1

Financial Statement Effects of Adopting International Accounting Standards:

The Case of Greece

Athianos Stergios1

Vazakidis Athanasios2

Dritsakis Nikolaos3

Abstract

This paper investigates the effects of adopting International Accounting Standards

(IAS) on financial statements and their value relevance for a sample of Greek firms

during 2003-2004. By implementing an innovative research design, we make a

comparison between accounting results reported under Greek accounting rules (Greek

GAAP) with those under IAS for the same set of years and document how IAS

adoption changes key financial measures and the value relevance of financial

statement information. Greek accounting system is stakeholder–oriented and usually

viewed as a historical cost accounting model that gives emphasis in income

smoothing while IAS is shareholder-oriented and generally viewed as fair value

accounting model that gives emphasis in balance sheet valuation. According to these

realizations, we find that total assets and book value of equity as well as variability of

book value and net income are significantly higher under IAS than Greek GAAP. In

addition, we find that book value (net income) plays a greater (lesser) valuation role

under IAS than under Greek GAAP. Finally, we find that while the IAS adjustments

to book value are generally value relevant, the adjustments to net income are

generally value irrelevant.

Key words: IAS, IFRS, GAAP, IAS Adoption

1 Lecturer, Department of Accounting, TEI of Serres

PhD Candidate, Department of Applied Informatics, University of Macedonia

156, Egnatia st, P.O Box 1591, 540 06 Thessaloniki – Greece

Tel: +30 23210 49175,

e-mail:as@teiser.gr 2Assistant Professor, Department of Applied Informatics, University of Macedonia

156, Egnatia st, P.O Box 1591, 540 06 Thessaloniki – Greece

Tel: +30 2310 891863,

e-mail:vasak@uom.gr 3 Assistant Professor, Department of Applied Informatics, University of Macedonia

156, Egnatia st, P.O Box 1591, 540 06 Thessaloniki – Greece

Tel: +30 2310 891876,

e-mail:drits@uom.gr

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1. Introduction

In the start of 2005, all listed companies in the European Union are required to

prepare their financial statements in accordance with International Accounting

Standards (IAS). IAS adoption by the European Union is one of the biggest events in

the history of financial reporting and this will make IAS the most widely accepted

financial accounting standard in the world. From the adoption of IAS, there is a direct

need for managers and investors to understand the consequences of IAS, especially in

European countries with stakeholder- oriented accounting systems (such as Germany,

France and Greece). The adoption of IAS is expected to have some important

influences and effects in the reporting of financial statements of companies in

stakeholder-oriented countries because IAS are affected by the shareholder- oriented

Anglo-Saxon accounting principles while national standards in many European

countries have greater contracting orientation and are influenced by considerations of

tax book conformity which is one of the most important obstacles for a country to

adopt IAS.

The objective of this paper is to examine financial statement effects from

adopting IAS in European countries with stakeholder-oriented accounting systems.

Therefore, it is used a sample of 40 Greek firms which adopt IAS for the first time in

2003. More specifically, we try to investigate the effects of IAS adoption on the

financial statements by both examining these changes which is running more quickly

by adopting IAS and studying the consequences of these alteration on key financial

ratios and the value relevance of financial statement information. The IAS adoption

has indirect effects such as higher market liquidity or lower cost of capital and direct

effects such as the changed financial statements and the related footnote disclosures.

It is very important to be mentioned that the investigation will be limited to the

Greek capital markets in order to overcome problems, which will be created by the

comparison of countries with different institutional environments.

Our research design allows us to compare with direct way accounting numbers

prepared under Greek Generally Accepted Accounting Principles (GAAP) with those

under IAS for the same years. We can make this comparison because many Greek

firms restate their financial statements under IAS for the years before the adoption,

therefore providing us with financial statements under both IAS and Greek GAAP for

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the year before the adoption. Moreover, our model controls for cross sectional and

time series differences between IAS and Greek GAAP users. Finally, it is important to

be noted that we make our research for these two years (2003-2004) because the most

Greek companies do not restate their financial statements under IAS prior to 2003.

Our relative value relevance analysis suggests that IAS reduce constantly the

income persistence. The major reason for this reduction is the relatively greater

emphasis on fair values and lesser emphasis on income smoothing. According to this

statement, we can say that book value is more important under IAS than under Greek

GAAP and reversely net income is less important under IAS than under Greek GAAP.

We cannot find any evidence that suggests that IAS improve the relative value

relevance of the book value of equity and net income, either separately or in

combination. Our incremental value relevance analysis suggests that although the IAS

adjustments to book value are generally value relevant, the adjustments to income are

generally value irrelevant with result to deterioration of value relevance. Generally,

value relevance results under IAS are formed according to balance sheet and fair

value and Greek GAAP according to income smoothing. Although it is focused the

fair value accounting instead of income smoothing, which increases the relative

importance of book value against net income, it does not appear very important

improvement of any summary measure, separately or in combination.

We outline that the firms of our sample do not represent a random selection of

Greek firms because they voluntarily adopted IAS before the mandatory IAS adoption

date. For the evaluation of the consequences on our value relevance results, we apply

the two-stage regression procedure that suggested by Heckman (1979). The effects of

this procedure suggest that while the size of enterprise and the financing needs drive

IAS adoption decisions, all our inferences are made to the effects of self- selection

bias.

With our investigation, we contribute to the literature on several dimensions.

First of all, we present evidence on the financial statement effects of the adoption of

IAS in European Union, which is one of the most important events in the history of

the financial reporting. By focusing on Greece, we study a country which have a

major change from the stakeholder- oriented Greek GAAP to the shareholder oriented

IAS. In the past, there were many studies which presented the potential effects from

adopting IAS in economies with stakeholder-oriented accounting systems but the lack

of data prevent these researches from coming to sure conclusions (Joos and Lang,

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1994). In our investigation, with the usage of collected data from annual reports of our

sample firms, we provide evidence concerning the financial statement effects of

adopting IAS in a country with a stakeholder-oriented accounting system such as

Greece.

Last researches, which studied this subject, based on cross-sectional

comparisons across different countries and arrived at the conclusion that the

shareholder-oriented system is more value relevant than the stakeholder-oriented

model (Ali and Hwang, 2000; Ball et al., 2000). However, the literature is not able to

distinguish if this result is driven by the difference in accounting systems or by other

institutional factors such as shareholder protection or market development. Reversely,

our model focuses in a single country and makes comparisons between two alternative

accounting systems for the same years. In this paper we examine accounting

differences under a ceteris paribus condition, which can control for time series and

cross-sectional differences in many country-specific institutional factors.

Finally, we examine the value relevance of IAS such as the prior studies

(Harris and Muller,1999; Ashbaugh and Olsson, 2002), by focusing on the period

(2003-2004) in Greece, which is prior to the mandatory adoption of IAS. In this

period, the core standards already change the accounting recognition and

measurement rules comprising IAS and they are regarded as a “true” presentation of

IAS.

The rest of the paper is as follows. Section 2 describes the tries of European

Union to convergence and harmonization and refers to the value relevance literature.

In section 3, it is presented the sample of Greek firms in which we make our

investigation. Section 4 mentions the methodology, which is followed for the

processing of the data. Section 5 provides the effects of adopting IAS on key

accounting measures and financial ratios, reports the differences in the book value of

equity and the net income across two accounting systems and moreover it analyzes

the results on relative value relevance of Greek GAAP and IAS as well as the

incremental value relevance of IAS book value and net income adjustments. Finally

section concludes.

