Purpose of AssignmentThe purpose of the learning team assignme.docx

Purpose of Assignment
The purpose of the learning team assignment is to offer students
the opportunity to investigate their understanding of how
globalization affects a company's strategic plan. Additional
objectives include allowing students to assess the effectiveness
of strategic alliances in the growth process of a company and to
understand the necessity for innovation to create a sustainable
long-term organizational environment. The students will also
identify how organizational structures facilitate company
growth and controls in the global environment.
Assignment Steps
Create a 4-slide Microsoft® PowerPoint® presentation
(excluding the title slide and references) with speaker notes and
address the following topic:
· Evaluate the effects of globalization on strategic management
planning.
International Journal of Management Vol. 29 No. 4 Dec
2012 531
The Effects of International Diversification on Firm
Performance: An Empirical Study across Twelve
European Countries
Alfredo M. Bobillo
University of Valladolid, Spain
Felix López-Iturriaga

Fernando Tejerina-Gaite
The relationship between international diversification and firm
performance is a
binomial that has led to many investigations leading to mixed
results, in some cases
there is a positive relationship, in others no significant
relationship or even negative. In
this paper we try to find the possible reasons why these results
occur. The international
diversification is assessed by the ratio of exports to total
turnover. Besides, we extend
the research to the different performance that industrial and
service firms could have,
bearing in mind, too, if their business culture base originates
from civil law or common
law countries. Based on a sample of 1721 firms from twelve
European countries, we
compare this relationship for the 2000-2009 period. The
empirical results obtained
show a stronger ID-performance positive relationship in service
firms than in industrial
ones. Those firms with a culture based on civil law systems
(bank oriented financial
system) will have greater flexibility to counteract the negative
relationship between ID
and performance, than those firms with culture based on
common law systems (capital
market oriented system).
Introduction
Accessing foreign markets is becoming a more and more
attractive option for firms.

International diversification (ID) is a stabilisation procedure for
the firm’s sales and
also a way of reducing the risks derived from the reduction in
demand on the domestic
market. Likewise, the presence of a firm on the global market
entails greater derived
risks, mainly due to the greater uncertainty and commitment of
resources entailed by this
action. It also represents a challenge to improve their
competitiveness in their fight with
local firms (Lucas, 1993; Bowen & Wersema, 2005). The degree
of internationalisation is
also contemplated as a pre-condition for the firm to become
more financially successful
(Annavarjula & Beldona, 2000; Ruigrok & Wagner, 2003).
Consequently, by way of international expansion, firms seek a
way of improving their
long-term financial profitability, extending diversification in
general (Graham et al. 2002;
Campa & Kedia, 2002) and diversification via foreign markets
in particular (Kotabe et
al., 2002; Lu & Beamish, 2004). However, the efficiency of
these actions is frequently
questioned. Nevertheless, the resource-based view of the firm,
based on strategic
management (Barney, 1991; Kogut & Zander, 1993) and the
theory of internationalisation
532 International Journal of Management Vol. 29 No. 4 Dec
2012
of foreign direct investments (Buckley & Casson, 1976; Hymer,
1976) indicate that the

greater the involvement of a firm on international markets, the
greater the possibility of
exploiting its tangible and intangible assets in search of greater
profitability.
In this context, faced with situations where there is a reduction
in profit margins
on domestic markets, firms seek to improve their profitability
through international
diversification. Therefore, the underlying question is to what
extent does international
diversification affect the company’s profitability? It is also
worth asking what the ID-
performance relationship is like and how it differs, regarding
profile, in industrial and
service firms. In this context, La Porta el al. (1997, 1998) point
out that each country’s
legal system is related to its financial system. In agreement with
this idea, investors are
the ones that provide the firms with funds for their growth,
which means that the greater
the legal protection, both of shareholders and of bondholders,
the greater the certainty of
exercising their ownership rights. Therefore, in those countries
where the legal protection
of investors is high (common law system), the capital markets
are the most important
source of funds that firms will use to finance their international
expansion. However, in
those countries where the protection of investors is weak (civil
law system) the source
providing the resources for the firm’s international expansion is
the banking system.
The above arguments enable us to postulate that the
international expansion of firms

from countries where greater investor protection prevails
(common law system) could
be favoured more, compared with firms from countries with less
investor protection
(civil law system).
The remainder of the paper is organised as follows: Firstly, we
present the literature and
hypothesis about the relationship between ID and performance.
Secondly, we show the
study methodology. Thirdly, the results will be provided. And,
finally, the conclusions
will be discussed.
Literature and Hypothesis
International diversification becomes a growth strategy for a
firm whose aim is to capture
the opportunities offered by foreign markets (Capar & Kotabe,
2003). In this regard, the
relationship between ID and a firm’s financial performance is a
widely debated topic
by researchers in the field of strategic management and
international business. The
internationalisation option offers firms different advantages
related to economies of scale,
scope and learning, derived from accessing foreign markets
(Kogut, 1985; Ghoshal, 1987;
Kim et al., 1989, 1993), at the same time as they can develop
their main capabilities in
different business segments and different geographic markets
(Hamel, 1991). In other
words, the aim is to extend these capabilities, which have
previously been generated in
the domestic markets, in the form of tangible and intangible
assets abroad, in order to

