table 3. . (Intangible-goodwill)/Total assets - Accuracy and Dispersion(1) (2) (3) accurnk_n accurnk_n accurnk_n no all early adopters early adopters .021 .423 -.131 IntangiblesTA (0.10) (0.63) (-0.58) IntangiblesTA * .02 -.374 .133 POST (0.09) (-0.46) (0.60) POST -.0133 .0127 -.0241 (-0.62) (0.27) (-0.95) Goodwill .00364 -.00328 .00423 (0.91) (-0.52) (0.81) .0341 .108 .0154 IndependentsAudit (0.83) (1.09) (0.36) Early_adopt -.0276 (-0.98) Listing_Status .0214 -.000734 .0127 (0.91) (-0.01) (0.49) Size -.0176 -.0382 -.011 (-1.59) (-1.64) (-0.86) Leverage -.301*** -.152 -.259*** (-3.82) (-0.64) (-3.16) NE .00389** .00618* .00392** (2.31) (1.77) (2.01) M/B .00896** .00873 .00622 (2.08) (0.78) (1.40) .324 .445 .232 OCFTotal Assets (1.52) (1.15) (1.00) -.096 -.968** -.0366 R&DOperatingExpenditure (-0.36) (-2.11) (-0.12) EBITDA .0126 .056* .000714 (1.00) (1.97) (0.05) Enforcement -.0272*** .00318 -.0318*** (-3.69) (0.14) (-3.96) CONSTANT .782*** .964*** .712*** (4.27) (3.62) (3.42) Industry dummies Yes No Yes R2 0.077 0.11 0.089 R2-adj 0.054 0.073 0.059 N. of cases 1183 316 867 N. of firms 212 54 158 Std. Err. adjusted for clusters t-statistics in parentheses * p<0.10, ** p<0.05, *** p<0.01 Variables description in Table 1

(4) disprnk_n all .239 (1.12) -.458** (-2.39) .019 (1.02) -.00452 (-1.18) -.0774** (-2.00) -.0206 (-0.70) -.0413 (-1.50) .0291** (2.29) .394*** (4.07) -.00122 (-0.64) -.0234*** (-4.32) -.426* (-1.85) .227 (0.81) -.0302** (-2.52) -.021** (-2.34) -.0242 (-0.12) Yes 0.21 0.19 1184 212

(5) disprnk_n early adopters .554* (1.91) -.734** (-2.13) -.0191 (-0.50) -.00668 (-1.22) -.107 (-1.66) -.0249 (-0.50) .0121 (0.51) .638*** (3.02) -.00106 (-0.37) -.00981 (-0.69) -.386 (-0.86) 1.28** (2.58) -.0384* (-1.78) -.0218 (-0.92) .0874 (0.28) No 0.24 0.21 317 54

(6) disprnk_ n no early adopters .188 (0.76) -.431** (-1.98) .0317 (1.44) -.00205 (-0.41) -.0614 (-1.29) -.0405 (-1.19) .0341** (2.25) .363*** (3.33) -.000611 (-0.27) -.023*** (-4.15) -.537** (-2.01) .141 (0.43) -.0256* (-1.82) -.0239** (-2.33) -.121 (-0.52) Yes 0.21 0.18 867 158

36

Table 4. . (Intangible-goodwill)/Total assets -h and s(1) (2) h h all early adopters 7.19* 3.11 IntangiblesTA (1.73) (0.87) IntangiblesTA * -3.49 -4.07 POST (-0.84) (-1.11) POST 1.47*** .679 (2.94) (1.36) Goodwill -.146 -.256 (-1.56) (-1.27) .101 .724 IndependentsAudit (0.20) (1.47) Early_adopt .598* (1.72) Listing_Status .162 .0613 (0.40) (0.24) Size .15 .184 (0.73) (1.50) Leverage -.609 -.954 (-0.25) (-0.53) NE .107** .0124 (2.47) (0.62) M/B .0665 -.131 (0.39) (-1.17) -1.5 .236 OCFTotal Assets (-0.25) (0.04) -7.12 -4.75 R&DOperatingExpenditure (-0.97) (-1.58) EBITDA .122 -.151 (0.56) (-0.81) Enforcement .401*** .083 (2.72) (0.36) CONSTANT -6.12** -2.56 (-2.01) (-1.66) Industry dummies Yes No R2 0.070 0.076 R2-adj 0.046 0.033 N. of cases 1181 316 N. of firms 212 54 Std. Err. adjusted for clusters t-statistics in parentheses * p<0.10, ** p<0.05, *** p<0.01 Variables description in Table 1

(3) h no early adopters 8.5 (1.63) -4.1 (-0.81) 1.99*** (3.05) -.091 (-0.81) .179 (0.27) .0621 (0.10) .136 (0.48) -1.07 (-0.38) .142** (2.41) .109 (0.60) -1.99 (-0.29) -7.42 (-0.70) .201 (0.69) .481*** (2.69) -6.83 (-1.49) Yes 0.081 0.050 865 158