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2. Literature Review

2.1 The Convergence’s Tries

The expansion of international trade and the accessibility of foreign stock and

debt markets have been a step to increase the discussion about the need for a global

set of accounting standards. Companies, especially multinational enterprises, compete

globally for resources, investors and creditors therefore the adoption of an

international accounting system is an urgent need. It has been claimed that a common

set of practices will provide a “level playing field” for all companies in the world. It

has been made many efforts by a lot of organizations to reduce the existing

differences between accounting systems. In 1973, the International Accounting

Standards Committee (IASC) is the most important organization, which was found for

the compilation of an international set of standards. Its target is to “work generally for

the improvement and harmonization of regulations, accounting standards and

procedures relating to the presentation of financial statements” (IASC, 1995). Its

members claim that the adoption of an international accounting standard improves the

quality of financial statements and increases the degree of comparability (IASC,

1995). From 1973 to 2001, the statements of International Accounting Standards that

issued by the board of the International Accounting Standards Committee are

designated “International Accounting Standards” (IAS). According to Epstein and

Mirza (1997), the IASC’s progress can be seen as taking place in three phases: (1)

1973-1988 when there was the development of a common body of standards; (2)

1989-1995 when the comparability and development project became; and (3) 1995-

current when the core standards project has been applied. In the early development

years, there were the establishment and the codification of a set of international

accounting standards. The comparability project was the result of criticism in relation

to alternatives allowed by the IASC standards and it drove to the revision of ten

standards. Finally, the objective of the core standards project that has been

encouraged by the International Organization of Securities Commissions (IOSCO) is

the development of high-quality standards that they are able to use for cross-border

reporting.

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In recent years, the International Accounting Standards Board (IASB) has

acquired greater legitimacy and stature (Choi et al, 2002; Herz, 2003; Meek and

Thomas, 2004; Roberts et al, 2002). The IASB announced in April 2001 that its

international accounting standards would be designated “International Financial

Reporting Standards” (IFRS). The 2002 GAAP convergence survey which was made

by the six largest accounting firms shows that 95% of the countries which take part in

the research, are committed to either complete or partial convergence of their national

accounting standards with IFRS (BDO et al.,2003). This valid research in 2002 has

focused in the first fifteen members of the EU.

The most important event for the IASB was the European Union (EU)

decision in 2002 to require all EU listed enterprises to prepare consolidated

accounting using IFRS from the beginning of 2005. If we want to make a historical

route in the EU’s decisions about accounting issues, it is very useful to be mentioned

a lot of events from 2000 until today when all listed companies of EU are obliged to

use IAS in the reporting of their financial statement. Specifically, in June 2000, the

European Commission issued a communication (a policy document) which proposed

that European listed enterprises would no longer have a free choice to prepare their

consolidated financial statements in accordance with either national accounting

standards, United States Generally Accepted Accounting Principles (US GAAP) or

IAS. Additionally, this communication was supported by the Economic and Finance

Ministers of the European Union (ECOFIN) at a meeting in July 2000. In February

2001, the European Commission presented draft legislation to the parliament and the

council of ministers acting out the policy that set out in their Communication.

According to EU Financial Reporting Strategy: The Way Forward, all the EU

companies listed on a regulated market (with the participation of banks and other

financial institutions) should be required to prepare consolidated accounts in

accordance with IAS from 2005 at the latest. It is also intended that in the next two

years the requirement for using IAS will be extended to all companies preparing a

public offer prospectus according to the EU’ s Listing Particulars Directive.

Moreover, the Commission suggested the Member States either to require or to allow

their non-listed enterprises to publish their financial statements in accordance with the

same set of standards as those for listed firms.

According to the Commission’s realizations, the financial reporting was

recognized as a key part of an efficient capital market therefore it must be compatible

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with global developments and it must be formed in relation to investors’ needs. It

wanted those accounting standards to meet an internationally recognized financial

reporting framework. In the borders of EU, two such frameworks are used: IAS and

US GAAP.

The Commission recognizes that it is not able to influence the processing of

US GAAP so it considers that IAS is a comprehensive and acknowledged set of

financial reporting rules which can serve the needs of the international business

community. The development of IAS with international prospects and not being

formed according to one business environment, is an additional advantage of IAS. It

is also necessary to be said that the Commission, through its Observer status at the

IASC Board and the steering committees, was able to participate to the IASC’ s

consultations and decisions.

There are some important provisos in the Commission’s proposal such as the

establishment of an “endorsement mechanism” in the European Commission. The

Commission claims that the European Union can not transfer the responsibilities for

setting financial reporting requirements for listed EU firms to a non-governmental

third party. All this process must be exercised oversight and therefore it has proposed

a two-tier mechanism to give legislative validity to IAS in Europe.

Furthermore, the Commission believes that the existence of an appropriate

mechanism is significant before the new standards are adopted by the IASB. For this

reason, it has decided for the establishment of a committee at the EU level, which will

facilate the adoption of IAS in Member States. The endorsement mechanism will

advise the Commission for the possible amendments to the EU Accounting

Directives. In addition to this mechanism, there will be, according to Commission, a

technical level of review, which supported by the private sector. The Commission also

makes a constructive, dedicated and continuous dialogue with the IASB and more

specifically with the IASB’s Standing Interpretations Committee (SIC) when

implementation leading is required.

The EU’ S decision regarding IFRS has remarkable ramifications for the rest

of Europe despite the limited attention by academic researchers. The new EU member

countries after 2002 are obligated to follow the EU’s accounting decisions.

Specifically, the ten new EU members, which joined in 2004, and the three EU

candidate countries followed this direction.

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There are several barriers to the convergence, which were identified by the

GAAP convergence 2002. The most important difficulties for the accounting

convergence are: insufficient guidance for the first-time application of IFRS, the lack

of existence of transactions of specific nature (pensions and other post –retirement

benefits), the tax-driven nature of national accounting systems and the confused

national accounting standards. Many countries were concerned about financial

instruments and about standards, which regard the impairment of assets, income taxes

and employee benefits.

2.2 Harmonization

There were many pressures for the international harmonization of accounting

since the early 1970s when the IASC was established and it started the development

of international stock market and international investment. There are a lot of profits

from the adoption of an international accounting system such as the reduction of

investment risks and cost of capital in the entire world, the lowering of costs as result

of multiple reporting, the elimination of confusion arising from different accounting

measures in countries, the encouragement of international investment and the

allocation of international profits more efficiently (Sharpe, 1998). The issuance of

IASs during the 1970s and the 1980s were recognized as an important step to

international harmonization but in the late 1980s the activities of IASC were

increasingly criticized due to the continuing lack of comparability across country

borders.

An important event was the cooperation between the IASC and the IOSCO in

1988 in order to allow a company to list its securities in any foreign market according

to one specific type of reporting financial statements conforming to IASs (Cairns,

1995). IOSCO has been active in encouraging and promoting the improvement and

quality of IAS for over ten years. Moreover, IASB staff and IOSCO continue to work

together in the next years in order to resolve outstanding issues and identify areas

where IASs are needed. In 1989, the IASC responded with a project in relation to the

comparability of financial statement, which its aim was to eliminate the choices of

other accounting methods in order to increase the credibility and the acceptability of

IASs by the accounting community. The results of the Comparability Project were the

revision of ten IASs.