improve the firm’s financial performance (Hymer, 1976).
Similarly, accessing foreign markets offers firms the
opportunity to integrate their
activities across the national borders by marketing standardised
products, rationalising
production and allocating resources in a more efficient way
(Kobrin, 1991). Likewise, the
exploitation of the market imperfections and international
transactions, through transfer
2012 533
prices, could represent another competitive advantage of
international diversification,
which would be reflected in a greater negotiating power for the
firm. The above arguments
enable us to venture a close relationship between ID and a
firm’s financial performance,
which for some researchers is linear and positive (Daniels &
Bracker, 1989; Grant, 1987;
Gomes & Ramaswamy, 1999; Geringer et al., 1989). Other
studies have reached the
conclusion that there is no relationship or that there is even a
negative linear relationship
(Shiddhartan & Lall, 1982; Kumar, 1984; Michel & Sacked,
1986; Collins, 1990; Denis
et al., 2002). Finally, another approach has found a curvilinear
relationship, in some cases
U-shaped (Ruigrok & Wagner, 2003; Capar & Kotabe, 2003),
inverted U-shaped (Hit
et al., 1997; Ramaswany, 1993) or S-shaped (Contractor et al.,
2003; Lu & Beamish,

2004; Chang & Wang, 2007).
The results of the above papers show that, although at moderate
ID levels there are
important benefits for firms, the transaction costs entailed by
the internationalisation
processes make the firms’ financial performance decrease,
above all during the first
stages, due to the increase of management costs involved by
committing resources abroad.
The papers mentioned refer to industrial firms and one can
question if these results could
be extended to service firms. The reasons behind the
internationalisation of the latter are
basically the same as for industrial firms (labour costs, access
to international markets,
etc.), so service firms could benefit, just like industrial firms,
from economies of scale
at several stages of the value chain (Dunning, 1989) or from
obtaining economies of
scale in marketing activities (Campbell & Verbeke, 1994).
However, these arguments
assume that service firms, like industrial firms, incur fixed
costs regardless of the results
obtained (Katrishen & Scordis, 1998).
Despite the reasons given, it could be considered that the
and a firm’s financial performance in service firms is different
to the relationship for
industrial firms. There are reasons, such as the greater
regulation related to ownership, the
preferences in local policies of national firms, the different tax
treatment and employment
rules for local companies (Feketekuty, 1988; Knight, 1999) that

would affect service firms
and not industrial firms, and which could represent a greater
decline of profitability for
service firms, above all, during the first stages of
internationalisation. If we consider this
argument, it can also be put forward that multinational service
firms support an increase
in costs due to the greater need to adapt the services to the local
needs than industrial
firms, based on cultural differences (Kapar & Kotabe, 2003).
We can also point out
that many services simultaneously require production and
consumption (inseparability)
which, in certain cases, requires the multinational firm to own a
production subsidiary
in the host country in order to be able to carry out its business
(Boddewyn et al., 1986).
Consequently, greater investments are required for service firms
to access foreign
markets than for industrial firms, which makes it difficult for
these firms to benefit more
immediately from economies of scale, due to the high
government costs incurred.
In short, due to the specific traits of service firms: intangibility,
inseparability,
heterogeneity and alterability of their outputs, we can pose the
following hypothesis:
2012
H1: The relationship between ID and a firm’s financial

performance in service firms (non-
linear U-shaped) differs from the profile of industrial firms
(non-linear S-shaped).
In the context of legal systems (civil law vs. common law) the
regulations resulting from
them can be expected to have an influence in different ways and
to a different extent on
the private relationships of the individuals. Therefore,
according to Keizer (2008) the
explanation of the reasons for the firms’ performance would
have to be sought in the rules
and regulations of those that govern them. Therefore, the legal
system that reigns in each
country may favour the negotiating power of firms when
cancelling different contractual
relationships. Thus, in the common law system, the cancellation
of incomplete contracts
would be facilitated by the judges’ flexibility to create laws and
integrate any problem
that was inexistent until then within the legal framework. Both
systems maintain a high
level of contractual development; however, they differ in
effectiveness when enforcing
the contractual regulations, giving rise to different levels of
legal uncertainty. Thus, there
must be a set of rules that will make the level of uncertainty
decrease. From the financial
viewpoint, this approach favours greater or lesser
interventionism of the authorities in
the economic activity of the citizens and the firms.
The arguments listed above have been used as the basis to
structure bank-oriented
or capital market-oriented financial systems, depending on the
level of uncertainty

