Value relevance of accounts receivable discounting and its impact on financing strategy under k-ifrs

Abstract

This study investigates whether recognized accounts receivable discounting (AR discounting) under Korean International Financial Reporting Standard (K-IFRS) is more value relevant than disclosed AR discounting under Korean Generally Accepted Accounting Principles (K-GAAP). Because more rigorous standards are applied to the derecognition of AR discounting under K-IFRS, most AR discounting is recognized as a short term debt instead of being disclosed as a contingent liability unless all risks and rewards are transferred. This process increases the firms’ leverage ratio. Using a sample of non-financial firms, I find that the valuation coefficients on recognized AR discounting under K-IFRS are more negatively significant, whereas the valuation coefficients on disclosed AR discounting under K-GAAP are not significant. The negative relationship between market value of equity and AR discounting is more pronounced for firms with a high leverage ratio (over leverage ratio or high risk AR) than for those with a low leverage ratio (under leverage ratio or low risk AR). These results are consistent with the view that the market reacts to the recognized information rather than disclosed information, and only to firms with a high probability of financial distress. Moreover, after considering analyst following, I find that K-IFRS increases the value relevance of previously disclosed AR discounting for firms with a low level of analyst following, and that the increase in the value relevance becomes less pronounced for firms with a higher level of analyst following. These results are consistent with the view that analyst following affects the value relevance of disclosed information as well as the valuation difference between disclosed and recognized information. This study also shows that firms with a high leverage ratio decrease their use of AR discounting as a financing tool after the adoption of K-IFRS.