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The compliance of companies to IASs is a very important subject for the

IASC. It is concerned that although the companies claim compliance, in fact they are

not complying with all the requirements of IASs. The revision of IAS 1 refers that the

companies that state their compliance with IASs, they comply with all IAS

requirements.

A crucial question is that if the adoption of IAS by the companies is able to

harmonize the accounting practices. The reduction of the diversity between

accounting practices after the adoption of IAS improves the comparability of financial

reports prepared from companies from different countries. Harmonization occurs as

more enterprises choose to prepare financial statements using the same accounting

system.

Many studies help the try of IASC and the IASB to facilitate and achieve the

harmonization. These studies focus on either accounting practices of corporations, de

facto; or on national accounting standards, de jure (Tay and Parker, 1990). Early

studies investigate that the harmonization of official national accounting standards

with IASs has a lot of results (Larson and Kenny, 1999). The most recent researches

show that convergence is not complete (Bloomer, 1999; Street and Gray, 1999) while

the increased legitimacy of IASC and now the IASB drives to convergence of national

accounting standards with IAS (Andersen et al.,2000,2001).

It is important to be said that a lot of studies have focused on accounting

harmonization in the EU and in other European countries (Aisbitt & Nobes,2001;

Haller,2002; Roberts et al.,2002). Many researches examine the problems, which are

created by the translation of accounting terminology and concepts into different

European languages (Aisbit & Nobes,2001; Evans,2003). In other studies used annual

reports and indexes in order to measure the European harmonization (Taplin,2004;

Canibano & Mora, 2000). Roberts et al. (2002) show the development of

harmonization in accounting field through EU directives. Haller (2002) mentioned

that the EU’s order to the listed companies to report its consolidated financial

statements according to IFRS and the allowance to the countries to require national

GAAP for individual accounts is a reduction of efficiency and an increase of

complexity. Furthermore, Rahman et al. (2002) claim that the regulatory harmony can

improve the practice harmony. The EU decision to require IFRS adoption by the listed

companies and to allow each country to decide if its national accounting standards are

required for the non-listed companies and for individual accounts of listed enterprises,

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was affected by the ideas of Hoarau (1995). In an investigation of first 15 EU

member countries (Street and Larson ,2004) was found that there is a primary

convergence on the consolidated accounts of companies. It is important to be

mentioned that the major obstacle of the convergence of national accounting

standards with IFRS is the historical linkage of the continental European countries

between their financial reporting and tax laws (Eberhartinger,1999; Haller, 2002;

Jaruga et al.,1996). Finally, Guenther and Hussein (1995) arrived to the following

conclusion: “one of the biggest impediments to uniform international accounting

standards is the requirement in many countries that that financial reporting standards

conform to tax regulations”.

2.3 Value Relevance of Different Accounting Measures

When we use the term “value relevance”, we refer to the ability of the

summary accounting measures to reflect the underlying economic value of the firm

which we measure through contemporaneous stock prices. In the past, researchers

have used either levels (price) or changes (returns) specifications for examining value

relevance issues. According to Kothari and Zimmerman (1995), the price

specification is economically better than the return specification. One more advantage

of the price specification is the possibility to measure the value relevance of both the

stock (book value) and flow (net income or earnings) variables. It is very important

whether there is a trade-off between the value relevance of the book value and the net

income. For instance, IAS possibly improves the value relevance of book values at the

expense of net income. Price specification has a major disadvantage that it is open to

econometric problems, which arising from heteroskedasticity and scale bias (Kothari

and Zimmerman, 1995). For the avoidance of this problem, it is used several

alternative deflators (including an underflated specification).

In accounting literature, there are two different opinions, which are

represented through many studies. More specifically, many studies support the value

relevance of accounting earnings (e.g. Ball and Brown, 1968; Collins and Kothari,

1989; Kothari and Zimmerman, 1995) while others indicate that stock price is

associated with the book value of firm assets, assuming that measures of assets and

liabilities imply the expected results of future activities (e.g. Barth, 1991). All these

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studies use models based either on earnings or book values which are viewed as

alternative approaches to valuation models (e.g. Barth and Landsman, 1995;

Solomons, 1995) especially under the assumption of a perfect market.

Recent studies express their arguments that in more realistic settings with

market imperfections, the accounting systems are able to provide information about

book value and earnings which are additional components of equity value (Chang,

1999; Feltham and Olson,1995; Pennman,1998). According to Burgstahler and

Dichev (1997), who used the concepts of adaptation value and recursion value, the

book value does not provide the net value of the firm’s resources primarily in terms of

historical cost and it does not have any relation with the success of the firm’s

employment of its resources. Oppositely, earnings provide a measure of value, which

count the results of employing firms’ resources. Therefore, it is preferred the

valuation models with many variables to models with one variable.

To make more clearly the analysis about the value relevance, we classify the

value relevance studies into three categories (e.g. Lambert, 1996; Holthausen and

Watts, 2001): (i) relative association studies, (ii) incremental association studies and

(iii) marginal information content studies.

The relative association studies compare the association between stock market

values or returns and alternative bottom-line measures. This type of study examine if

the association of an earnings number which calculated under an accounting standard,

is more highly associated with market values or returns than earnings calculated under

existing GAAP (e.g. Dhaliwal et al, 1999). Other studies examine and compare the

associations of foreign GAAP and US GAAP earnings (e.g. Harris et al., 1994). These

studies usually test for differences in the R2 of regressions with the use of different

bottom line accounting numbers. The accounting number with the larger R2

is

described as being more value relevant.

The incremental association studies examine whether the accounting number

of interest is helpful in explaining value or returns given other specified variables. It is

believed that the accounting number is value relevant if its estimated regression

coefficient is significantly different from zero. Some incremental association studies

make extra assumptions about the relation between accounting numbers and inputs to

a market valuation model in order to predict coefficient values and valuate the

differences in the error with which different accounting numbers measure a valuation

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input variable. For instance, Vencatachalam (1996) examines if the coefficient on the

fair value of derivatives is significantly different from one.

Finally, there are the marginal information content studies that investigate if

the specific accounting number adds to the information set which is available to the

investors. In these researches, it is used event studies to determine if the

announcement of a specific accounting number is associated with value changes. The

price reactions are considered evidence of value relevance. Amir et al (1993) examine

the marginal information content of the Form 20-F reconciliation of foreign and US

GAAP earnings numbers for foreign enterprises by making regression the five-day

abnormal announcement returns on the difference and the change in the difference

between foreign and US GAAP.

In many cases, the value relevance literature theories are not well specified

and we collect them from the papers’ experimental designs. It is appeared that value

relevance studies uses two different theories of accounting and standard setting to

draw inferences: (i) “direct valuation” theory and (ii) “inputs-to equity-valuation”

theory.

In the direct valuation theory, accounting earnings is intended to either

measure, or be combined with, equity market value changes or levels. The book value

of equity under the direct valuation theory is indented to either count, or be associated

with, equity market values. According to this theory, standard setters would be

interested in the results of a study of the relative stock price relation of alternative

accounting earnings or book value of equity measures.

