What is the Impact of Eliminating the Reconciliation between IFRS and US GAAP? Early Evidence

John (Xuefeng) Jiang Assistant Professor

Michigan State University

Kathy R. Petroni* Deloitte /Michael Licata Professor of Accounting

Michigan State University

Isabel Yanyan Wang Assistant Professor

Michigan State University

November 11, 2009

Very preliminary, please do not quote without permission.

JEL Classification: M41, M48, G12, G14, G15, G18 Keywords: Reconciliation, IFRS, Information Environment * Corresponding author: N250 Business College Complex, Eli Broad College of Business, Michigan State University, East Lansing MI, 48824. Phone: 517-432-2924. Fax: 517-432-1101. Email: petroni@bus.msu.edu

Abstract

We investigate the impact of the SEC’s decision to allow foreign private issuers who use

IFRS (IFRS filers) to stop providing a reconciliation from IFRS to US GAAP. Using a difference-in-difference research design, we examine both cost savings and changes in the information environment related to the elimination of the reconciliation for a sample of 88 IFRS filers. We find that stock prices for the average IFRS filer respond positively to significant events during the SEC’s deliberations on eliminating the reconciliation. Consistent with cost savings, we find that the average IFRS filer that has larger differences between IFRS and US GAAP accelerates its 20-F filing by 17 days while the average IFRS filer that has small differences between IFRS and US GAAP does not accelerate its filing. We find some evidence that audit fees went down for the average IFRS filer but we also find that the decline is driven by firms with smaller differences between IFRS and US GAAP, so we do not attribute the decline to the elimination of the reconciliation. Our analyses of changes in abnormal trading volume, abnormal return volatility, and analyst activities provide no evidence that IFRS filers experienced a significant information loss, even for those with the largest differences between IFRS and US GAAP.

What is the Impact of Eliminating the Reconciliation between IFRS and US GAAP? Early Evidence

1. INTRODUCTION

In December 2007, the SEC ruled that it would begin accepting foreign private issuers’

financial statements prepared under International Financial Reporting Standards (IFRS) as

adopted by the IASB without requiring reconciliation to US GAAP starting fiscal years ending

after November 15, 2007. In this study, we examine the impact of this regulation on these

foreign private issuers, which we refer to as IFRS filers.

While intended as a step towards broader convergence between US GAAP and IFRS, the

decision to allow IFRS filers to no longer reconcile their net income and stockholders’ equity to

U.S. GAAP is very controversial. For example, the response to the SEC proposal to eliminate

the reconciliation was sharply divided among the academic community. The Financial

Reporting Policy Committee of the Financial Accounting and Reporting Section of the American

Accounting Association (AAA) voiced strong opposition to the SEC’s proposal to eliminate the

reconciliation (Hopkins et al. 2008). Terry Yohn, a member of this committee, cautioned in her

congressional testimony that “elimination of the reconciliation could leave investors with less

relevant information for making investing decisions” (Yohn 2007). In contrast, the Financial

Accounting Standards Committee of the AAA endorsed the SEC’s proposal because “it is

unlikely that the reconciliation schedule would provide useful information to investors, unless

the IFRS were not implemented properly” (Jamal et al. 2008). These opposing views are not that

surprising given, as we more thoroughly discuss in the next section of the paper, that the results

from academic studies that address the usefulness of the reconciliation between IFRS and US

GAAP are mixed.

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Users of foreign companies’ financial reports also disagree on the usefulness of the

reconciliation. The CFA Institute, which represents investment analysts and portfolio managers,

argued that the SEC proposal to remove the reconciliation was premature. In its comment letter

to the SEC it stated that “the current SEC reconciliation requirement is an important tool that

allows [investment professionals] to compare companies in different countries on an apples-to-

apples basis. To the extent accounting standards have not yet converged (or new differences

develop) investment professionals rely on the reconciliation as an efficient and cost effective

way of bringing to their attention the material differences in accounting” (CFA Institute 2007).

On the other hand, Fitch Ratings, the third largest rating agency, argues that it “does not pay very

much attention to US GAAP reconciliations in 20-F reports and does not consider that their

elimination would have a substantial impact on [its] ability to conduct analysis” and “the cost of

preparing US GAAP reconciliations is probably one the market could spare” (Fitch Rating

2007).

Perhaps not surprisingly, IFRS filers overwhelmingly supported the SEC’s proposal to

eliminate the reconciliation requirement. They argued that the reconciliation was of little use and

costly to prepare. The CFO of Delhaize Group, a global food retailer headquartered in Belgium

stated “…investors make very limited use of the reconciliation of IFRS to U.S. GAAP and that

the omission of U.S. GAAP information would not have a meaningful impact to the users of our

financial information…the requirement to reconcile our IFRS-based financial statements to U.S.

