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

Document Type

Article

Source of Publication

International Journal of Accounting

Publication Date

1-1-2020

Abstract

© Board of Trustees, Vernon K. Zimmerman Center, University of Illinois 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.

ISSN

1094-4060

Publisher

World Scientific

Volume

55

First Page

2050008

Disciplines

Business

Keywords

Acquired intangible assets, Africa, Business combinations, IFRS 3, Institutional quality, Managerial discretion

Scopus ID

85091109632

Indexed in Scopus

yes

Open Access

no

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