In the inputs–to-equity-valuation theory, the role of accounting is the

providing of information on inputs to valuation models which investors use in valuing

the equity of firms. It is not obvious that standards setters would be interested in the

results of the above relative association study and it is more likely that they are

interested in a study that suggests investors could use an accounting number or a

possible accounting number in their valuation models. That inference requires a

valuation model (valuation theory) and an assumed combination between the

accounting number and a variable, which enters into the valuation model. Value

relevance studies that follow an inputs-to-equity valuation theory possibly perform an

incremental association study.

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3. Sample and Data

Our sample consists of 40 Greek industrial firms that adopted IAS for the first

time during 2003-2004. We begin our investigation period from 2003 because in that

year, many listed Greek companies started to report their financial statements both

under IAS and under Greek GAAP. Moreover, by restricting our sample to Greek

firms adopting IAS from 2003 and later, we are sure that the standards applied by our

IAS sample companies are representative of the international standards and that our

sample IAS adopters are not selectively applying only a subset of the prescribed

international standards. Both of these two conditions ensure that the IAS data, which

we use in our analyses, are representative of the current IAS rules.

In our investigation, we use the following procedures to identify our sample

and collect the necessary restated IAS accounting data. First, we use the site of Athens

Stock Exchange (ASE) in order to gather the observations of each firm for the two

years (2003-2004) with the available data on net income, book value and market

value. Second, we identify the firms, which report their financial statements both

under IAS and under Greek GAAP. These procedures result in a sample of 40 firms.

Third, we use all the available annual reports of the selected 40 firms, that we find

from the Athens Stock Exchange during the years in which we focus our

investigation. We verify the financial statements that are used Greek GAAP and those

that are used IAS by examining notes to financial statements and audit reports.

Therefore, we have financial statements of each company under Greek GAAP and

under IAS for every year. In our sample, there is not any company with negative book

value so the sample remains the same.

Table 1 reports the distribution of our sample firms by industry group.

Specifically, table 1 classifies enterprises based on the industry classification made by

Fama and French (1997). It shows that our sample firms are well allocated across

various industry groups with no group having more than 15% of the sample.

Moreover, the relatively high concentration of our sample firms in banking sector, in

food and in retail industries, reflect their dominance in the Greek economy and the

quality of the firms in these industries which reported their financial statements under

IAS before 1 January 2005. Finally, it is important to be mentioned that our sample

firms are representative of a broad cross section of Greek companies.

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4. Methodology

Our empirical investigation comprises three basic sets of analyses. First, we

present the incidence and the magnitude of key accounting differences between IAS

and Greek GAAP. Second, we examine the results of the IAS adoption on key

accounting measures and financial ratios. Finally, we observe the relative and the

incremental value relevance of IAS and Greek GAAP book values and net income.

We begin our analysis by showing both the incidence and the magnitude of

key accounting differences between Greek GAAP and IAS based on book value and

net income reconciliation adjustments, which our sample firms report in their annual

reports. We find that the translation of financial statements from Greek GAAP to IAS

has widespread and significant changes in fixed tangible assets, depreciation of fixed

tangible assets, valuation of inventories, deferred taxation, foreign currency

translation, brands and trademarks and goodwill. Overall, our analysis underlines that

while Greek GAAP give more emphasis in the prudence principle and income

smoothing (e.g. limited recognition of assets and frequent use of optional loss

provisions), IAS emphasizes fair-values and balance sheet valuation (e.g. use of fair

value for financial instruments and recognition of internally developed intangibles).

In addition, we analyze the effects of adopting IAS on key accounting

measures and financial ratios for our sample of IAS adopters. We find the total assets,

the total liabilities, the book value, the sales and the net income under IAS and under

Greek GAAP in order to examine the significance of the differences between the two

accounting systems. Moreover, we analyze the effects of adopting IAS on key

accounting ratios (return on equity, return on assets, assets turnover, leverage, profit

margin, book to market and earnings to price) in order to find the differences of

adopting IAS in relation to Greek GAAP in accounting measures and common- used

valuation metrics.

The final part of analyses examines the effects of IAS adoption on the value

relevance of book values and net income. We measure value relevance in relation to

the ability of accounting measures to give explanations to stock prices in the same

moment. We compare the relative value relevance of IAS and Greek GAAP and we

examine the incremental value relevance of the results made by IAS and Greek

GAAP. Our relative value relevance analysis can compare the ability of Greek GAAP

versus IAS to reflect economic information which proceeds from stock prices when

only one accounting system is available while our incremental value relevance

15

analysis examines the ability of two accounting systems to reflect information both

one system is available and when two accounting standards are applied

simultaneously.

More specifically, about the final part of our analysis, it has to be mentioned

that when income is neither permanent nor transitory, Ohlson (1995) proposes that the

correct specification is a model in which price is regressed on both book value of

equity and net income. Accordingly, our basic model for examining relative value

relevance is:

(1) 2P 10it ititit eNIaBVaa +++=

where :

Pit : total market value of equity for a firm at year end t.

BVit : book value of equity.

NIit : net income.

Book value and net income are alternatively measured under Greek GAAP

and IAS for the period 2003-2004. We also estimate a book value only version of (1)

which provides a balance sheet approach to valuation (Barth, 1991). This model is

important because it gives us the opportunity to examine the effects of IAS on the

value relevance of the balance sheet alone which is a basic focus of the fair value

approach adopted by IAS. Secondly, we test an income only version of equation (1)

which assumes an income approach to valuation (Black, 1993)

In addition, incremental value relevance tests allow us to examine per se the

value relevance of IAS to book value and net income. Accordingly, we examine the

incremental; value relevance of IAS adjustments. Our model for examining relative

value relevance is:

(2) 222112110 itititititit eNIDIFaNIGGaBVDIFaBVGGaaP +++++=

Where :

Pit= total market value of equity for a firm at year end t.

BVGGit= book value of equity under Greek GAAP

BVDIFit= book value of equity under IAS- book value of equity under Greek GAAP

NIGGit= net income under Greek GAAP

NIDIFit= net income under IAS-net income under Greek GAAP

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5. Results

5.1 Accounting Differences Between Greek GAAP and IAS for Calculation BV

and NI

5.1.1 Differences on BV of Equity

Panel A of Table 3 reports details of the book value reconciliation adjustments

between Greek GAAP and IAS (in euro million). We make a classification of

adjustments into eight specific categories (categories are identified as those with a

minimum of twenty observations in our sample of 40 Greek firms) and classify all

other adjustments as “other”. We present descriptive statistics for each of the

categories and for the book value under Greek GAAP and IAS.

Panel A of Table 3 documents that book values of equity under IAS are larger

than those under Greek GAAP. Both mean and median book value under IAS

(1313.75 million and 673.05 million respectively) is larger than under Greek GAAP

(1112.71 million and 559.26 million respectively). This is consistent with Greek

GAAP (e.g. limited recognition of assets and frequent use of provisions) producing

more conservative accounting numbers than IAS (e.g. use of fair value for financial

instruments and recognition of internally developed intangibles). Furthermore, there is

larger standard deviation under IAS than under Greek GAAP, which indicates that the

adoption of IAS increases cross-sectional variation. This is consistent with income

smoothing orientation of Greek accounting system and fair value orientation of IAS

(because fair values possibly enlarge differences between firms).

Finally, the panel A reports the major book value reconciliation categories

which influenced negative or positive in calculation of book value across two

accounting systems. These major categories are: valuation of fixed tangible assets,

depreciation of tangible assets, inventories valuation, deferred taxes, foreign currency

translation, brand and trademarks, goodwill and provisions. In Panel A of Table 3,

there are descriptive statistics of all these categories in the calculation of book value.