entailed by executing the contractual agreements that arise from
the economic-financial
relationships.
On their part, the different specific economic activities of each
firm may differ with
respect to the financial services they require to execute them.
Some activities will
demand radical innovation and will need to be executed in a
short period of time, whilst
others will require a longer gestation period and an incremental
innovation process that
will lead to the firm obtaining a sustainable competitive
advantage. In this scenario,
the international diversification of the firm’s operations is
associated with a long-term
incremental resource commitment process and with a chain of
successive innovations
to improve the competitiveness of their products.
The main consequence of this proposal could give rise to the
consideration that
firms belonging to countries with corporate government
systems, “outside systems”,
characterised by a high liquidity of the capital market, a large
number of listed firms,
disperse ownership structure and active corporate control
markets, would be in better
or worse conditions to cope with international diversification
activities than those firms
with a culture based on “insider systems” where the number of
listed firms is less, the
ownership structure is more concentrated and the corporate
control market is less active.
Thus, firms with capital market-oriented financial systems

would manage those activities
that entail a radical innovation better and whose management is
carried out in the short
term, whilst those activities, such as international
diversification, which require long-term
incremental investment, and that represent a high degree of
supervision, would be better
managed by firms originating from bank-oriented financial
systems. The latter would
be in a better position to obtain private benefits of control due
to the greater ownership
2012 535
concentration, and to maintaining closer relationships with the
financing supplier, which
would favour the fight for improving performance in foreign
markets.
With respect to the causal relationship between ownership
concentration and firm
performance, this is theoretically and empirically ambiguous.
Studies such as those
conducted by Pedersen & Thomsen (2003), Loderer & Martin
(1997), Cho (1998),
Himmelberg et al.(1999), Demsetz & Villalonga (2001), which
apply simultaneous
equations (contrasting with the studies that use ordinary least
squares) do not reflect a
significant relationship between ownership structure and firm
performance. However,
there is a certain consensus about the possible positive
relationship between ownership

concentration by insiders and firm performance.
The logical consequence of these arguments is that firms
originating from countries with
a civil law culture, due to the closer relationships between
borrowers and lenders, and
with a bank-oriented financial system, would have a greater
volume of funds to cope with
the underperformance difficulties during the first stages of the
firm’s internationalisation
process. Likewise, the greater ownership concentration in hands
of the insiders would
favour a positive impact on the firm’s performance.
In agreement with the premises set out above, the firms with
culture based on the civil
law system would recover in a shorter period of time from the
difficulties caused by the
first stages of international diversification and their
performance would have a shorter
reduction cycle.
Consequently, and based on this reasoning, we can put forward
the following hypothesis:
H2: A non-linear (U-shaped) relationship between ID and
performance could be expected
in a longer time period in those firms whose culture is
structured around common
law systems than in those firms with a culture based on civil
law).
Data and Methodology
Data
Our database consists of 8,959 observations from 1,721 firms
from 12 countries between

2000 and 2009. According to La Porta et al. (1997 and 1998),
we divide the countries into
two main groups: those belonging to civil law systems and those
belonging to common
law systems. We also divide the sample into industrial firms and
service firms according
to the two-digit SIC code classification: industrial firms for SIC
codes between 01 and
39 and service firms for SIC codes between 40 and 87. In
Tables 1 and 2 we provide
further information about the structure of the sample and some
descriptive statistics:
Variables
Our dependent variable is the firm’s performance (ROA)
defined as the ratio between
the EBITDA (Earnings before interests, taxes, depreciation and
amortization) and total
assets. We define four explanatory variables: ID is the degree of
internationalisation and
is calculated as the ratio between exports and total turnover;
LEV is financial leverage
defined as total debt to equity; SIZE is the log of total assets;
and INTANG aims to
2012
measure the asset intangibility and is defined as the proportion
of intangible assets over
total assets.
Methodology
We estimate the coefficients using a panel data method that

combines observations from
a number of firms over a 10-year period. The panel data
methodology allows the control
of the so-called unobservable constant heterogeneity –e.g. the
specific characteristics of
each firm that remain constant throughout time-.
Our model can be expressed with the following equation, where
i refers to the firm, t
the year, e
it
is the random error and η
i
is the fixed-effects term:
ROA
it
= α
i
+ β
1
ID
it
+ β
2
ID2
it
+ β

3
ID3
it
+ β
4
LEV
it
+ β
5
SIZE
it
+ β
6
INTANG
it
+ e
it
+ η
i
The thus-specified model was tested for the full sample and for
each one of the two
sub-samples into which we had divided the initial sample:
common law firms, civil
law firms, industrial firms and service firms (Table 3). In all the
estimates we report the
adjusted-R2 coefficient and the Hausman test. This test shows

the importance of the fixed
effect component –closely correlated with the remaining
explanatory variables–, so that
the within groups, the estimation method becomes necessary in
order to deal with the
constant unobservable heterogeneity.
Results
As expressed in column 1 of Table 3, there seems to be a
negative linear relationship
between the firm’s performance and its degree of international
diversification. This
result poses the question of why firms undertake
internationalisation processes when
these processes translate into a loss of performance. One of the
possible answers to that
Table 1: Distribution of the sample
Observations Firms Observations Firms
France 1390 267
Belgium 244 47 Common law system 3,716 714
Germany 1488 286 Civil law system 5,243 1007
Denmark 314 60
Spain 254 49
Finland 205 39 Industrial firms 4,445 854
UK 2619 503 Service firms 4,514 867
Ireland 119 23
Italy 568 109
Holland 270 52
Poland 654 126
Sweden 834 160
TOTAL 8,959 1,721

