Financial performance, liquidity, financial leverage and the extent of their compliance with IFRS3 business combination between 2006-2010: A test Ross' signaling theory

College

Ramon V. Del Rosario College of Business

Department/Unit

Accountancy

Document Type

Article

Source Title

Academy of Accounting and Financial Studies Journal

Volume

20

Issue

2

First Page

74

Last Page

92

Publication Date

1-1-2016

Abstract

This study focused on how compliance with International Financial Reporting Standards regarding Business Combination Index is related with and its impact on the financial performance, liquidity and financial leverage of publicly listed companies. The compliance audit output was used by the author to calculate the financial statement disclosure index using a dichotomous procedure to score each of the company indices. Using panel analysis, the author regressed each of the variables, namely, financial performance, liquidity and financial leverage of publicly listed companies against IFRS 3 Index, the latter being the main components of the disclosure indexed that capture the IFRS requirements. The IFRS Index served as proxy variables to test whether Ross' signaling theory can be validated or not in the Philippine equity market. Findings suggest that the IFRS 3 disclosure index of merger and acquisition exhibited a significant positive relation with the current ratio. Hence, this resulted to the rejection of the null hypothesis that the exogenous variable has no relation with the endogenous variable. Furthermore, merger and acquisition disclosure index denoted an insignificant relation with the asset turnover ratio and debt to equity ratio, as evidenced by the insignificant p-value. Applying the signaling theory by Ross, the companies would be disclosing financial information as their managers want to show off the firm's financial position and the results of the operations to different stakeholders like the investors to be reassured that the company is into going concern status and relieving market pressures. It can be further deduced that the results of the dichotomous procedure of attaining the level of compliance among PLCs with IFRS disclose requirements are anchored with Signaling Theory. It must be noted that financial statement serves as a mode of communicating with different stakeholders. Signaling theory conveys information such as financial information disclosed on the face of the financial statements to wide range of different users. Thus, companies would be disclosing information with the help of their auditors in providing sufficient data to different stakeholders. Signaling hypothesis, was used by different companies, refers to the proposition that signaling motivates corporate disclosure.

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Disciplines

Accounting | Finance and Financial Management

Keywords

Corporations—Finance; Liquidity (Economics); Financial leverage; Financial statements—Standards

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