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Simultaneous releases of U.S. and foreign GAAP earnings.

Article Excerpt
Abstract

Prior studies examine the incremental information content of U.S. generally accepted accounting principles (GAAP) reconciliation of U.S. listed foreign firms and find mixed results. One of the main methodological issues in prior studies is the uncertainty concerning the dates of the reconciliation releases. This study examines the information content of U.S. GAAP reconciliation for a sample of U.S. listed foreign firms that released both U.S. and foreign GAAP earnings information simultaneously. The findings show that there is no incremental information content for the U.S. GAAP reconciliation over foreign GAAP earnings. When added to other empirical evidence from prior studies, this studies' results of no incremental information content further support the recent SEC announcement to work towards eliminating the reconciliation by 2009 for firms using IFRS. (JEL F30, F39, M41)

Introduction

The rapid globalization of capital markets is reflected by the increasing number of foreign firms that cross-list their shares on U.S. stock exchanges. In 2001, the trading volume of foreign securities reached $788 billion on the New York Stock Exchange (1) and $115 billion on the National Association of Security Dealers Automated Quotation System. (2) The U.S. Securities and Exchange Commission (SEC) requires foreign firms listed on organized exchanges to reconcile earnings and shareholders' equity based on foreign generally accepted accounting principles (GAAP) to the amounts based on U.S. GAAP in the firms' annual 20-F reports.

Prior studies have examined if U.S. GAAP earnings reconciliation (referred to as 'earnings reconciliation' hereafter) has incremental information content over foreign GAAP earnings. (3) Some of the prior studies examine the association between annual stock returns and earnings reconciliation and foreign GAAP earnings. Other studies examine the stock price reactions in the days around the 20-F report filing dates. However the findings of these studies are mixed and do not provide strong evidence that earnings reconciliation is informative to U.S. investors [Saudagaran and Meek, 1997]. Association tests using annual returns do not provide direct evidence that investors directly use the earnings reconciliation information or the information is timely [Frost and Lang, 1996].

A potential problem of the prior studies is the difficulty in determining the exact date of earnings reconciliation release. Since foreign firms usually only announce foreign GAAP earnings during earnings announcements, prior studies assume that earnings reconciliation was announced to investors at the 20-F filing date. But the reconciliation information could be available to the market prior to the filing dates after foreign firms have announced their foreign GAAP earnings [Pope, 1993; Frost and Lang, 1996; Saudagaran and Meek, 1997].

The objective of this study is to examine the incremental information content of earnings reconciliation for a sample of foreign firms that announced their foreign and U.S. GAAP earnings simultaneously. While prior studies only examine the information content of earnings reconciliation using annual earnings, this study also examines the information content of earnings reconciliation in quarterly earnings announcements. Thus, this study provides a more powerful test for the incremental information content of earnings reconciliation for three reasons. First, this study uses more accurate announcement dates for earnings reconciliation rather than assuming that the information is only available to investors at the filings of 20-F reports. Second, having both foreign and U.S. GAAP earnings announced at the same time provide...

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