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

Does the Form 20‐F reconciliation help ensure the financial reporting quality of cross‐listed IFRS firms? A comparison with cross‐listed non‐IFRS firms

“…Table 1 summarizes prior studies related to our research. Collectively, prior studies have explored the influence of the SEC's decision to revoke the reconciliation requirement for cross‐listed IFRS firms on investors' perceptions of risks, information asymmetry and information comparability (Byard et al, 2017; Chen, Deng, & Sami, 2015; Dugan et al, 2018; Kim et al, 2012; Maroney et al, 2008; Maroney & hÓgartaigh, 2005), short‐term trading volume reactions to earnings reconciliation (Chen & Sami, 2008), financial professionals' investment recommendations (Krishnamoorthy et al, 2008), stock market reactions (Chen & Khurana, 2015), audit pricing (Lin & Huang, 2017), earnings persistence (Kang et al, 2012) and the attributes of accounting information (Chiu & Lee, 2013).…”

“…Regarding the value relevance of the Form 20‐F reconciliation, Hopkins et al (2008, p. 225) state that ‘material reconciling items exist between U.S. GAAP and IFRS and the reconciliation currently reflects information that participants in U.S. stock markets appear to impound into stock prices’, and they conclude that the reconciliation information is relevant to public investors. Relatedly, Chen, Deng, et al (2015, p. 76) argue that ‘eliminating the 20‐F reconciliation reduces the level of information disclosure, which, in turn, leads to less information in the equity markets and more information asymmetry’. Henry et al (2009) also point out that investors and market participants should be aware of the significant gap in net income between IFRS and US GAAP.…”

“…In contrast, to examine whether reconciliated earnings are comparable to US earnings, Lang et al (2006) compare the reconciled accounting data of cross‐listed non‐US firms with that of matched US firms and find that the reconciled accounting data exhibit more earnings smoothing, more earnings management towards a target, less timely loss recognition and less correlation with the share price. In addition, Hansen et al (2014) show that cross‐listed IFRS firms with longer reconciliation notes experience significant increases in earnings informativeness, measured by abnormal trading volumes, after the elimination of the reconciliation requirement, and Chen, Deng, and Sami (2015) find that information asymmetry, measured by the mean daily bid–ask spreads, decreases in cross‐listed IFRS firms after the elimination of the reconciliation requirement 4 . Together, these studies suggest that the reconciliation requirement does not help ensure the comparability of reconciliated earnings but rather may create an opportunity for managerial discretion.…”

The Convergence of IFRS and U.S. GAAP: Evidence from the SEC's Removal of Form 20‐F Reconciliations

“…Research on the usefulness of the reconciliation information disclosed in Form 20‐F has employed different research methodologies, and the evidence is inconclusive . Recent studies examine the effect of the SEC ruling on the properties of earnings and analyst forecasts (Kang, Krishnan, Wolfe, and Yi, ; Hansen, Pownall, Prakash, and Vulcheva, ), on information asymmetry (Jiang, Petroni, and Wang, ; Kim, Li, and Li, ; Chen, Deng, Gupta, and Sami, ), and on the cost of debt and cost of equity capital (Sridharan and Soonawalla, ).…”

“…Chen et al. () examine the effect of eliminating the reconciliation requirement on information asymmetry for FPIs using IFRS, and they find evidence of a decrease in information asymmetry. Moreover, they find that the information asymmetry reduction is more pronounced for firms with more pre‐rule reconciling items .…”