Our analyses on the accounting differences and reconciliation items find that

switching to IAS results in widespread changes relating to tangible assets, inventories,

deferred taxes and foreign currency translation. Accounting differences in goodwill,

provisions, brand and trademarks are less widespread but they are economically

significant for certain firms. It is very important to be outlined that the fluctuations of

17

these accounting numbers are consistent with the role of every result in each

accounting system.

5.1.2 Differences on NI

Panel B of Table 3 reports details of net income reconciliation adjustments

between Greek GAAP and IAS (in euro million). As in Panel A, Panel B provides the

two sets of descriptive statistics on the reconciliation adjustments, which concern net

income measures under Greek GAAP and IAS. The panel shows that the mean net

income is slightly larger under IAS (122.57 million) than under Greek GAAP (120.69

million) while the median is larger under Greek accounting standards (78.16 million)

than under international accounting standards (67.94 million). In addition, the

standard deviation of net income increases under IAS (from 129.85 to 140.65).

The average effects of the net income reconciliation adjustments are generally

in the same direction as the effects of book value reconciliation items apart from the

adjustments related to provisions and deferred taxes. It must be mentioned that it is

not necessary to change book value and net income in the same direction because

book value captures the cumulative effect of accounting differences and net income

captures the effect during the financial year. For instance, although the change from

tax-based accelerated depreciation methods to straight-line depreciation methods will

increase book value of fixed tangible assets and therefore the book value of equity, it

will decrease (increase) depreciation expense with result to increase (decrease) net

income in the earlier (later) stage of fixed tangible assets’ useful life.

Finally, the panel B reports the major book value reconciliation categories,

which influenced negative or positive in calculation of net income across two

accounting systems. These major categories are the same as those of book value

reconciliation items. In Panel B of Table 3, there are descriptive statistics of these

items, which are used for the calculation of net income. The adoption of IAS has

widespread changes in tangible assets, deferred taxes and provisions. It is also

necessary to be mentioned that the fluctuations of these accounting numbers are

consistent with the role of every result in each accounting system.

18

5.2 Effects of Accounting Differences on Financial Statement Measures and

Ratios

In this part of paper, we document the effects of adopting IAS on key

accounting measures and financial ratios.

In Panel A of Table 4, we present descriptive statistics on key results of

balance sheet (total assets, total liabilities and book value of equity) and income

statement (sales revenue and net income) measures. As concerned as balance sheet,

we find that both total assets and total liabilities are higher under IAS than under

Greek GAAP: the mean total assets under IAS are significantly higher than that under

Greek GAAP at p≤5% while the mean total liabilities under IAS are significant higher

than under Greek GAAP at p≤5%. These evidences imply that IAS recognizes more

asset and liability items on the balance sheet or that it measures them at higher values,

probably due to its fair-value orientation. Moreover, book values of equity are larger

under IAS than under Greek GAAP: the mean (median) book value under IAS is 1314

(673) versus 1113 (559) million under Greek GAAP with different significance at

p≤10% (p≤15%).These results are consistent with the common opinion that the Greek

GAAP is more conservative than IAS. In addition, in the income statement, the sales

revenues are almost the same because the process of the recognition of the revenues

across the two systems is almost same. Finally, both the mean net income under IAS

and under Greek GAAP are significantly same at p≤10% and the median net income

is not significantly different between the two systems at the conventional levels.

Interestingly, Panel A of Table 4 shows that IAS generates greater cross-

sectional variability in both balance sheet and income statement measures.

Particularly, the standard deviation of all accounting measures except for sales is

significantly higher under IAS than under Greek GAAP at p≤1%. The standard

deviation of sales is significantly same across the two different systems at p≤1%.

These results show that IAS has a tendency to magnify the differences across

companies, which could be a consequence of its greater fair-value orientation while

Greek GAAP tends to diminish the differences as a consequence of smoothing

orientation.

In Panel B of Table 4, we present descriptive statistics on key financial ratios.

Firstly, we examine five ratios that rely on financial statement only: (1) return on

equity, ROE, which equals to net income divided by book value of equity; (2) return

on assets, ROA, which equals to net income divided by total assets; (3) assets

19

turnover, ATO, which equals to sales revenue divided by total assets; (4) leverage,

LEV, which equals to total liabilities divided by book value and (5) profit margin,

PM, which equals to net income divided by sales revenue. The results reveal that

ROE, ROA and ATO ratios under IAS are lower than under Greek GAAP (the mean,

median and standard deviation differences in ATO are significant lower at p≤1%

while the mean, median differences in ROE are significant at p≤10% and the standard

deviation differences in ROE and ROA are significant at p≤1%). Furthermore, there is

an on insignificant difference in mean, median and standard deviation leverage while

the mean profit margin is significant the same across the two systems at p≤10%. The

median PM is insignificant lower under IAS than Greek GAAP while the standard

deviation is significant same at p≤1%.

We next examine two financial ratios, which compare accounting-based

valuation of shareholders’ equity and net income to market valuation: (1) book to

market, BM, which equals to book value divided by total market value of equity; (2)

earnings to price ratio, EP, which equals net income divided by total market value of

equity. The mean BM is significantly higher under IAS than under Greek GAAP at

p≤5% while the mean EP is significantly lower under IAS at p≤10%. This decrease in

mean EP ratio is a result of the higher average net income generated by the adoption

of IAS, showing that the IAS effects are different between small and large companies

(EP ratio is like a deflated version of net income and controls size).

To make a conclusion, we can indicate that the adoption of IAS significantly

affects many key accounting measures and financial ratios. According to IAS fair-

value orientation and Greek GAAP’ s conservatism, we find that total assets, total

liabilities and book value are (the most times significantly) larger under IAS than

under Greek GAAP and that the mean net income and its cross-sectional variation are

significantly higher under IAS than under Greek GAAP. Furthermore, we find that the

adoption of IAS by Greek enterprises significantly reduces the average return of

equity and the average assets turnover due to the larger total assets and book value

under IAS than Greek GAAP. Finally, we understand from the table 4 that the

adoption of IAS significantly influences commonly used valuation ratios.

20

5.3 Value Relevance of Greek Accounting Measures and IAS

In this part of our paper, we examine the value relevance of summary

accounting measures-book values and net income- measured alternatively under

Greek GAAP and IAS. It is important to be mentioned that we are not trying to

measure whether the alternative accounting numbers are differentially valued by the

stock market participants, i.e., whether these alternative measures actually

differentially affect investors’ decisions. Rather, we merely use stock prices as

proxies for the fundamental value of the firm and moreover we study the degree to

which the alternative measurements correlate with information used by investors in

setting stock prices (Barth et al, 2001). The previous analysis for the calculation of

book value and net income under Greek GAAP and IAS shows that there are

significant differences between two systems in the calculation of these accounting

measures, therefore it is important to examine the combined value relevance of both

book value and net income.

Firstly, we compare the relative value relevance of book values and net

income alternatively measured under IAS and Greek GAAP. Relative value relevance

tests compare the ability of measurements under each alternative accounting system,

separately, to reflect economic information, which is produced by stock prices. We

also examine the incremental value relevance of the adjustments made by IAS to

Greek GAAP book values and net income. Incremental value relevance tests valuate

the ability of IAS measures to reflect information beyond that in the Greek GAAP

measurements.