2012 537
question consists in clarifying the firms’ performance according
to the type of activity
or the institutional-legal framework they operate in.
Thus, when the model is estimated in a different way for
industrial firms and for service
firms, the results change considerably.
Thus, in the case of industrial firms, we detect an S-shaped
relationship, with a first
decreasing section, a middle section when the performance
increases as does the
international diversification, and a final section when the
relationship becomes negative
again. On the contrary, in the case of service firms, there is a
quadratic relationship, with
a first negative relationship section that combines both
variables and a second positive
relationship section.
When the estimation is made in agreement with the legal
system, a different pattern is also
observed. Whilst, in both environments, the coefficients of ID,
ID2 and ID3 are always
significant, the relationship profile is different. In the civil law
environment, an S-shaped
relationship is observed, with an alternation of negative,
positive and negative signs for
different sections of the international diversification
coefficient. On the other hand, in the
common law environment, the relationship is U-shaped, so
initially there is a negative
effect of the ID on the firm’s performance, an effect which

becomes positive later on.
Table 3: Baseline estimates
General Industrial Services Civil Common
ID -0.213*** -0.6994*** 0.0857 -0.2773*** -0.2052**
0.049 0.0742 0.0648 0.0600 0.0818
ID2 -0.045 0.7434*** -0.5442*** 0.3243** -0.3094*
0.116 0.1849 0.1525 0.1494 0.1878
ID3 0.017 -0.1122*** 0.2796*** -0.0894*** 0.2615**
0.080 0.1319 0.1037 0.1063 0.1254
LEV -0.001*** -0.0003*** -0.0001 -0.0003*** 0.0001
0.001 0.0001 0.0001 0.0001 0.0001
SIZE 0.003** -0.0006 0.0059** -0.0002 0.0068***
0.002 0.0024 0.0023 0.0022 0.0026
INTANG -0.032*** -0.0622*** 0.0007 -0.0250* -0.0353***
0.009 0.0133 0.0128 0.0137 0.0127
# obs 8959 4445 4514 5243 3716
Adj-R2 0.1264 0.1811 0.1173 0.0899 0.1118
F test 173.6*** 133.54*** 79.10*** 68.13*** 110.81
Hausman test 102.8*** 122.27*** 37.22*** 67.77*** 87.14

2012
If we now make the estimations, combining both criteria, we
obtain the results obtained
in Table 4. The first column shows that in industrial firms from
civil law countries, there
is a cubic S-shaped relationship, with three sections: a negative
slope, a positive slope,
and finally a third section with negative slope. However,
industrial firms in common
law countries show a U-shaped quadratic relationship, with an
initially negative sign
that becomes positive for sufficiently high internationalisation
levels. Insofar as service
firms are concerned, whilst in civil law countries their
performance does not depend
on the degree of international diversification, in common law
countries we detect an
inverted S-shaped cubic relationship, with an initially positive,
then negative and finally
positive sign.
Table 4: Additional estimates
Industrial Services
Civil Law Common Law Civil Common
ID -0.7026*** -0.6443*** -0.0202 0.1634*
0.0915 0.1263 0.0812 0.1079

ID2 0.9826*** 0.5288* -0.0960 -0.9342***
0.2309 0.3099 0.2008 0.2415
ID3 -0.6417*** -0.0614 -0.0668 0.5858***
0.1646 0.2206 0.1426 0.1575
LEV -0.0003*** -0.0007** -0.0005** 0.0002
0.0001 0.0003 0.0002 0.0001
SIZE 0.0013 -0.0053 -0.0011 0.0125***
0.0030 0.0040 0.0032 0.0034
INTANG -0.0781*** -0.0451** 0.0406** -0.0225
0.0182 0.0199 0.0206 0.0163
# obs 2880 1565 2363 2151
Adj-R2 0.1506 0.2352 0.0741 0.1813
F test 68.17*** 65.34*** 24.97*** 62.45***
Hausman test 69.16*** 40.00*** 72.27*** 93.74***
2012 539
Conclusions
The results obtained confirm the hypotheses put forward and

show how the relationship
between ID and performance differs, according to which
economic activity sector they
belong to and depending on whether their culture is associated
with civil law or common
law based legal systems.
Our empirical results can be summarised as follows. We find
evidence that industrial firms
have greater difficulties than service firms in reaching a
positive relationship between ID
and performance, due to the higher costs of adapting to the local
needs and to the higher
government costs they incur, either due to their nature
(production-consumption) or to
the greater investment required by their international
diversification.
In the business culture context, the performance is different
depending on whether the
firm belongs to bank oriented financial systems or to capital
market oriented financial
systems. Those firms with a culture based on civil law systems
(bank oriented financial
system) will have greater flexibility to counteract the negative
and performance in a shorter period of time during the first
international diversification
phases, than those firms with culture based on common law
systems (capital market
oriented financial system), due to the fact that the more distant
borrower-lender
relationships of the latter could represent a reduced contribution
of funds to improve
the firm’s performance more quickly.

