1. Corporate Governance and Financial Reporting in Brazil Alexsandro Broedel Lopes, PhD broedel@usp.br

2. Alexsandro Broedel Lopes  Assistant Professor, USP  Member of the Education Advisory Board – IASB  Former positions at the London School of Economics, University of Manchester and Fundação Getúlio Vargas  Author of five books and several articles published internationally on topics related to accounting and finance  Member of the Corporate Reporting and Auditing Research Center – Universtiy of Manchester

3. Presentation  Motivation  Related Research  Brazilian Corporate Financial Reporting System  Brazilian Capital Markets  Models and Hypothesis  Data and Results  Conclusions

4. Motivation  Value relevance is the major venue in the capital markets research paradigm  There is almost no evidence from emerging markets (Mexico is the exception)  Inefficient (?) markets make accounting more or less relevant? Price formation Competition  Institutional factors provide a ‘laboratory’ to test existing theories

5. Related Research  Ball et all (2001): common law countries have more conservative and value relevant accounting  Ali and Hwang (2000): show that value relevance decreases with: Bank-oriented systems Government regulation Continental model High influence of tax rules Inverse of the amount spend on auditing

6. Related Research  Ball and Shivakumar (2002): show lower conservatism for private than public British companies. Why? No trading Concentrated ownership

7. Brazilian Corporate Financial Reporting System  Government issues all standards  High discretionary power (revaluations, R&D etc)  Strong tax influence  Poor disclosure (pensions, derivatives etc)  Poor compliance (devaluation etc)

8. Brazilian Capital Markets  Concentrated ownership  Poor governance  Bank oriented system  State participation  Fill at least four of Ali and Hwang (2001) ‘worst’ criteria

9. Models and Hypothesis  Hypothesis Earnings are not relevant  No function as reducers of information asymmetry Book values dominate Earnings are not conservative Concentration vs. Trading

10. Data and Results  Bovespa, Economática, 1995-1999  Major Results Accounting is generally value relevant Book values have greater explanatory power Earnings do not reflect earnings Earnings are not conservative Earnings reflect return better for new than for old economy companies Accounting is highly informative for new economy companies

11. Conclusions  Earnings don’t incorporate and don’t reflect returns as expected  Book values are more relevant reflecting Companies’ Law  Concentration rather than trading seems to explain conservatism  New economy governance or capitalization of intangibles make accounting for these companies more relevant

12. Conclusions  Brazilian governance system makes earnings irrelevant Managers-owners don’t need external reporting  Book values dominate