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The value of discretion in Africa: evidence from acquired intangible assets under IFRS 3

The value of discretion in Africa: evidence from acquired intangible assets under IFRS 3
The value of discretion in Africa: evidence from acquired intangible assets under IFRS 3

This paper examines the value of managerial discretion in financial reporting by exploring the value relevance of intangible assets acquired in business combinations (AIA) before and after the 2008 International Financial Reporting Standard (IFRS) 3 amendment. The 2008 IFRS 3 amendment gave managers the discretion to recognize previously unrecognized intangibles in the target firm, hence, we posit that if managerial discretion improves the quality of financial reporting, we should observe an increase in the value relevance of AIA after the amendment. Our empirical analysis is based on a dataset of 603 mergers announced between 2004 and 2016, across seven African countries. Consistent with our main hypothesis, we find that the value relevance of AIA, predominantly acquired goodwill (AGW), increased after the amendment, suggesting that managerial discretion improves the quality of financial information. Our results further show that the value of discretion is moderated by the underlying institutional quality, with the value relevance of AIA being greater in high-quality institutional contexts. Our findings are robust to alternative measures of AIA, alternative models for testing value relevance, and various controls for endogeneity. Overall, our findings have important implications for accounting standard-setters, governments, investors, and practitioners.

Acquired intangible assets, Africa, Business combinations, IFRS 3, Institutional quality, Managerial discretion
0020-7063
Tunyi, Abongeh A.
5b8bebf9-5060-4f17-8cee-14ce3a93b458
Ehalaiye, Dimu
71595ba6-54f6-4ef5-aaed-e7b1b4281499
Gyapong, Ernest
e66a2c9e-ef09-40f6-84f0-3c5a31e0078c
Ntim, Collins
1f344edc-8005-4e96-8972-d56c4dade46b
Tunyi, Abongeh A.
5b8bebf9-5060-4f17-8cee-14ce3a93b458
Ehalaiye, Dimu
71595ba6-54f6-4ef5-aaed-e7b1b4281499
Gyapong, Ernest
e66a2c9e-ef09-40f6-84f0-3c5a31e0078c
Ntim, Collins
1f344edc-8005-4e96-8972-d56c4dade46b

Tunyi, Abongeh A., Ehalaiye, Dimu, Gyapong, Ernest and Ntim, Collins (2020) The value of discretion in Africa: evidence from acquired intangible assets under IFRS 3. The International Journal of Accounting, 55 (2), [2050008]. (doi:10.1142/S1094406020500080).

Record type: Article

Abstract

This paper examines the value of managerial discretion in financial reporting by exploring the value relevance of intangible assets acquired in business combinations (AIA) before and after the 2008 International Financial Reporting Standard (IFRS) 3 amendment. The 2008 IFRS 3 amendment gave managers the discretion to recognize previously unrecognized intangibles in the target firm, hence, we posit that if managerial discretion improves the quality of financial reporting, we should observe an increase in the value relevance of AIA after the amendment. Our empirical analysis is based on a dataset of 603 mergers announced between 2004 and 2016, across seven African countries. Consistent with our main hypothesis, we find that the value relevance of AIA, predominantly acquired goodwill (AGW), increased after the amendment, suggesting that managerial discretion improves the quality of financial information. Our results further show that the value of discretion is moderated by the underlying institutional quality, with the value relevance of AIA being greater in high-quality institutional contexts. Our findings are robust to alternative measures of AIA, alternative models for testing value relevance, and various controls for endogeneity. Overall, our findings have important implications for accounting standard-setters, governments, investors, and practitioners.

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The_value_of_discretion_in_Africa_Final - Accepted Manuscript
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More information

Accepted/In Press date: 1 January 2020
e-pub ahead of print date: 26 June 2020
Published date: 30 June 2020
Additional Information: Publisher Copyright: © Board of Trustees, Vernon K. Zimmerman Center, University of Illinois Copyright: Copyright 2020 Elsevier B.V., All rights reserved.
Keywords: Acquired intangible assets, Africa, Business combinations, IFRS 3, Institutional quality, Managerial discretion

Identifiers

Local EPrints ID: 436709
URI: http://eprints.soton.ac.uk/id/eprint/436709
ISSN: 0020-7063
PURE UUID: 6ba89a5e-f6fc-4830-90cf-008e560b8dcf
ORCID for Collins Ntim: ORCID iD orcid.org/0000-0002-1042-4056

Catalogue record

Date deposited: 03 Jan 2020 11:01
Last modified: 26 Nov 2021 05:35

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Contributors

Author: Abongeh A. Tunyi
Author: Dimu Ehalaiye
Author: Ernest Gyapong
Author: Collins Ntim ORCID iD

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