Value-relevance of comprehensive income and its components under IFRS: Insights from major European capital markets

Motivated by the recent works by Lev [2001b ; 2004] and Villalonga [2004], and the current debate surrounding the IAS 38 adoption related to reported intangible investment issues, this study investigates whether European firms using national GAAPs exhibit differences while considering the relationship between firm performance and intangible investment. Using a four-EU-country-based (i.e. UK, Germany, France and Spain) sample, we investigate whether intangible accounting numbers in these various settings can be significantly linked, during the period 1993-2003, to the following firm performance triptych: financial, operational and competitive performance. Intangible investment is measured herein by three accounting proxies: the change in goodwill stock [Griliches, 1981], the change in reported intangible assets [Hall, 2000] and R&D expenditures. Our findings bring us towards the following concerns: First, in any stock market under scope, we find clear evidence that while constructing their investment portfolios investors adopt a short-term perspective or "myopic view" by precluding firms from reporting high intangible investments in their financial statements. Secondly, we do not find any evidence that reported intangible investments regardless the local GAAPs underpin a better competitive position inside a specific market. Finally, our results clearly support the idea that Latin accounting frameworks, while opposed to UK settings, ease the relationship between intangibles and the firm operational performance. This last result would suggest that IAS implementation could lead to disconnect progressively operational margins from reported intangibles as their valuations are, under IAS, overall market-oriented.