Finally, we must point out the lack of significance in the
relationship between ID and
performance of service firms, both belonging to civil and to
common law systems.
In short, the profile of the relationship between ID and
performance varies significantly
if the firms belong to different economic activity sectors and
also depending on whether
the business culture is based on civil or on common law
systems.
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Contact email address: [email protected]
Reproduced with permission of the copyright owner. Further
reproduction prohibited without permission.
www.ccsenet.org/ijbm International Journal of Business
and Management Vol. 7, No. 9; May 2012
ISSN 1833-3850 E-
ISSN 1833-8119 20
The Effects of International Accounting Standardization on
Business

Performance: Evidence from Hungary
Gyorgy Csebfalvi1
1 Department of Business Information System, University of
Pecs, Pecs, Hungary
Correspondence: Gyorgy Csebfalvi, Department of Business
Information System, Faculty of Business and
Economics, University of Pecs, PO box 80, Street of Rakoczi,
City of Pecs H-7622, Hungary. Tel:
336-36-72-501-599. E-mail: [email protected]
Received: January 18, 2012 Accepted: March 6, 2012
Published: May 1, 2012
doi:10.5539/ijbm.v7n9p20 URL:
http://dx.doi.org/10.5539/ijbm.v7n9p20
Abstract
The purpose of this study was to measure the differences
between national rules and the international standards,
evaluating and analyzing their effects on the shifting business
environment. The unified business information
system will lead to new types of analysis and data, furthermore
with the possible integration of new indicators
from the business environment of certain countries. The results
show that those businesses which have adopted
international standards achieved higher and statistically
significant positive coefficients than those following
local accounting rules. Companies which had adopted
accounting standards also provided higher quality and
value relevant accounting information systems. As a further
consequence of international accounting standards

adoption, corporate policy and requirements became gradually
more clear and transparent – in the same way as
the application and implementation of the standards became
more user-friendly.
Keywords: accounting standards, unified business information
system, shifting environment, economic effects,
value based management, Hungary
1. Introduction
The present paper is organized as follows. After the background
information this section shows the content,
scope and importance of this research. The next section reviews
the related international literature. Section 3
describes the research methodology and the results. Finally,
concluding remarks and discussion are presented in
Section 4.
Nowadays, especially during the current global financial crisis,
companies in Hungary are striving desperately to
remain competitive and achieve sustainable levels of economic
development. The highly competitive
environment requires companies to create a clear business
strategy, and accounting has to be part of this strategy
since it helps individual enterprises to achieve their strategic
objectives. International accounting standards are
new global methods to develop unified business information
systems and they are able to harmonize financial
regimes both world-wide and in Hungary also. The increased
globalization of markets, the complexity of
commercial trading and the concentration of business in global
competition have led to a still greater need for
international harmonization.
With increasing globalization of the marketplace, international
investors need access to financial information

based on harmonized accounting standards and procedures.
Investors constantly face economic choices that
require a comparison of financial information. Without
harmonization in the underlying methodology of
financial reports, real economic differences cannot be separated
from alternative accounting standards and
procedures. Harmonization is used as a reconciliation of
different points of view, which is more practical than
uniformity, which may impose one country’s accounting point
of view on all others. Organizations, private or
public, need information to coordinate its various investments
in different sectors of the economy. With the
growth of international business transactions by private and
public entities, the need to coordinate different
investment decisions has increased.
Since in case such multinational companies like Daimler
Chrysler owning more than 900 subsidiaries, operating
on 5 continents in more than 60 countries, the published
financial results according to international standards is
1.5 times of the one according to German accounting standards.
If earning after taxation (EAT) – deducted actual
Published by Canadian Center of Science and Education 21
tax burdens - according to US GAAP is taken as 100 percent,
due to differences between national accounting
standards, EAT would be 25% more in UK, 3% less in France,
23% less in Germany and 34% less in Japan
(Barth et al., 2007).

2. Previous Related International Literature Review
International accounting literature provides evidence that
accounting quality has economic consequences, such as
costs of capital (Leuz and Verrecchia, 2000), efficiency of
capital allocation (Bushman and Piotroski, 2006) and
international capital mobility (Guenther and Young, 2008). The
International Accounting Standards Board (IASB)
has planned to develop a unified and understandable global
accounting convergence (Easton, 2006), and the
IASB’s plan has resulted in more than 100 countries world-wide
now requiring, permitting or adopting
International Financial Reporting Standards (IFRS) (Epstein,
2009). This growing acceptance of IFRS has also
influenced emerging economies (Ball et al., 2003). Beke (2010a,
p.23) asserted that “the purpose of the use of
international accounting information systems is that similar
transactions are treated the same by companies
around the world, resulting in globally comparable financial
statements”. These findings have led many authors
to conclude that global comparability will be driven by factors
other than the accounting standards. In particular,
most authors point to either regulatory oversight or capital
market pressures (Burgstahler et al., 2006).
Researchers have suggested that the best approach to assessing
the applicability of IFRS is to evaluate the
convergence process in emerging markets (Jones and Higgins,
2006, Cordazzo, 2008). However, the process of
adoption has been the subject of limited research, since
researchers themselves have suggested that it would be
better to use national case studies to analyze the adoption of
IFRS in individual nations. Examples of this are
Callao-Jarne-Lainez (2007) in Spain, Cormier-Demaria-
Lapointe-Teller (2009) in France, Lantto and Sahlström
(2009) in Finland, Iatridis and Rouvolis (2010) in Greece, Peng

