The effects of International Financial Reporting Standard (IFRS) 3 disclosure index on liquidity ratios.

• Author: Ferrer, Rodiel C.

1. INTRODUCTION

   Internalization theory analyzes the decision of the multinational enterprise on whether to outsource the production of a given product or to acquire a subsidiary in the foreign country and, hence, continue producing the product in-house. Another option, however, is for the firm to simply continue exporting its products to foreign market. Internalization theory is a broad concept, which had been the subject of many revisions and applications by different authors. Nevertheless, internalization theory would be presented in this paper as it relates to the conduct of mergers and acquisitions of various companies.

   Merger or acquisition may occur as a result of a company wanting to obtain a specific advantage possessed by another firm. Neary (2009) explained each of the three components in Dunning's eclectic paradigm as follows: "Ownership advantages address the question of why some firms but not others go abroad, and suggest that a successful multinational enterprise (MNE) has some firm-specific advantages which allow it to overcome the costs of operating in a foreign country. Location advantages focus on the question of where an MNE chooses to locate. Finally, internalization advantages influence how a firm chooses to operate in a foreign country, trading off the savings in transactions, holdup and monitoring costs of a wholly-owned subsidiary, against the advantages of other entry modes such as exports, licensing, or joint venture." A firm may merge or acquire another company in order to secure its desired ownership advantages. Ownership advantages are firm-specific skills, such as research capabilities, managerial competence or trade secret. One such example was the acquisition of Bostons Coffee Connection Chain by Starbucks in 1994, which enabled Starbucks to obtain the recipe for its top-selling beverage, the frappuccino (mahalo.com). In contrast, a firm may engage in a business combination with another company in order to have a strategic location for its products. This is often the case when a manufacturing company either acquires or merge with a distribution channel, such as retail stores. Finally, a company may acquire another company in order to internalize its production.

   This paper examines the impact of compliance with IFRS 3 disclosure requirement on firm's liquidity ratios in terms of current ratio and quick ratio.

2. THEORETICAL FRAMEWORK

   Markusen (2009) defined internalization as "the decision by a multinational firm producing abroad whether to own a foreign production facility or to license with a foreign firm to produce a good or service on behalf of the multinational." In simple terms, internalization pertains to the decision to either produce a product in-house (internalize the production) or to outsource them. In fact, Markusen (2009) mentioned that outsourcing is simply another name for internalization. He explained outsourcing as referring to the decision of the firm on whether to outsource or internalize a production. According to Markusen (2009), internalization theory examines the benefits that a multinational firm could gain by outsourcing its production, subject to the risks associated with the opportunistic behaviour of foreign licensees, contractors or even its managers for an owned subsidiary. (Hereafter, foreign licensees would be understood as pertaining to foreign licensees, contractors or managers.)

   There had been myriad of researches from different countries conducted on the effect of merger or acquisition on the liquidity and activities of various companies. Ollinger, Nguyen, Blayney, Chambers and Nelson (2006) provided empirical evidence that merger and acquisition improved the labor productivity in the food sector. Holmstrom (2001) examined changes in the merger activity and...