(4) S all -98.6*** (-3.99) 71.2*** (3.09) -11.2*** (-3.61) .488 (0.79) 17.5*** (3.11) -15.5*** (-3.78) -3.35 (-0.70) -6.92*** (-3.12) 1.89 (0.07) -.41 (-1.49) .0999 (0.08) -38.9 (-0.70) 55.8 (0.73) 3.05 (1.58) 4.51*** (2.81) 165*** (4.74) Yes 0.26 0.25 1181 212

(5) s early adopters -57.5* (-1.89) 59.5* (1.87) -8.65** (-2.46) 2.41 (1.31) -1.31 (-0.22) 4.07 (1.41) -3.99** (-2.11) -35.3** (-2.15) .28 (1.25) 1.54 (1.49) -70.2 (-1.06) 17 (0.25) 2.7* (1.89) -.563 (-0.26) 94.8** (2.60) No 0.22 0.19 316 54

(6) s no early adopters -102*** (-3.44) 72.3*** (2.79) -13.4*** (-3.40) .088 (0.13) 22*** (3.01) -3.31 (-0.49) -8.66*** (-2.91) -6.78 (-0.23) -.54 (-1.58) -.0159 (-0.01) -18.5 (-0.27) 88.5 (0.90) 3.14 (1.27) 6.34*** (3.33) 202*** (4.13) Yes 0.25 0.23 865 158

37

Table 5. Brands and Accuracy and Dispersion (1) accurnk_n IndefiniteTotal Brands .0482 (1.55) Disclosure -.108** (-2.21) Early_adopt s -.0583* (-1.79) IndefiniteTotal Brands * Adopt Disclosure * Adopt Brands=Firm name BrandsTotal Assets Loss Goodwill IndependentsAudit Listing_Status Size Leverage NE M/B OCFTotal Assets R&DOperatingExpenditure EBITDA Enforcement CONSTANT Year dummies Industry dummies R2 R2-adj N. of cases N. of firms Std. Err. adjusted for clusters t-statistics in parentheses * p<0.10, ** p<0.05, *** p<0.01 Variables description in Table 1 -.00222 (-0.07) .162 (0.88) -.0352 (-1.14) .00509 (1.10) .065 (1.52) .0252 (0.91) -.0255* (-1.78) -.3*** (-3.26) .00315 (1.49) .0193*** (2.71) .00729 (0.03) .0819 (0.24) .0268 (1.43) -.0434*** (-5.16) .939*** (3.78) Yes Yes 0.14 0.093 728 212

(2) accurnk_n .0325 (0.94) -.145*** (-2.64) -.172* (-1.80) .0659 (0.87) .144 (1.21) -.000114 (-0.00) .186 (1.02) -.0344 (-1.14) .0047 (1.00) .0676 (1.56) .0225 (0.81) -.025* (-1.74) -.304*** (-3.31) .00333 (1.55) .0189*** (2.67) -.00197 (-0.01) .0726 (0.21) .0269 (1.43) -.0412*** (-4.80) .963*** (3.83) Yes Yes 0.14 0.093 728 212

(3) disprnk_n -.0697** (-2.23) -.0221 (-0.39) -.0268 (-0.79)

.0245 (0.62) -.00321 (-0.02) .0314 (0.99) -.000678 (-0.13) -.0997** (-2.37) -.0314 (-1.01) .0201 (1.21) .436*** (4.03) -.00068 (-0.27) -.037*** (-4.19) -.137 (-0.47) .122 (0.38) -.0539*** (-3.04) -.00735 (-0.76) .173 (0.66) Yes Yes 0.23 0.19 728 212

(4) disprnk_n -.0196 (-0.55) -.0265 (-0.41) .0321 (0.35) -.183*** (-2.70) .0144 (0.12) .0177 (0.46) -.113 (-0.62) .0228 (0.73) -.000538 (-0.10) -.0942** (-2.28) -.031 (-1.02) .0197 (1.21) .44*** (4.13) -.0007 (-0.29) -.0362*** (-4.15) -.136 (-0.48) .0227 (0.07) -.0554*** (-3.15) -.0128 (-1.30) .166 (0.65) Yes Yes 0.24 0.20 728 212