GAAP creates significant additional work for our internal preparers and in-house counsel,

requires additional review by our executive officers and audit committee, and adds significant

costs associated with internal systems, independent auditors and outside counsel” (Delhaize

Group 2007).

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To shed light on the impact of this controversial decision, we collect data on 88 IFRS

filers that supplied a reconciliation for 2007 but are no longer required to do so starting in 2008.1

Surprisingly, we find that none of these firms voluntarily provided the reconciliation in 2008.

This suggests that all of the IFRS filers considered the firm level costs of the reconciliation

greater than the firm level benefits. Consistent with this notion, we observe positive stock price

responses for the average IFRS filer on the dates in 2007 when the SEC made indications that it

would remove the reconciliation requirement.

We next investigate the impact of the absence of the reconciliation to see if it reduced the

costs of producing the 20-F or had a noticeable reduction in the level of information available in

2008. Because it would be difficult to attribute any observed changes in costs and the

information environment in 2008 to the absence of the reconciliation rather than some other

factors changing between 2007 and 2008, we employ a difference-in-difference research design.2

Specifically, we divide our sample IFRS filers into two groups: those that have larger differences

between IFRS and US GAAP and those with smaller differences, denoted HIGHDIF and

LOWDIF, respectively. We then examine differences in the changes of various measures of

interest between 2007 and 2008 separately for our HIGHDIF and LOWDIF firms. If we observe

changes that are more pronounced for the HIGHDIF firms we can infer that they result from the

absence of the reconciliation.

Our results demonstrate some cost saving as a result of eliminating the reconciliation.

The average IFRS filer was able to file its 20-F, which is the document that includes the

1 For ease of exposition, we refer to the year when the firm last provided a mandatory reconciliation as 2007 and the first year the firm no longer has to provide the reconciliation as 2008. Note, however, this convention in some instances will result in some misnomers. For example, for a firm with a December 31 fiscal year-end, the first time it would not have to provide a reconciliation would be the year ended December 31, 2007 but we will refer to the observation as if it were in 2008. 2 See Ke et al. (2008) for a discussion on the difficulties of isolating the impact of a regulatory change on a population of firms and another example of a difference-in-difference research design.

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reconciliation, 10 days earlier in 2008 than in 2007, while its earnings announcement date is

relatively unchanged over the same period. Importantly, the observed acceleration of the 20-F

filing is driven by our sample firms with larger differences between IFRS and US GAAP. This

suggests that the acceleration of the filing likely results from less time being devoted to

preparing the reconciliation for the 20-F.

We also observe that on average IFRS filers pay less audit fees (as a percentage of total

assets) in 2008 relative to 2007. But we are not comfortable attributing this finding to the

absence of the reconciliation because the decrease is mostly attributable to firms with smaller

differences between IFRS and US GAAP.

Next, we evaluate the potential information loss due to eliminating the reconciliation by

examining changes in various market responses to the release of the 20-F in 2007 and 2008.

Specifically, we examine the changes in abnormal trading volume, changes in abnormal return

volatility, changes in analyst coverage, and changes in the frequency of newly issued or revised

forecasts surrounding the release of the 20-F filings between 2007 and 2008 for our HIGHDIF

and LOWDIF firms. We find no decline in either abnormal trading volume or abnormal return

volatility and no difference in the changes in either measure across our HIGHDIF and LOWDIF

firms. Our analyses of analyst behavior suggest that there are no significant changes in analyst

coverage or the incidence of newly issued or revised forecasts around the 20-F filings in 2008

relative to 2007 and again no differences in the changes in analyst behavior across our HIGHDIF

and LOWDIF firms.

Overall, our study suggests that the SEC’s decision to allow IFRS filers to eliminate the

reconciliation between IFRS and US GAAP directly benefits IFRS filers. It appears that these

firms reduced their reporting costs with no evidence of a loss of information to investors, at least

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in the short window surrounding the release of the reconciliation information, relying on

common metrics used to measure the level of information in equity markets, and assuming that

we have appropriately identified firms that are more and less likely to be affected by the absence

of the reconciliation.

This paper proceeds as follows. In the next section we discuss the prior literature on the

usefulness of the reconciliation. In the third section we present the data analysis and we

conclude in the final section.

