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Journal of Business Economics
Erschienen in: Journal of Business Economics 6/2015

01.08.2015 | Original Paper

Are different stock market transparency requirements associated with different accounting quality levels? An analysis of bonding effects on the German stock market

verfasst von: Marius Gros, Christoph Wallek

Erschienen in: Journal of Business Economics | Ausgabe 6/2015

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Abstract

Most international stock exchanges distinguish solely between domestic and foreign issuers, whereas in Germany, issuers can choose between two market segments with diverse transparency levels: the Prime Standard and Non-Prime Standard segment. Transparency requirements for the Non-Prime Standard segment coincide with the minimum legal requirements of the EU-regulated market/regulated unofficial market. Companies that opt for a listing in the Prime Standard segment must comply with the higher transparency standards stipulated by the Frankfurt Stock Exchange. In our study, we find evidence indicating that companies that voluntarily bond themselves to these additional (private) regulations and tighter transparency requirements show higher accounting quality. Our results relate to papers that emphasize the importance of regulatory and legal environments as well as to papers discussing bonding effects on both the national and international levels. In summary, the unique German listing regime offers companies a setting in which to flexibly choose an appropriate level of transparency while considering the trade-off between the costs and benefits of specific listing requirements. For investors, the market segment is relevant for assessing the expected accounting quality level and the reliability of financial statements, respectively.
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Fußnoten
1
For the ongoing discussion regarding the consequences (costs and benefits) of the regulatory oversight of exchanges, see Mendoza (2008).
 
2
The Changes of the “Börsengesetz” (BörsG) are based on the “Vierte Finanzmarktförderungsgesetz” BGBl. Nr. 39/2002 of June 26 2002; see also Burger and Ulbrich (2004).
 
3
The Entry Standard is a segment of the open market. Its legal framework is defined by the “General Terms and Conditions of Deutsche Boerse AG for the Regulated Unofficial Market on the Frankfurt Wertpapierboerse.” The transparency requirements are lower than the requirements of the General or Prime Standard Segment. See the Issuer guide by Deutsche Boerse Group (2012).
 
4
Before 2007, Non-Prime Standard listed companies were not required to publish financial information on a quarterly basis. Today, Non-Prime Standard companies must publish interim management statements on a quarterly basis, but the requirements are still lower compared with the Prime Standard.
 
6
For the structure of the UK listing regime, see Leitterstorf et al. (2008). Within the UK context, Gerakos et al. (2011) analyze the consequences of a listing on the privately regulated London Alternative Investment Market (AIM). For example, they find that AIM firms perform poorly according to a variety of dimensions.
 
7
Extensive costs for complying with transparency requirements are, for some companies, reason to leave the Prime Standard and choose a listing in the General Standard (downlisting). For instance, the Sunways AG released the following explanatory statement for its transfer from Prime Standard to General Standard: "This change in trading segment is meant to reduce the additional expense involved in connection with a Prime Standard listing” (Sunways AG, Ad hoc announcement, June 26, 2012).
 
8
However, in a study of German companies reporting under IFRS, Paananen and Lin (2009) find a decrease in accounting quality after the mandatory EU adoption of IFRS in 2005. Also, Lin et al. (2012) find that accounting quality decreased when companies switched from USGAAP to IFRS in Germany in 2005.
 
9
Adverse selection as a component of the spread was first discussed by Bagehot (1971).
 
10
Another (older) explanation for cross-listings is the market segmentation hypothesis. “[It] was assumed that cross-listing was basically a means of integrating segmented markets and thus enabling the issuer to access trapped pools of liquidity” (Coffee 2002).
 
11
For an overview of the literature on private benefits and cross-listing, see Benos and Weisbach (2004) or Karolyi (1998).
 
12
In addition, theoretical research shows that commitments to increased disclosure levels would result in lower costs of capital. See Diamond and Verrecchia (1991).
 
13
“An alternative measure of accrual quality at the firm-year level is absolute value of the residual for that year. The tenor of the results is similar for this alternative specification, but the relations to firm characteristics and earnings persistence are weaker” Dechow and Dichev (2002), 35–59 (ft. 6).
 
14
For instance, Benston and Hagerman (1974) examine the US setting and find that as the price of a security doubles, the spread increases by 59 %.
 
15
During the entire sample period, 190 companies were Prime Standard listed continuously; 129 companies were listed in the Prime Standard at least for one year; and 434 companies were never listed in the Prime Standard.
 
16
In similar research contexts, prior literature often analyzes pre-post data in an event study design. However, because of the quality of available data before 2002, a pre-post study design is not feasible. Furthermore, the structure of the FSE before the comprehensive reforms in 2002 was characterized by a different multi-stage transparency concept and was considered to be quite opaquely. A pre-post design including this period could therefore be difficult to apply and not meaningful in relation to our research question, as similar bonding effects could also have occurred in the pre-period.
 
17
Applying the Performance-adjusted Jones Model (Kothari et al. 2005) also results in a significant negative coefficient (−0.0125 and significant at the 5 % level). Using the original Dechow/Dichev Model results in an insignificant negative coefficient for the Prime Standard dummy.
 
18
For an explanation of the German enforcement mechanisms, see Ernstberger et al. (2012).
 
19
However, such benefits only occur in countries, such as Germany, where firms have incentives to be transparent and where legal enforcement is strong.
 
20
Findings by Christensen et al. (2013) suggest that changes in reporting enforcement play a critical role for the observed liquidity benefits after IFRS reporting became mandatory in the EU.
 
21
Studies addressing these questions in an UK context are Leitterstorf et al. (2008) and Jenkinson and Ramadorai (2007).
 
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Metadaten
Titel
Are different stock market transparency requirements associated with different accounting quality levels? An analysis of bonding effects on the German stock market
verfasst von
Marius Gros
Christoph Wallek
Publikationsdatum
01.08.2015
Verlag
Springer Berlin Heidelberg
Erschienen in
Journal of Business Economics / Ausgabe 6/2015
Print ISSN: 0044-2372
Elektronische ISSN: 1861-8928
DOI
https://doi.org/10.1007/s11573-015-0763-7