and Smith (2010) in China and Beke (2010b) in
Hungary also.
The research undertaken in the form of national case studies
will develop guide-lines on best practice in the
implementation of IFRS in order to assist developing countries
and countries with economies in transition to
succeed in their efforts to harmonize their national accounting
rules and practice with international requirements
Earlier literature shows that the level of the capital market
orientation of the financial environment also follows
the differences in accounting systems internationally. Examples
of this are found when the Common Law
accounting systems of the USA and the UK are compared with
Code Law-based systems of many Continental
European countries (see, for example, La Porta, 1998).
Earlier studies show that, in Code Law countries (e.g., in
Europe) the capital provided by banks tends to be more
important than in Common Law countries (e.g., the USA and
Canada) where firms are mainly financed by a
large number of private investors (Zeff, 2007). Therefore,
information asymmetry between capital providers and
the company is likely to be resolved in Code Law countries by
providing accounting information to the capital
providers by means of high-quality, public financial reporting
(e.g. Beke, 2011a).
Previous studies also show that the adoption of IFRS improves
the accounting quality of publicly traded
companies in Europe (Daske and Gebhardt, 2006). Overall, the
adoption of IFRS seems to benefit investors,
especially in countries which resemble Code Law clusters and
where the information needs of investors were not
the primary interest of standards setters.

Additionally, many papers examine the properties of business
information across different accounting regimes.
Overall, these studies indicate that similar accounting methods
are applied very differently around the world.
However, Beke (2011b, p.176) remarked that “the unified
business information system will probably lead to new
types of analysis and data – with the possible additional
integration of new indicators from the practice of certain
countries”. Accounting standard-setters and regulators around
the globe are planning to harmonize accounting
standards with the goal of creating one set of high-quality rules
to be applied world-wide (Whittington, 2008).
3. Methodology
The purpose of this study was to measure the differences
between national rules and the international methods,
evaluating and analyzing their effects on the business
environment. This survey also includes information on
how international accounting standards have been affected by
the global economic crisis. To examine decisions
made by companies to adopt IFRS, we created a sample
comprising Budapest Stock Exchange (BSE) enterprises
who adopted IFRS in Hungary in 2007. For the purpose of
research, the pre-adoption period was 2004-2006 and
the post-adoption 2008-2010. The final sample consists of 65
companies who adopted IFRSs and 260 Hungarian
firms using local accounting rules. The specific samples are of
conventional shareholder companies with
Hungarian headquarters who employ an average of more than 50
people.

ISSN 1833-3850 E-
ISSN 1833-8119 22
The financial data are taken from accounts published on the
Budapest Stock Exchange and in the Hungarian
Business Information database. In our sample, the firms are
classified as either ‘following international
standards’ or as ‘using national accounting rules”. The
manufacturing firms have the largest representation in our
sample. The study excluded banks, insurances, pensions and
brokerages since their accounting measures are not
always comparable with industrial sectors. Parameters in the
logistic regression models were estimated with
maximum likelihood method and the correlations between
variables with autocorrelation and multicollinarity.
Basically, we used a qualitative comparative approach, but to
identify the results of our research, we elaborated
three hypotheses:
H1: Balance Sheet indices deteriorated - especially in respect of
solvency and prosperity after adopting IFRS.
H2: Heavy losses tend not to be infrequent after IFRS adoption
decisions.
H3: Business management has higher value relevance after the
post-adoption period.
3.1 Accounting Methods and Balance Sheet Effects
This set of analyses measures how Hungarian enterprises have
been affected in terms of business performance by
IFRS and how they have adjusted over time (see also Beke,

2011c) The logistic regression models employed are
(1,2):
RRi,t= a0 + a1 Sizei,t + a2 Dividendi,t + a3 Growthi,t + a4
Profitability i,t +
+ a5 Liquidity i,t + a6 Leverage i,t + ei,t
(1)
PAi,t = a0 + a1 Sizei,t + a2 Dividendi,t + a3 Growthi,t + a4
Profitability i,t +
+ a5 Liquidity i,t + a6 Leverage i,t + ei,t
(2)
Where:
RRi,t = dummy variable, indicating the regulatory system,
- RRi,t = 1, financial numbers are reported by IFRS,
- RRi,t = 0, financial numbers are reported by National
GAAP,
PAi,t = dummy variable, indicating the post-adoption effects.
- PAi,t = 1, financial numbers are reported by IFRS in 2008
- PAi,t = 0, financial numbers are reported by IFRS in 2006.
Size: Natural logarithm of market capitalization:
- NAVSH: Net asset value per share
- RESSFU: Reserves to shareholders’ funds
Dividend: - DIVCOV: Dividend cover
- DIVSH: Dividend per share

