Accounting choices under ifrs and their effect on over-investment in capital expenditures

 

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ACCOUNTING CHOICES UNDER IFRS AND THEIR EFFECT 
ON OVER-INVESTMENT IN CAPITAL EXPENDITURES 
by 
Mohamad Mazboudi 
A thesis submitted in partial fulfillment of the 
requirements for the Doctor of 
Philosophy degree in Business Administration in 
the Graduate College of 
The University of Iowa 
May 2012 
Thesis Supervisor: Professor Daniel Collins 

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Copyright by
MOHAMAD MAZBOUDI
2012
All Rights Reserved 
 

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Graduate College 
The University of Iowa 
Iowa City, Iowa 
CERTIFICATE OF APPROVAL 
_____________________________ 
PH.D. THESIS 
_____________ 
This is to certify that the Ph.D. thesis of 
Mohamad Mazboudi 
has been approved by the Examining Committee
for the thesis requirement for the Doctor of Philosophy 
degree in Business Administration at the May 2012 graduation. 
Thesis Committee: _______________________________________________ 
Daniel Collins, Thesis Supervisor 
________________________________________________ 
Douglas DeJong 
________________________________________________ 
Paul Hribar 
________________________________________________ 
Erik Lie 
________________________________________________ 
Richard Mergenthaler
 
 

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ii 
ACKNOWLEDGMENTS 
I wish to express my sincerest thanks to my dissertation chair, Professor Daniel 
Collins, for his valuable guidance and help during my time at the University of Iowa. I 
would also like to thank members of my dissertation committee, Professors Douglas 
DeJong, Paul Hribar, Erik Lie, and Richard Mergenthaler, for their insights and 
assistance in improving my dissertation. Thanks are also owed to Matt Glendening, Dolf 
Kerklaan, Gerard Mertens, and workshop participants at the University of Iowa and at the 
American University of Beirut. The financial assistance of the Henry B. Tippie College 
of Business and the University of Iowa is gratefully acknowledged. 
I owe special thanks to my mom and my family for their continuous support and 
love. To my mom, I will be forever grateful for the many sacrifices she has made in order 
that this goal was attained. 
Above all and most of all, thanks and praises are owed to Allah, the one and only 
God and Creator, who gave me the health and strength to finish my Ph.D. and made 
everything easy for me. 
Responsibility of any errors accrues solely to me. 

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iii 
TABLE OF CONTENTS 
LIST OF TABLES 
iv 
LIST OF FIGURES
v 
CHAPTER
I.
INTRODUCTION 
1 
II.
RELATED LITERATURE AND HYPOTHESES DEVELOPMENT 
10 
2.1
Related Literature 
10 
2.1.1
Timely Loss Recognition and Over-investment 
10 
2.1.2
Accounting Choices for PPE before and after IFRS
12 
2.2
Hypotheses Development 
16 
III.
MEASURES, RESEARCH DESIGN, AND SAMPLE SELECTION 
18 
3.1
Measures of Over-investment
18 
3.2
Research Design 
19 
3.3
Sample Selection 
21 
3.3.1 Total Sample
21 
3.3.2 Sub-samples based on Accounting Choices
23 
IV.
RESULTS 
25 
4.1
Preliminary Results 
25 
4.1.1 The Frequency of Impairment Losses for PPE
before and after IFRS Adoption 
25 
4.1.2 Asymmetric Timeliness of Loss Recognition
26 
4.2 Main Results
28 
4.2.1 Test of H1 
28 
4.2.2 Test of H2 
29 
4.2.3 The Effect of the Economic Downturn and
other Institutional Factors 
31 
V.
SUPPLEMENTAL TEST 
34 
VI.
CONCLUSION 
37 
APPENDIX A. LIST OF VARIABLE DEFINITIONS 
39 
APPENDIX B. EXAMPLES OF IMPAIRMENT DISCLOSURES
41 
APPENDIX C. FIGURES AND TABLES
43 
REFERENCES 
54 

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iv 
LIST OF TABLES 
Table 
C1. Comparison of Impairment Rules for PPE between IFRS
and Domestic GAAP
45 
C2. Distribution by Country & Industry and Descriptive Statistics 
46 
C3. Accounting Choices for PPE under UK GAAP and IFRS
47 
C4. Asymmetric Timeliness of Loss Recognition after IFRS Mandatory 
Adoption 
48 
C5. Multivariate Analysis of the Effect on Over-investment after
IFRS Mandatory Adoption
49 
C6. Univariate Analysis using Difference-in-Differences of the Effect on
Over-investment between HL_HS firms and FV_HS firms
50 
C7. Multivariate Analysis of the Effect on Over-investment for HL_HS
firms and FV_HS firms 
51 
C8. Multivariate Analysis of the Effect on Over-investment among
UK firms 
52 
C9. Multivariate Analysis of the Effect on Over-investment based on
Managerial Ownership 
53 

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v 
LIST OF FIGURES 
Figure 
C1. Frequency of Impairment Losses for PPE
44 

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1 
CHAPTER I 
INTRODUCTION
Beginning in 2005, listed firms in the European Union (EU) countries are 
required to prepare their consolidated financial statements according to International 
Financial Reporting Standards (
IFRS
). One key objective of accounting standards is to 
efficiently allocate resources in an economy (Kothari et al. 2010). In this paper, I 
examine the effect of accounting choices that firms can make under 
IFRS
on corporate 
investment efficiency, one dimension of efficient allocation of resources in an economy. 
In particular, I exploit an exogenous shock, 
IFRS
mandatory adoption in 2005, that 
allowed EU firms to choose between two accounting alternatives (fair-value or historical 
cost with impairment testing) for property, plant and equipment (
PPE
). Further, I 
examine whether these two accounting alternatives are associated with a reduction in 
over-investment in capital expenditures after