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Table 6. Brands and h and s IndefiniteTotal Brands Disclosure Early_adopt s IndefiniteTotal Brands * Adopt Disclosure * Adopt Brands=Firm name BrandsTotal Assets Loss Goodwill IndependentsAudit Listing_Status Size Leverage NE M/B OCFTotal Assets R&DOperatingExpenditure EBITDA Enforcement CONSTANT Year dummies Industry dummies R2 R2-adj N. of cases N. of firms Std. Err. adjusted for clusters t-statistics in parentheses * p<0.10, ** p<0.05, *** p<0.01 Variables description in Table 1 .835 (0.79) -1.87 (-0.69) -.394 (-0.98) -.0426 (-0.62) -.17 (-0.32) -.187 (-0.47) -.00182 (-0.01) .701 (0.33) .0954** (1.99) .0431 (0.22) 3.02 (0.56) -1.13 (-0.22) .125 (0.32) .537*** (3.17) -5.4 (-1.18) Yes Yes 0.12 0.076 728 212 (1) h .225 (0.45) 1.48 (1.41) .248 (0.69) (2) h -.0676 (-0.11) 2.49* (1.93) 2.32** (2.00) .862 (0.93) -3.86** (-2.45) .876 (0.83) -.954 (-0.36) -.305 (-0.77) -.0345 (-0.51) -.313 (-0.61) -.124 (-0.31) -.00906 (-0.03) .73 (0.34) .0913* (1.90) .0413 (0.21) 3.25 (0.61) .483 (0.10) .146 (0.38) .557*** (3.10) -5.9 (-1.28) Yes Yes 0.13 0.081 728 212 (3) s -9.53** (-2.18) 10.4 (1.26) -9.95*** (-2.75) (4) s -14*** (-2.76) 12.8 (1.20) -10.4 (-1.03) 15.9** (2.48) -8.86 (-0.66) .246 (0.03) -17.4 (-0.99) -4.52 (-1.45) .225 (0.41) 17.4*** (3.21) -2.57 (-0.50) -3.89* (-1.71) 2.29 (0.11) -.316 (-1.03) 1.19 (1.11) -82.5* (-1.82) 37.1 (0.55) .67 (0.23) 2.38 (1.54) 98.1** (2.58) Yes Yes 0.29 0.25 728 212

-.36 (-0.05) -27.8 (-1.62) -5.32* (-1.68) .219 (0.39) 18.1*** (3.36) -2.67 (-0.52) -3.9* (-1.70) 2.6 (0.13) -.311 (-1.02) 1.26 (1.18) -82.9* (-1.84) 26.2 (0.39) .504 (0.17) 1.91 (1.30) 98.4** (2.57) Yes Yes 0.28 0.25 728 212

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Table 7. Brands and Enforcement IndefiniteTotal Brands Disclosure Enforcement Disclosure * Enforcement IndefiniteTotal Brands* Enforcement IndependentsAudit Brands=Firm name BrandsTotal Assets Loss Goodwill Early_adopt s Listing_Status Size Leverage NE M/B OCFTotal Assets R&DOperatingExpenditure EBITDA CONSTANT Year dummies Industry dummies R2 R2-adj N. of cases N. of firms Std. Err. adjusted for clusters t-statistics in parentheses * p<0.10, ** p<0.05, *** p<0.01 Variables description in Table 1 (1) accurnk_n .0197 (0.63) -.173*** (-3.59) .044* (1.82) -.111*** (-3.54) -.046** (-2.39) .0751* (1.79) .0026 (0.08) .212 (1.22) -.0369 (-1.24) .00481 (1.00) -.0733** (-2.16) .0156 (0.56) -.0273* (-1.92) -.324*** (-3.55) .00297 (1.42) .0192** (2.59) .00803 (0.03) .095 (0.29) .022 (1.19) 1.06*** (4.30) Yes Yes 0.16 0.11 728 212 (2) disprnk_n -.0165 (-0.51) -.0343 (-0.59) -.0178 (-0.71) -.00887 (-0.27) .0736*** (4.30) -.106** (-2.57) .019 (0.50) -.0822 (-0.48) .0256 (0.85) -.00078 (-0.14) .0112 (0.32) -.0202 (-0.67) .0209 (1.27) .448*** (4.30) -.000629 (-0.26) -.0371*** (-4.17) -.181 (-0.64) -.0503 (-0.15) -.0528*** (-3.05) .137 (0.53) Yes Yes 0.26 0.22 728 212 (3) h -.117 (-0.21) 2.45** (2.28) -.407 (-1.28) 1.49*** (3.25) -.399 (-1.48) -.218 (-0.41) .852 (0.83) -1.44 (-0.54) -.315 (-0.80) -.0377 (-0.53) -.0746 (-0.20) -.217 (-0.55) .0115 (0.04) .821 (0.38) .0972** (2.02) .0444 (0.23) 3.64 (0.67) .965 (0.18) .172 (0.43) -6.47 (-1.41) Yes Yes 0.13 0.085 728 212 (4) s -11.3** (-2.55) 18.6** (1.97) -6.55 (-1.64) 12.8** (2.59) -1.83 (-0.72) 17.5*** (3.41) -.341 (-0.05) -25.8 (-1.51) -4.73 (-1.51) .26 (0.47) -11.9*** (-3.32) -2.67 (-0.54) -3.77* (-1.73) 3.95 (0.20) -.294 (-1.01) 1.27 (1.20) -78.5* (-1.73) 40.6 (0.62) .928 (0.33) 88.3** (2.37) Yes Yes 0.30 0.26 728 212

40