The Impact of Firm Characteristics on Trading Volume Reaction to the Earnings Reconciliation from IFRS to U.S. GAAP*

Does eliminating the Form 20-F reconciliation from IFRS to U.S. GAAP have capital market consequences?

“…They find a significant, positive relation between earnings reconciliation and abnormal trading volume around 20-F filing dates, suggesting that the reconciliation provides useful information to investors. Chen and Sami (2010) replicate their trading volume tests for an update sample from 2005 to 2006, and continue to find significant abnormal volume reactions, although the reactions are weaker for pure IFRS users and are insignificant for continuous IFRS users (i.e., the results are mainly driven by first-time IFRS users). On the other hand, Plumlee and Plumlee (2007) find that, for a sample of U.S.-listed IFRS reporting firms from 2002 to 2006, there is no abnormal trading volume reaction to 20-F filings, suggesting that the market does not view the reconciliation as informative.…”

“…Trading-volume studies provide more direct evidence. Chen and Sami (2008) find significant abnormal volume reactions to the reconciliation from 1995-2004, and Chen and Sami (2010 continue to find evidence in [2005][2006]. In contrast, Plumlee and Plumlee (2007) find no evidence of abnormal volume reactions to 20-F filings from 2002 to 2006.…”

“…If reconciliation information is rarely used by investors, and investors do not perceive cross-listed firms' accounting numbers based on IFRS to be of inferior quality relative to those based on U.S. GAAP, then eliminating the reconciliation is unlikely to have a negative impact on the liquidity and PIN of foreign cross-listed firms. Supportive of this view, some studies suggest that the usefulness of the reconciliation has declined or may even diminish by 2006 due to the increased convergence between IFRS and U.S. GAAP and the improvements of IFRS in recent years (e.g., Plumlee and Plumlee, 2007;Chen and Sami, 2010;Jiang et al 2010). Many practitioners also consider reconciliation an unnecessary and expensive practice (Edwards, 1993;Dzinkowski, 2007).…”

Which financial stocks did short sellers target in the subprime crisis?

“…Additionally, we follow the approach in Garfinkel and Sokobin (2006), Chen and Sami (2008) and Connolly and Stivers (2005) to create a demeaned or abnormal Short Volume (%). We subtract the gross Short Volume (%) by the contemporaneous median Short Volume (%) of all publicly traded companies, financial and nonfinancial, on the same stock exchange of the financial firm on the short ban list.…”

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

“…Gordon et al (2008) show that accrual reconciliation from IFRS to U.S. GAAP provides incremental information content beyond IFRS accruals. Chen and Sami (2013) find that the relation between abnormal trading volume and earnings reconciliation from 2005 to 2006 is driven by first-time IFRS users with low institutional ownership. Several more recent papers have examined the economic consequences of the SEC's elimination of 20-F reconciliation.…”