5.3.1 Relative Value Relevance

Table 5 reports the results of our relative value relevance analyses. We adopt

the undeflated specification, which is reported in Table 5. We separately report results

of the book-value only, income only and combined book value and income versions

of the (1). For each model we run two set of regressions: one with Greek GAAP

measurements, one with IAS measurements. We also report differences in coefficients

and adjusted R-squares across the Greek GAAP and IAS models. It has to be

mentioned that the number of observations is steady in each regression model (40

Greek firms). It is important that each regression for every model to have identical

observations.

21

We first compare the value relevance of Greek GAAP and IAS book value and

net income. As in prior investigations, we measure value relevance as the explanatory

power of accounting measures for market values. The analyses find little evidence,

which suggest that the value relevance of book value and/or net income improve

under IAS. For the book-value only model, the explanatory power under IAS is higher

than under Greek GAAP and it is significant in conventional levels. For the income

only model, the explanatory power under IAS is lower than under Greek GAAP but

the difference is insignificant in conventional levels. Finally, in the combined book

value and net income model, we find that the explanatory power under IAS is lower

and it is significant in conventional levels. The combined model gives us a more

complete picture of the value relevance of aggregate accounting measures under two

alternative accounting systems. To conclude about the explanatory powers of the IAS

to Greek GAAP, it important to be said that the IAS has higher power in the book

value only model which is significant while IAS has lower power in income only

model (although the difference is insignificant at conventional levels) and in the

combined book value and net income model which the difference is significant.

In addition, we examine the pricing weights (coefficients) on book value

and/or net income. In the book-value only model, the coefficient on book value is

little higher (difference: 0.03) under Greek GAAP and this difference is significant at

p≤1%. The higher coefficients on the Greek accounting system’s book values are

influenced by lower values reported under Greek GAAP, which are result of the

greater conservatism of Greek accounting rules in relation to international standards.

In the income only model, the coefficients on net income are also higher under Greek

GAAP (differnce:1.99) and the difference is significant at p≤1%. The higher

coefficients on the Greek GAAP income are consistent with Greek GAAP income

numbers that are more smoothed and more persistent than IAS numbers. Finally, we

examine the model that combines book value and net income. This model is important

because there can be many trade-offs between the relative valuation roles of book

values and net income. We find that the pattern of coefficients in the combined model

provides two important insights into the differences between Greek GAAP and IAS.

Firstly, the degree to which the net income coefficients are different under the two

systems: the Greek GAAP income is three times larger than IAS income and this

difference is significant at p≤1. Secondly, the book value coefficients under IAS are

larger than under Greek GAAP and the difference is significant. The higher book

22

value and lower net income coefficients under IAS than under Greek accounting rules

is consistent with much lower income persistence under IAS. Sometimes, the lower

income persistence could exclusively create higher book value coefficients

(Ohlson,1995).

5.3.2 Incremental Value Relevance

Table 6 presents results of the incremental value relevance test, representing

the undeflated specification as in Table 5. As in our relative value relevance analyses,

we examine book value only, income only and combined book value and income

versions of equation (2).

In Table 6, the book value only model undoubtedly reveals that the IAS

adjustments to the balance sheet are incrementally relevant: the BVDIF coefficients

(6.11) are all significantly positive at p=3%. However, the income only model,

reveals that the IAS adjustments to net income actually decrease income value

relevance. Specifically, the NIDIF coefficients (-1.00) are significant negative at

p≤1%. Finally, the book value and net income model reveals that the book-value

adjustments are incrementally value relevant (BVDIF coefficient =0.35) but the

difference is insignificant in conventional levels while the income adjustments are

negative (the NIDIF coefficient =-1% is significantly negative at p≤1%).

To summarize, it is important to be said that the book value adjustments in the

book only models are incrementally more value relevant under IAS while the income

adjustments in income only method are more incrementally value irrelevant under

IAS in relation to Greek GAAP. In the combined book value and net income

valuation model, book value (net income) plays a greater (lesser) valuation role under

IAS than under Greek GAAP, which is consistent with IAS’ s greater focus on the

balance sheet and fair values and less emphasis on income smoothing.

6. Conclusion

In this paper, we investigate the financial statement implications of adopting

IAS in Greece, a country with stakeholder-oriented and tax driven accounting system.

By using an advanced research design which compares information under both Greek

GAAP and IAS for the same set of firm-years, we examine the financial statement

changes which were created by the adoption of IAS by Greek firms and document the

23

effects of such adoption on key financial measures, ratios and value relevance of

financial statement information. It is important to be mentioned that our findings are

consistent with Greek GAAP’s conservativeness and income smoothing orientation

and with IAS’s fair value and balance orientation. More specifically, we document

three major findings: (1) total assets and book value of equity as well as variation in

book value and net income are significantly higher under IAS than under Greek

GAAP; (2) book value (net income) plays a greater (lesser) valuation role under IAS

than under Greek GAAP even though there is little evidence that indicates that IAS

the relative value relevance of either book value or net income and (3) the IAS

adjustments to book value are generally value relevant while the IAS adjustments to

net income are generally value irrelevant and they may decrease the value relevance.

Generally, our analyses show a consistent picture of the financial statement

effects of adopting the shareholder-oriented IAS from a stakeholder-oriented

accounting system such as Greek accounting standards. We document that an

important difference is that Greek GAAP gives much emphasis in the prudence

principle and income smoothing while IAS emphasizes fair-values and balance sheet

valuation. This difference is not widely appreciated in the prior studies but it has been

emphasized by practitioners (Ernst and Young, 2004). Although this fair-value

orientation of IAS significantly improves the relative importance of book values and

reduces the importance of income, there is little evidence, which suggest that the

movement from Greek GAAP to IAS increases the value relevance of the summary

measures, book value and net income.

It is important to be mentioned that we use in our research the underflated

specification for the avoidance of econometric problems, which arise from

heteroskedasticity and scale bias. In our analyses, we do not face these problems

because the F-statistic and p-values are in satisfied levels. The p-values have to be up

to 0.05 (5%) for being significant the F-statistic.

Moreover the paper provides timely and relevant insights into the potential

results of the IAS adoption by listed companies of the European Union in 1/1/2005,

which is one of the most important events in the history of the financial reporting.

Although the prior cross-country studies such as Ali and Hwang (2000) and Ball et al

(2000) find that the value relevance of accounting measures is lower in stakeholder-

oriented economies than in shareholder-oriented economies, in our analysis does not

find any significant difference. Our results highlights the importance of institutional

24

factors such as shareholder protection which plays an important role in giving

explanations of cross-country variation in the value relevance of accounting data (Ball

et al, 2003).

We recognize some limitations of our paper. Firstly, our research focuses

exclusively on Greek firms and our results may have not been generalized to other

countries. The focus in a stakeholder-oriented economy such as Greek economy, help

us to better understand the accounting differences between stakeholder-oriented and

shareholder-oriented accounting systems. The results have little value for IAS

adoption in shareholder- oriented countries such as U.K. Secondly, most of our

analyses are low power due to the relatively small sample in relation to typical

market-based analyses. Finally, the progress of IAS is a continuing progress and

IASB has recently issued several rules, which affect recognitions of important

economic activities (e.g IFRS 2: Share-based payment). Although it has more

possibilities that these new rules are according to balance sheet and fair value

orientation of IAS, they may cause additional financial statement changes for IAS

adopters in the future.