- DIVYI: Dividend yield.
Growth: - MVBV: Market value to book value
Profitability: - EPS: Earnings per share
- NPM: Net profit margin
- ROCE: Return on capital employed
Liquidity: - CFM: Cash flow margin
- CUR: Current ratio
- OCF: Operating cash flow scaled by total assets
- QUI: Quick ratio
- WCR: Working capital ratio
Leverage : - DEBTE: Debt to equity
- DSFU: Debt to shareholders’ funds
- CGEAR: Capital gearing
ei,t = the error term.
The results of hypotheses H1 are reported in Table 1.

Table 1. Accounting method effects
Denomination Domesticl GAAP-using firms IFRS adopted firms
Mean Std. deviation Mean Std. deviation
DIVSH
DIVYI
MVBV
NPM
EPS
ROCE
OCF
CUR
CFM
DEBTE
CGEAR
DSFU
0,0846
17,5764
5,8152
-0,2945
0,1987
0,2008
3,8812
1,9911
0,8029
1,9843
0,3454
0,3258

0,1986
19,8721
7,8125
4,5412
1,0561
0,3051
15,4421
6,9105
2,3126
2,3566
0,2325
0,1353
0,1557
22,8705
2,5478
-0,1031
0,1897
-0,0081
4,8512
2,9814
-0,0408
2,3099
0,8714
0,5469
0,2106
25,4457
8,1547
7,4581

1,5061
0,6401
16,8041
3,1125
1,5974
2,1577
0,3115
0,8540
(Source: Author’s own constructions)
It can be seen in Table 1 that the average index of dividend per
share (from earnings after tax) is higher at
companies which had already adopted IFRS than in others.
However, the relative average value (DIVYI)
contains a high deviation (the deviation value is almost 30 in
respect of companies using IFRS).
The companies applying the National Accounting Rules earn
more than double (5,8152) in terms of growth
(measured by market value to historical value of assets) than do
other firms. In this sense the IFRS-adopting
companies’ average index is much lower.
The companies examined had a negative average net profit
value (loss) in both groups in the period covered,
although the return on equity and the average return on capital
employed gave better results for National
Accounting Rules users. The latter index showed a declining
tendency (-0,0081) at companies which adopted the
IFRS.
The National Accounting Rules-using companies’ average
indices measuring solvency (OCF, CUR, CFM) and
leverage were higher than the others. Cash Flow, for instance,

decreased (-0,0408) at IFRS-adopting companies,
although around the relative average value of Operating Cash
Flow on assets the deviation is quite high (between
15 and 17). As the indebtedness of companies using National
Regulations was lower, the leverage indices
(DEBTE, CGEAR, DSFU) were better than in those companies
which had adopted IFRS.
To summarize, we can state that Balance Sheet indices
deteriorated especially regarding solvency and prosperity
after the adoption of IFRS.
3.2 Accounting Methods and P&L Effects
This part of our research examined whether firms determine
small positive profits rather than large losses. (see
Beke, 2011d) .Our analysis employed the next model (3):
RRi,t = a0 + a1Profitabilityi,t + a2Dividendi,t +
a3Growth i,t + a4 Sizei,t+
+ a5Liquidityi,t + a6Leveragei,t + a7SPi,t +
a8LLi,t + ei,t (3)
Where:
SPi,t = dummy variable indicating a measure of small positive
profits.
SPi,t = 1 if net profit scaled by total assets is
between 0 and 0.01,
SPi,t = 0 otherwise.
LLi, = dummy variable indicating a measure of timely loss
recognition.

LLi,t = 1 if net profit scaled by total assets is less
than - 0.20,
LLi,t = 0 otherwise.
The results of model (3) are reported in Table 2.
ISSN 1833-3850 E-
ISSN 1833-8119 24
Table 2. Small profit or large losses
Denomination IFRS adopted firms Domestic GAAP- using firms
SP -1,194** 0,451
LL 2,581* 1,324
Sourse: Author’s own constructions
* at 10% level significance, **at 5% level significance..
The data in the Table 2 prove that the companies which had
already adopted IFRS were less willing to hide profit
in the P&L. Account when it was low, and by doing so, the
probability of reporting a small profit (SP) was
significantly negative (-1,194) in their case.
Further, we can state that neither did they did tend to hide a

large loss. The latter statement is a consequence of
the positive and high value of the coefficient of LL (2,581). It is
specific for National Accounting Rules-using
companies to favor reporting smaller profits (0,451) and avoid
large losses being reported in P&L Account -
which is possible when using accrual-based accounting.
3.3 Accounting Methods and Value Relevance
Prior researches indicates that the standardization based
accounting systems tend to realize higher quality and
value relevance (e.g. Hung and Subramanyam, 2007; Tarca,
2004; Tandeloo and Vanstraelen, 2005). We were
wondered if is it the same case in Hungary and we tested it with
following hypothesis:
3.3.1 The first value relevance test is an OLS regression of
share price on book value per share and net profit per
share (4)
Pi,t = a0 + a1 BVPSi,t + a2 NPPSi,t + ei,t
(4)
Where:
Pi,t = Total market value of equity deflated by number of
shares outstanding,
BVPSi,t = Total book value of equity deflated by number of
shares outstanding,
NPPSi,t = Total net profit deflated by number of shares
outstanding.
3.3.2 The second value relevance test is an OLS regression of
profits on stock returns (5)

