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

 
 
 
 
 
 
 
 
 
 
 
 
 
 

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39 
APPENDIX A 
LIST OF VARIABLE DEFINITIONS
 
BIG4_5 
An indicator variable equaling one when the firm’s auditor is 
either one of the big four or five auditors, and zero 
otherwise. 
CAPEX 
The natural logarithm of capital expenditures scaled by 
lagged total assets, where capital expenditures are obtained 
from the cash flow statement. 
CAP_STRUCTURE 
The ratio of long-term debt to the sum of long-term debt and 
the market value of equity. 
CASH 
Cash level measured as cash and cash equivalents scaled by 
lagged total assets. 
CFO 
Cash flow from operating activities scaled by lagged total 
assets. 
CFO_SALE 
The ratio of cash flow from operating activities to net sales. 
CLOSELY_HELD 
The percentage of closely-held shares for a firm as reported 
by WorldScope. 
D 
An indicator variable equaling one if 
RET
is negative, and 
zero otherwise. 
DIV 
An indicator variable equaling one if the firm paid a 
dividend, and zero otherwise. 
EARN 
Earnings per share before extraordinary items scaled by 
stock price at the fiscal year-end of last year.
FCF 
Free-cash flow measured as cash flow from operating 
activities scaled by lagged total assets minus predicted 
capital expenditures.
FV_HS 
An indicator variable equaling one for firms that switched 
from fair-value accounting (
FV
) under domestic GAAP to 
historical cost accounting with strict impairment rules (
HS
) 
under 
IFRS
, and zero otherwise. 
 

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40 
HIGH 
An indicator variable equaling one for firms that are in the 
highest quartile of 
CLOSELY_HELD
, and zero otherwise. 
IFRS 
An indicator variable equaling one for firms adopting 
International Financial Reporting Standards (
IFRS
) after 
January 1, 2005, and zero otherwise. 
IFRS
equals one if 
WorldScope reports code 23 in the field of accounting 
standards followed. 
LOSS 
An indicator variable equaling one if the firm’s net income 
before extraordinary items is negative, and zero otherwise. 
LOW 
An indicator variable equaling one for firms that are in the 
lowest quartile of 
CLOSELY_HELD
, and zero otherwise. 
MTB 
The ratio of market value of total assets to book value of 
total assets. 
OPERATING_CYCLE 
The natural logarithm of: 
(receivables/net sales + inventory/cost of goods sold) * 360 
OVER_INV 
The average of two ranked values based on terciles of free-
cash flows (
FCF
) and cash levels (
CASH
). 
PPE 
The gross value of property, plant and equipment scaled by 
lagged total assets. 
RET 
12-month compound return ending three months after the 
fiscal year-end. 
SALES_GROWTH 
The percentage change in net sales as reported by 
WorldScope. 
SIZE 
The natural logarithm of end of year market value of equity. 
TANGIBILITY 
The ratio of the gross value of property, plant and equipment 
to total assets. 
Z_SCORE 
A measure of bankruptcy risk (distress) computed as 
follows: 
3.3(income before taxes) + net sales + 0.25(retained 
earnings) + 0.5((current assets – current liabilities)/(total 
assets))