Earnings changes associated with relaxing the reconciliation requirement in non-U.S. firms’ SEC filings

The SEC's elimination of 20-F reconciliation and information asymmetry

“…In contrast, Kim et al (2012a) find that eliminating the reconciliation does not have any significant impact on the foreign firms' information asymmetry, market liquidity, or cost of equity in the year immediately following the SEC's elimination rule. Our results are more in line with Hansen et al (2014) and Kang et al (2012), in that earnings quality improves to some degree after eliminating the 20-F reconciliation. Moreover, we reconcile our results with Kim et al (2012a) and find that our results may be attributed to 2 In this paper, we refer IFRS to both IFRS and its predecessor International Accounting Standards (IAS), which were developed by the International Accounting Standards Committee.…”

“…The results indicate that eliminating the reconciliation constraint enables these firms to make accounting policies that are more reflective of their underlying economic substances. Similarly, Hansen et al (2014) find that earnings become more informative in the post-rule period for foreign IFRS firms with more pre-rule disclosure incentives. Kang et al (2012) document that IFRS firms domiciled in weaker investor protection countries improve their earnings predictability in the post rule period.…”

“…Throughout the paper, we refer to our test firms as foreign IFRS firms. the longer sample period as examined in Hansen et al (2014) and Kang et al (2012). We argue that it may take more than a year to fully realize the reconciliation constraint and cost savings effects.…”

“…Prior literature (e.g., Leuz, 2006;Radebaugh et al, 1995) argues that large reconciliation differences may attract more scrutiny from investors and regulators about the reliability of their accounting measurements. As a result, foreign firms listed in the U.S. had incentives to choose accounting policies that focus on minimizing the apparent difference between their primary GAAPs and the U.S. GAAP before the SEC's rule to remove the reconciliation (Hansen et al, 2014;Pownall and Schipper, 1999).…”

“…Hansen et al (2014) document that foreign IFRS firms with more pre-rule disclosure incentives are more committed to improving the informativeness of their reported earnings, and hence are more likely to benefit from the relaxation of the reconciliation constraint. Following Hansen et al (2014), we employ the average number of pages in the reconciliation footnote as a proxy for pre-rule disclosure incentive. We find that firms with higher pre-rule disclosure incentives experience more reduction in information asymmetry, compared with firms with lower pre-rule disclosure incentives.…”