NPPi,t = a0 + a1 ARi,t + ei,t
(5)
Where:
NPPi,t = Net profit divided by beginning of year share price,
ARi,t = Annual stock return at year-end.
3.3.3 The third value relevance test measured the association
between IFRS-based book value and net profit
figures, then stock returns (6)
ARi,t = a0 + a1BVPSi,t + a2BVCHAi,t + a3NPPSi,t +
a4NPCHAi,t + ei,t (6)
Where:
BVCHAi,t = Variable indicating the change in corporate book
value following the transition to IFRS,
NPCHAi,t = Variable indicating the change in corporate net
profits following the transition to IFRS.
The results of value relevance models are summarized in Table
3.
Table 3. Accounting methods and value relevance
Denomination Coefficients
Domestiv GAAP-using firms IFRS adopted firms
NPPS 2,041** 3,025**
BVPS 0,547** 1,354**
AR 2841,145** 3694,124*
BVCHA 0,1941** 0,2941*

NPCHA 0,0182** 1,3541
R² 0,689 0,799
*Statistical significance at 10% level, **Statistical
significance at 1% level.
(Source: Author’s own construction)
Our H3 assumption, namely that the information system of
companies who adapted IFRS shows a higher value
relevance than other national accounting rules-user companies,
is proved by the data of Table 3.
The first test of value relevance gave a result for earnings after
tax/share (EPS) coefficient (3,025) and for book
value of equity/share (1,354) which is significantly (at 1 %)
positive and higher at IFRS-adopting companies
than at others. These companies also had more profitable,
higher correlation coefficients of financial indices (R2
= 0,799).
The second test of value relevance gave similar results since the
coefficient of Return on Equity (ROE) is also
significantly (at 10 %) positive and higher (3694,124) at
companies which have already adopted IFRS.
The coefficient of Book Value Change (1,3541) produced turned
out significantly more positive at

IFRS-adopting companies according to the third test of value
relevance. These results obviously prove that the
companies which adopted IFRS have an orientation towards a
reporting policy based on greater reliability and
more realistic evaluation. However, the index presenting the
change of Net Profit (NPCHA) was also positive
(but not significantly) at these companies (1,3541).
4. Conclusion
In today’s business environment, companies need to take every
opportunity they can to remain competitive.
Global competition, rapid innovation, entrepreneurial
competitors, and increasingly demanding customers have
altered the nature of competition in the marketplace. This new
competitive environment requires companies to be
able to create value for their customers and to differentiate
themselves from their competitors through the
formulation of a clear business strategy. Business strategy must
be supported by appropriate organizational
factors such as an efficient manufacturing process,
organizational design and harmonized accounting information
systems also.
We noted that the Balance Sheet indices deteriorated, especially
regarding solvency and prosperity after adoption
of IFRS. The results show that those businesses which have
adopted international standards achieved higher and
statistically significant positive coefficients than did those
following local accounting rules. We found that larger
firms, those with more leverage, higher market capitalization
and substantial foreign sales, were more likely to
have adopted international accounting standards. Among these
firms, lower profits are declared less frequently -
possibly indicative of the quality of earnings management.
Companies which had adopted IFRS also provided

higher quality and value relevant accounting information
systems. As a further consequence of IFRS adoption,
corporate policy and requirements became gradually more clear
and transparent – in the same way as the
application and implementation of the standards became more
user-friendly.
After the measuring these economic effects of accounting
standardization on business management and
achieving some results the author decided that we have to
continue this analyzing process using interdisciplinary
methods also, because it can be reach the whole real picture of
globalized unified business information systems.
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Read Chapters 10-12
Instructions
Research the methods for managing foreign exchange risk and
write a paper that addresses the following:
1. Analyze the types of risks that must be managed for a
multinational corporation. Your discussion should include both
transaction and operating exposure.
2. Ascertain the use of forward contracts, currency futures,
currency options, and currency swaps for managing foreign
exchange risk exposure.
3. Compare options, forwards, futures, and swaps for managing
foreign exchange risk exposure. Form an argument for what you
believe is the best method for a non-financial firm in managing
this exchange rate risk.
Support your paper with at least five (5) resources. In addition
to these specified resources, other appropriate scholarly

resources, including older articles, may be included. Your paper
should demonstrate thoughtful consideration of the ideas and
concepts that are presented in the course and provide new
thoughts and insights relating directly to this topic. Your
response should reflect scholarly writing and current APA
standards. Length: 5-7 pages (not including title and reference
pages).

Purpose of AssignmentThe purpose of the learning team assignme.docx

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