25

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31

Appendix 1

Case 1: Excerpts from the Notes to the Group Financial Statements in FOLIE-

FOLIE 2004

Annual Report

Basis of preparation

The consolidated financial statements of FOLIE-FOLIE S.A.(“FOLIE FOLIE Group

financial statements” or “Group financial statements”) at 31 December 2003 have

been drawn up for the first time both under Greek General Accepted Accounting

Principles (GREEK GAAP) and International Accounting Standards (IAS).

The impact of the adoption of IAS for financial reporting

The FOLIE-FOLIE Group financial statements have been prepared and presented as if

they had always been prepared in accordance with IAS and IAS Interpretations. The

adjustment resulting from the conversion to IAS has been treated as an adjustment to

the opening balance of equity.

Equity

Equity under IAS decreases by euro 527 million (-0,85%). The following summary

shows the recognition and measurement differences between Greek GAAP and IAS

and shows the equity under Greek GAAP and IAS at 1st December 2004.

In euro thousands

Equity at 1.1.2004 under Greek GAAP 61,885

Provisions for compensation of staff -1,251

Deferred taxes +1,613

Depreciation of assets -119

Leasing +5

Cancellation of expenses of many-years

depreciation

-2,251

Transfer of recognition of dividends

payable

+5,930

Adjusting of expenses of next period -89

Other adjusting entries +35

Settling of provisions -958

Provisions for audit tax differences -312

Recognition of differences of

consolidation of subsidiaries

-3,129

Equity at 1.1.2004 under IAS 61,358

32

Net income

The net income under IAS is euro 48, 834 million (14.2%) higher than under Greek

GAAP. The net profit for IAS and Greek GAAP is reconciled as follows:

In euro million

Greek GAAP IAS Difference

Sales 194,661 194,626 -35

Cost of goods sold -77,728 -77,641 87

Gross operating

profit

116,933 116,985 52

Other operating

income

+1,207 +1,578 371

Administrative

expenses

-9,878 -9,470 408

Selling expenses -50,882 -50,773 109

Depreciation -4,345 -3,364 981

Incomes before

taxes, financial and

investment results

53,035 54,956 1,921

Interest expenses -3,528 -5,179 -1,651

Income for

participations

+3,250 +13,061 9,811

Net income before

taxes

52,757 62,838 10,081

Taxes -10,358 -14,004 -3,646

Net income 42,399 48,834 6,435

33

TABLE 1

Number of Greek firms using both Greek GAAP and IAS, by industry group

Industry group N %

Retail 3 7.5

Food 4 10

Participations 3 7.5

Computers 2 5

Bank 6 15

Telephony services 1 2.5

Transportation 2 5

Refinery 2 5

Fun 2 5

Wholesale 2 5

Energy 1 2.5

Constructions 2 5

Jewellery construction 1 2.5

Paper 2 5

Drink 2 5

Electric equipment 1 2.5

Furniture construction 1 2.5

Telecommunications 2 5

Cement 1 2.5

Total 40 100

See Fama and French (1997) for the industry classification scheme and related SIC code.

34

TABLE 2

Summary of accounting standards differences between Greek GAAP and IAS

Accounting treatment Valuation of fixed tangible assets

Greek GAAP Their revaluation is considered as value

of possession of assets

IAS Their revaluation is considered as income

or expense

Accounting treatment Depreciation of tangible assets

Greek GAAP Annual depreciation rates are determined

by the legislation for each category of

tangible assets

IAS Appreciation of useful life and calculation

under one of three suggested methods

Accounting treatment Inventories valuation

Greek GAAP Five methods of valuation (FIFO, Weighted

Average, LIFO, Unit Cost, Base Inventory)

IAS Two methods of valuation (FIFO, Weighted

Average)

Accounting treatment Deferred taxation

Greek GAAP No statement

IAS Faces as an expense

Accounting treatment Foreign currency translation

Greek GAAP Arose by loans, considered as intangible assets

and amortized during the period of loan

IAS Increase the cost of asset and amortized during its

useful life

35

Accounting treatment Brand and trademarks

Greek GAAP Evaluation at their cost of acquisition and amortization

in straight line method during useful life

IAS Part of goodwill

Accounting treatment Goodwill

Greek GAAP Entire or partial amortization in no more than 5 years

IAS Prohibitation of amortization and testing for impairment

in 1 year or more frequently

Accounting treatment Cash flow statement

Greek GAAP No obligatory publication of cash flow statement

and use of indirect method

IAS Obligatory publication of cash flow statement and

use of either direct or indirect method

36

TABLE 3

Descriptive statistics on the Book Value and Net Income Reconciliation Adjustments between

Greek GAAP and IAS

MEAN MEDIAN STD. DEV

PANEL A

BV_GREEK GAAP 1112,71 559,26 1267,65

FIXED TANGIBLE ASSETS 145,15 59,34 56,87

DEPRECIATION -57,12 -24,52 12,89

INVENTORIES 82,57 15,98 25,90

DEFERRED TAXES 84,19 72,04 23,80

FOREIGN CURRENCY TRANSLATION -65,20 -23,17 9,03

BRAND-TRADEMARKS -39,35 13,73 12,05

GOODWILL 36,89 12,98 27,91

PROVISIONS 40,66 12,29 35,71

LEASING -26,75 -8,90 8,26

BV_IAS 1313,75 673,05 1480,07

PANEL B

NI_GREEK GAAP 120,69 78,16 129,85

FIXED TANGIBLE ASSETS 14,10 6,78 3,78

DEPRECIATION -3,82 -4,97 1,91

INVENTORIES 2,16 1,56 1,01

DEFFERED TAXES -8,02 -6,66 0,91

FOREIGN CURRENCY TRANSLATION 1,23 0,91 0,31

BRAND-TRADEMARKS 0,45 0,23 0,34

GOODWILL -2,87 -4,67 0,19

PROVISIONS -4,56 -5,57 0,72

LEASING 3,21 2,17 1,63

NI_IAS 122,57 67,94 140,65

1)Variable definitions: BV_Greek GAAP is book value of equity under Greek GAAP; BV_IAS is

book value of equity under IAS; NI_Greek GAAP is net income under Greek GAAP; NI_IAS is net

income under IAS.

2) All numbers are in Euro million.

