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Enforcement of Accounting Standards in Europe: Capital-Market-Based Evidence for the Two-Tier Mechanism in Germany

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  • J�rg-Markus Hitz
  • J�rgen Ernstberger
  • Michael Stich

Abstract

On the background of regulatory initiatives that mandate the establishment of comparable enforcement systems in EU jurisdictions to ascertain consistent and faithful application of IFRS, this paper provides capital-market-based evidence on investor reactions for one specific institutional set-up: the two-tier enforcement system in Germany. In operation since 2005, the German enforcement mechanism consists of a private body, the DPR, which investigates compliance of published financial reports of firms listed on a regulated market segment and, upon error findings, involves the German securities regulator BaFin, which on a second level enforces disclosure of these findings to establish adverse disclosure ('name and shame'). For a sample of error findings published in the period 2005-2009, we investigate short- and long-term market reactions to error announcements. Results for abnormal returns, abnormal trading volumes and abnormal bid-ask spreads indicate that these announcements represent new, negative information and suggest that, despite an enforcement environment that is categorised as weak in the extant literature, the activities of the DPR/BaFin seem to penalise infringing firms and thus provide potential deterrence. Multivariate analyses yield weak evidence that the magnitude of the market value discount is positively associated with the severity of the errors, with the threat of subsequent litigation and with cases in which firms disagreed with the error findings of the DPR.

Suggested Citation

  • J�rg-Markus Hitz & J�rgen Ernstberger & Michael Stich, 2012. "Enforcement of Accounting Standards in Europe: Capital-Market-Based Evidence for the Two-Tier Mechanism in Germany," European Accounting Review, Taylor & Francis Journals, vol. 21(2), pages 253-281, August.
    • Handle: RePEc:taf:euract:v:21:y:2012:i:2:p:253-281
    DOI: 10.1080/09638180.2011.641727
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    1. Beuselinck, C.A.C. & Joos, P.P.M. & Khurana, I.K. & van der Meulen, S., 2010. "Mandatory IFRS Reporting and Stock Price Informativeness," Other publications TiSEM ef72d273-639c-41d8-9c5c-5, Tilburg University, School of Economics and Management.
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    Cited by:

    1. Kim, Jung Hoon & Lin, Steve, 2019. "Accrual anomaly and mandatory adoption of IFRS: Evidence from Germany," Advances in accounting, Elsevier, vol. 47(C).
    2. Alexander Merz, 2020. "Expensing performance-vested executive stock options: is there underreporting under IFRS 2?," Journal of Business Economics, Springer, vol. 90(3), pages 461-493, April.
    3. Wang, Yang & Ashton, John K. & Jaafar, Aziz, 2019. "Money shouts! How effective are punishments for accounting fraud?," The British Accounting Review, Elsevier, vol. 51(5).
    4. Christensen, Hans B. & Hail, Luzi & Leuz, Christian, 2013. "Mandatory IFRS reporting and changes in enforcement," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 147-177.
    5. Visani, Franco & Di Lascio, F. Marta L. & Gardini, Silvia, 2020. "The impact of institutional and cultural factors on the use of non-GAAP financial measures. International evidence from the oil and gas industry," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 40(C).
    6. Dal Maso, Lorenzo & Kanagaretnam, Kiridaran & Lobo, Gerald J. & Mazzi, Francesco, 2020. "Is accounting enforcement related to risk-taking in the banking industry?," Journal of Financial Stability, Elsevier, vol. 49(C).
    7. Marie Herly & Nikolaj Niebuhr Lambertsen, 2023. "Restatement costs and reporting bias," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(1-2), pages 91-117, January.
    8. Silvia Gardini & F. Marta L. Di Lascio & Franco Visani, 2017. "Opportunism in disclosing pro-forma indicators: rationale and contextual drivers," BEMPS - Bozen Economics & Management Paper Series BEMPS42, Faculty of Economics and Management at the Free University of Bozen.
    9. Donal Byard & Masako Darrough & Jangwon Suh, 2021. "Re-examining the impact of mandatory IFRS adoption on IPO underpricing," Review of Accounting Studies, Springer, vol. 26(4), pages 1344-1389, December.
    10. Nurunnabi, Mohammad, 2014. "‘Does accounting regulation matter?’: An experience of international financial reporting standards implementation in an emerging country," Research in Accounting Regulation, Elsevier, vol. 26(2), pages 230-238.
    11. Marius Gros & Alexander Nevrela, 2020. "Revisiting the effectiveness of the German accounting enforcement reforms: a replication study," Management Review Quarterly, Springer, vol. 70(1), pages 135-164, February.
    12. Vlad‐Andrei Porumb & Abe De Jong & Carel Huijgen & Teye Marra & Jan Van Dalen, 2021. "The Effect of Auditor Style on Reporting Quality: Evidence from Germany," Abacus, Accounting Foundation, University of Sydney, vol. 57(1), pages 1-26, March.

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