2. RELATED PRIOR LITERATURE

Foreign private issuers are required to file a form 20-F within six months after the end of

its fiscal year. This form is similar to a 10-K filed by companies domiciled in the US and

essentially requires that its information content is “substantially similar to financial statements

that comply with U.S. generally accepted accounting principles and Regulation S-X”

(see http://www.sec.gov/about/forms/form20-f.pdf). Accordingly within the 20-F, up until 2008,

all companies that did not follow US GAAP had to include a discussion of material variations

between the accounting principles, practices, and methods used in preparing the financial

statements from those used in the US. They also had to provide a tabular reconciliation between

IFRS net income and stockholders’ equity as reported on the financial statements and US GAAP

net income and stockholders’ equity.3

Several papers have investigated the usefulness of the information in the 20-F in the

period before 2008, with the focus on the reconciliation between IFRS and US GAAP.4 Harris

3 Rather than a reconciliation of stockholders’ equity, firms had the option of providing a restated balance sheet. All of our IFRS filers prepared a reconciliation of stockholders’ equity in 2007 rather than a restated balance sheet. 4 One recent paper, Christensen et al. (2009), considers the information content of a specific one-time reconciliation between UK GAAP and IFRS by examining the stock price response to reconciliations between UK GAAP and IFRS net income provided in 2004 prior to the mandatory adoption of IFRS in 2005. For a sample of 137 UK firms, they find that the abnormal returns around the release of the reconciliation are significantly associated with the unexpected difference between IFRS and UK GAAP income. The returns are more pronounced for firms that face a

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and Muller (1999) examine whether stock price metrics are associated with information in the

20-F reconciliations between International Accounting Standards (IAS), which is the predecessor

to IFRS, and US GAAP. For a sample of 31 cross-listed IAS filers during 1992 to 1996, they

find that after controlling for IAS net income the difference between IAS and US GAAP net

income as well as the change in this difference is associated with annual stock returns ending six

months after the fiscal year end. In addition they find that after controlling for IAS stockholders’

equity, the difference between IAS and US GAAP stockholders’ equity is associated with the

market value of equity measured six months after the fiscal year end. This latter finding

however does not hold up in a per share analysis.

Chen and Sami (2008) consider 48 cross-listed IAS filers during the 1995 to 2004 period.

Rather than using stock price metrics to measure information content of the reconciliation they

focus on abnormal trading volume. Importantly, they also consider the fact that some IAS filers

report their reconciliation to US GAAP within their annual report prior to the release of the 20-F.

They find that in the two-day window surrounding the release of the reconciliation abnormal

trading volume is positively associated with the absolute magnitude of the difference between

IAS and US GAAP net income. They also find some evidence, albeit less robust, that abnormal

trading volume is positively associated with the absolute magnitude of the difference between

IAS and US GAAP stockholders’ equity. This study suggests that there is information in the

reconciliation that investors rely on in making firm valuation decisions. Interestingly, in a follow

up study Chen and Sami (2009) find that their earlier findings in the 1995-2004 period only

persist in 2006 but not in 2007. This indicates that the usefulness of the reconciliation may have

high probability and cost of violating debt covenants. This study demonstrates in the unique setting of the pending mandatory adoption of IFRS that the reconciliation can be useful. It does not directly address whether reconciliations between US GAAP and IFRS are generally useful for IFRS issuers.

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been on the decline prior to the SEC’s decision to no longer mandate the preparation of the

reconciliation.

Finally, Henry et al. (2009) investigate the more recent time period of 2004 to 2006 on 75

European Union (EU) cross-listed IFRS filers while focusing on stock price metrics. They find

that the difference between US GAAP and IFRS net income is positively associated with market

value six months after the fiscal year end after controlling for IFRS net income and stockholders’

equity. But their findings are inconclusive because they find no relation between any

information in the reconciliation and annual returns measured over the 12 months ending six

months after the fiscal year end.

Overall, these studies do not settle the question of whether the information in the

reconciliation is useful for investor decision making. Even if these studies had demonstrated a

robust role for the reconciliation prior to 2007, it might have no role in 2008 because in recent

years due to the 2002 Norwalk Agreement, which committed the IASB and FASB to work

together on convergence, the gap between IFRS and US GAAP has narrowed (Henry et al. 2009).

It is possible that because of convergence the (limited) usefulness of the reconciliation

documented in the above studies is sufficiently diminished so that the lack of a reconciliation in

2008 might not represent a significant loss of information.

3. DATA AND ANALYSIS

Sample and descriptive statistics

We obtain our sample of IFRS filers by first identifying all firms that file a 20-F in 2008

from the Compustat SEC filing database, which indicates the type and date of each firm’s SEC

filings. We then, via EDGAR, identify all firms that indicate on the cover to their 2008 20-F that

they follow IFRS as adopted by the IASB. Our final sample includes 88 IFRS filers. As reported

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in Table 1, Panel A, our sample includes IFRS filers from 24 countries, with about ¼ of the firms

from the United Kingdom. More than half of the sample firms are from the EU due to the

mandatory adoption of IFRS by the EU in 2005. Table 1, Panel B, reports the sample industry

distribution, which indicates that our sample covers a variety of industry sectors, with half of

them from the financials, energy, and telecommunication services sectors.