37

TA

BLE 4

Descripive statistics on key accounting m

easures and financial ratios according to G

reek G

AAP and IAS

Panel A: Accounting Measures (in Euro million)

MEAN

MEDIA

N

STD.DEV

G

REEK

GA

AP

IA

S

G

REEK

GA

AP

IA

S

G

REEK

GA

AP

IA

S

TA

9,5

52.3

3

9,8

71.1

6

2,0

41.9

7

2,4

03.8

4

13,8

85.4

3

14,3

05.0

9

(0.0

3)*

*

(0

.12)

(0

.00)*

**

TL

8,1

72.1

8

8,5

09.9

6

1,1

13.7

9

1,1

00.6

2

13,1

74.8

8

13,6

09.6

3

(0.0

3)*

*

(0

.13)

(0

.00)*

**

BV

1,1

12.7

1

1,3

13.7

5

559.2

6

673.0

5

1,2

67.6

5

1,4

80.0

7

(0.0

7)*

(0.1

5)

(0

.00)*

**

SA

LES

1,6

63.1

0

1,6

79,4

8

868.7

5

818.5

4

1,6

96.3

3

1,6

89.8

7

(0.6

0)

(0

.33)

(0

.00)*

**

NI

120.6

9

122.5

7

78.1

6

67.9

4

129.8

5

140.6

5

(0.0

7)*

(0.3

3)

(0

.01)*

**

38

Panel B: Financial Ratios (in Euro million)

MEAN

MEDIA

N

STD.DEV

GREEK

GAAP

IA

S

GREEK

GAAP

IA

S

GREEK

GAAP

IA

S

RO

E

0.3

1

0.1

6

0.1

0

0.0

7

0.6

1

0.2

4

(0.0

9)*

(0.1

0)*

(0.0

1)*

**

RO

A

0.0

7

0.0

6

0.0

3

0.0

2

0.1

2

0.1

1

(0.1

6)

(1

.00)

(0

.00)*

**

ATO

3.2

9

0.7

8

1.7

5

0.6

9

4.4

4

0.7

9

(0.0

0)*

**

(0

.00)*

**

(0

.00)*

**

LEV

11.4

2

12.2

9

1.6

8

1.3

3

30.1

7

32.4

4

(0.4

5)

(1

.00)

(0

.10)*

PM

0.0

9

0.0

9

0.0

7

0.0

5

0.0

8

0.0

8

(0.0

9)*

(1.0

0)

(0

.00)*

**

BM

0.5

4

0.5

7

0.3

2

0.3

3

0.5

5

0.4

8

(0.0

5)*

*

(0

.50)

(0

.00)*

**

EP

0.0

5

0.0

4

0.0

5

0.0

3

0.0

6

0.0

7

(0

.10)*

(1.0

0)

(0

.00)*

**

1) Variable definitions:

TA

is

tota

l as

sets; TL is

tota

l liab

ilitie

s; B

V is

book v

alue

of eq

uity; SA

LES is

sale

s of re

venue;

NI is

net

inco

me;

RO

E is

retu

rn o

f eq

uity, w

hic

h

equal

s N

I div

ided

by B

V; R

OA

is

retu

rn o

n a

sset

s, w

hic

h e

qual

s N

I div

ided

by T

A; A

TO

is

asse

ts turn

over

, w

hic

h e

qual

s Sal

es

div

ided

by T

A; LEV

is

lever

age,

whic

h

equal

s TL d

ivid

ed b

y B

V; PM

is pro

fit m

argin

, w

hic

h e

qual

s N

I div

ided

by S

ales

; B

M is book to m

arket

, w

hic

h e

qual

BV

div

ided

by tota

l m

arket

val

ue

of eq

uity a

t yea

r end;

EP is ea

rnin

gs to

price

, w

hic

h e

qual

s N

I div

ided

by tota

l m

arket

val

ue

of eq

uity a

t yea

r en

d.

2) The

diffe

rence

in m

ean is bas

ed o

n p

aire

d sam

ple

t-tests. T

he

diffe

rence

in m

edia

n is base

d o

n sig

ned

ran

k tes

ts. The

diffe

rence

in sta

ndar

d d

evia

tion is bas

ed o

n t- te

sts.

Tw

o-tai

led p

-val

ues ar

e in

par

enth

ese

s.

3) *** : A

t signific

ance

lev

el of 1%

** : A

t signific

ance

lev

el of 5%

* : A

t signific

ance

lev

el of 10%

39

TA

BLE 5

Relative value relevance of book value and net income under G

reek G

AAP and IAS

MO

DEL: P

it= a

0+ a

1BV

it+a 2

NI i

t+e i

t

BV only m

odels

NI only m

odels

BV and NI models

Intercept

BV

Adj.R

2%

Intercept

NI

Adj.R

2%

Intercept

BV

NI

Adj.R

2%

GG

577

1.4

2

55.5

%

511

15.4

6

51.6

%

220

0.9

8

10.2

3

71.9

%

(0

.02)*

*

(0.0

0)*

**

(0.0

5)*

*

(0.0

0)*

**

(0.2

9)

(0.0

0)*

**

(0.0

0)*

**

IAS

499

1.3

9

62.4

%

706

13.4

5

41.2

%

455

1.1

9

3.2

8

62.6

%

(0

.03)*

*

(0.0

0)*

**

(0

.01)*

**

(0.0

0)*

**

(0.0

5)*

* (0.0

0)*

** (0

.26)

IAS-G

G

-78

-0.0

3

6.9

%

195

-1.9

9

-10.4

%

235

0.2

1

-6.9

5

-9.3

%

(0

.01)*

**

(0.0

0)*

**

(0.0

1)*

**

(0.0

0)*

**

(1.0

0)

(0.0

0)*

**

(0.0

0)*

**

White Heteroscedasticity Test

F-statistic

F-statistic

F-statistic

GG

0.1

8

0.5

6

0.7

2

(0.8

3)

(0

.20)

(0

.15)

IAS

0.3

6

0.7

0.7

1

(0

.4)

(0

.12)

(0

.14)

1) Variable definitions: P

is to

tal m

arket

val

ue

of eq

uity a

t yea

r-end; B

V is book v

alue

of eq

uity; N

I is n

et inco

me,

inte

rcep

t is c

onstant te

rm.

2) P-v

alues

are

in p

aren

these

s.

3) *** : A

t si

gnific

ance

level

of 1%

** : A

t signific

ance

lev

el of 5%

* : A

t signific

ance

lev

el of 10%

4) A

ll n

um

ber

s ar

e in

euro

million

40

TA

BLE 6

Incremental value relevance of IA

S adjustments to book value and net income

Full m

odel

: P

it= a

0+ a

11BV

GG

it+ a

12BV

DIF

it+ a

21N

IGG

it+a 2

2N

IDIF

it+ e

it

Intercept

BVGG

BVDIF

NIG

G

NID

IF

Adj. R

2 %

White Heteroscedasticity Test

F-statistic

N

BV only m

odel

460

1.0

5

6.1

1

58.5

%

0.4

2

40

(0.0

6)*

(0.0

0)*

**

(0

.03)*

*

(0

.32)

NI only m

odel

0

13.2

1

-1.0

0

100%

0.9

3

40

(1

.00)

(0.0

0)*

**

(0.0

0)*

**

(0

.11)

BV and NI model

0

0.4

9

0.3

5

9.8

1

-1.0

0

0.4

0

40

(1

.00)

(0

.00)*

**

(0.7

4)

(0.0

3)*

*

(0

.00)*

**

100%

(0

.35)

1) Variable definitions: B

V_G

G is

book v

alue

of eq

uity u

nder

GG

; BV

_D

IF e

qual

s book v

alue

of eq

uity u

nder

IA

S m

inus

book v

alue

of eq

uity u

nder

GG

;

NI_

GG

is net

inco

me

under

GG

; N

I_D

IF e

qual

s net

inco

me

under

IA

S m

inus net

inco

me

under

GG

.

2) P-v

alues

are

in p

aren

thes

es.

3) *** : A

t si

gnific

ance

lev

el o

f 1%

** : A

t signific

ance

lev

el o

f 5%

* : A

t signific

ance

lev

el o

f 10%

4) A

ll n

um

ber

s ar

e in

euro

million