A cross country comparison of the effect of legal system orientation and recognised intangibles on analyst activity in a period of reporting regime change

Abstract

This study examines the association of analyst activity (i.e., analyst following, analyst accuracy and analyst consensus) with reported intangible information (i.e., balance sheet identifiable intangible assets (IIA) and income statement research and development expense (R&D)) in countries with different legal origins. The study also examines whether these relations change when countries report under International Financial Reporting Standards (IFRS). I use an initial sample 12,972 entity/year observations related to publicly listed companies across ten countries for the years 2004-2006. After controlling for other factors affecting analyst activity, I find that the associations between analyst activity and reported intangibles are impacted by legal origin. Analyst following is higher in civil law companies and increases more in those companies than in common law companies when IIA or R&D are reported, suggesting increased interest in these companies. However, this effect is modified if companies are reporting under IFRS. In companies from all legal origins, analyst accuracy increases with increasing levels of reported R&D but decreases in civil law countries with increasing levels of IIA. Analyst consensus is greater in common law than civil law companies both for those that just report IIA and for those with increasing levels of IIA. These results suggest that there is greater uncertainty in forecasting for IIA-reporting companies in civil law jurisdictions. The effect is accentuated for these companies reporting under IFRS, suggesting greater uncertainty when IFRS is adopted. This study also finds evidence of a direct effect related to the use of IFRS. All measures of analyst activity (following, accuracy and consensus) are greater for companies reporting under IFRS. When R&D (IIA) are present, analyst following and analyst accuracy increase (decrease) more in IFRS-reporting companies; whereas analyst consensus decreases for intangible reporting companies reporting under IFRS. This study extends the existing body of knowledge in two ways. Firstly, this study extends prior research related to the association of analyst activity and reported intangibles by examining the relationship in a cross-country setting and considering the effects of legal origin. Secondly, this study extends the existing body of knowledge on the effects of the move to IFRS, focussing on the impact of change in one particular international accounting standard, IAS 38 Intangible Assets.