We searched the 20-F of each of our 88 IFRS filers in 2008 to determine if any

voluntarily provide a reconciliation between IFRS and US GAAP because IFRS filers can still

provide a reconciliation if it is in their best interests. However, we find that none of the IFRS

filers voluntarily provide a reconciliation in their 20-Fs in 2008. The uniform choice of not

providing a reconciliation indicates that IFRS filers view the costs of providing it greater than the

benefits (at least at the firm level), consistent with some opinions expressed in comments letters

to the SEC’s initial proposal.

Identifying IFRS filers with greater versus fewer differences between IFRS and US GAAP

Because we employ a difference-in-difference research design, we need to separate our

sample IFRS filers into those with more dissimilarity between IFRS and US GAAP (i.e., those

more likely to be affected by the absence of the reconciliation) and those with less dissimilarity.

From each firm’s 20-F filing in 2007, we collect three years of data on the reconciliation

between IFRS and US GAAP net income. For each firm-year reconciliation we count the

number of reconciling items and obtain the dollar difference between IFRS net income and US

GAAP net income. We then calculate the three-year averages of these amounts to reduce the

influence of year-to-year fluctuations. Table 2 provides descriptive statistics. The mean (median)

sample firm has on average nine (ten) items reconciling US GAAP net income to IFRS net

income during 2005 to 2007 (denoted #ITEMS). For the mean (median) sample firm the average

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net income reported under US GAAP is $312 ($86) million less than that reported under IFRS

during 2005-2007 (denoted US-IFRS). This difference is 3% (1%) of IFRS sales for the mean

(median) firm (denoted US-IFRS%SALES). To get a sense of the absolute magnitude of the

differences in net income, we average the absolute value of the difference in US GAAP and

IFRS net income scaled by the absolute value of IFRS net income (denoted │US-IFRS%NI│) for

2005-2007. The mean (median) absolute difference is 59% (16%) of IFRS net income.

To form one proxy of how much US GAAP and IFRS differ for each firm, we rank firms

by #ITEMS and by │US-IFRS%NI│.5 We consider the sum of these two ranks as a continuous

measure of the divergence between IFRS and US GAAP for each firm. We then designate firms

with a combined total of the two ranks greater than the sample median as HIGHDIF and those

with a combined total less than the sample median as LOWDIF. In Table 3, we provide

descriptive statistics across the two subsamples of firms. As constructed, #ITEMS and │US-

IFRS%NI│ are both significantly greater for the HIGHDIF firms. There is some evidence that the

divergence between IFRS and US GAAP increases with firm size. The median market cap and

sales for the LOWDIF firms are both significantly less than those of the HIGHDIF firms,

although the means across the two groups are not significantly different. There is no statistically

significant difference in the US market value of common equity divided by IFRS book value of

equity (MTB) at the end of 2007.

Market reactions to the SEC’s deliberations on eliminating the reconciliation requirement

5 We focus on the differences in net income under US GAAP and IFRS because prior research finds that reconciliation of net income is generally informative, but evidence on the usefulness of the reconciliation in stockholders’ equity is less robust (Harris and Muller 1999; Chen and Sami 2008).

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We identify three key events related to the SEC decision to eliminate the requirement that

IFRS filers provide a reconciliation to US GAAP.6 On June 20, 2007 the SEC decided to issue

for public comment a proposal to eliminate the reconciliation requirement for IFRS filers. On

July 2 the SEC posted the proposal on its website and on July 3 it issued a press release soliciting

public comments. On November 15 the SEC adopted the final rule, officially allowing IFRS

filers to discontinue providing a reconciliation for fiscal years ending after November 15, 2007.

For 83 of our 88 IFRS filers we obtained daily stock returns data from CRSP. We then

calculate the three-day cumulative abnormal returns around each of the three event dates

discussed above (June 20, July 2, and November 15 of 2007). Because July 2 and 3 are within

the same 3-day window, we consider this one event. We calculate abnormal returns as the

difference between each firm’s daily return in the US stock market and the value-weighted

market return.7

As shown in Table 4, Panel A, the mean (median) cumulative abnormal returns on June

20, the day the SEC first proposed the elimination of the reconciliation, are 1.02% (0.4%) while

on July 2nd and 3rd, when the SEC fully disclosed the details of the proposed rule, they are 1.01%

(0.67%). All of these abnormal returns are statistically different from zero (p < 0.01). On

November 15, when the SEC formally voted on the final ruling, the mean and median abnormal

returns are not significantly different from zero. Overall, the mean (median) sum of the

cumulative abnormal returns over the three event dates is 1.95% (1.49%), which is again

significantly different from zero. This finding is consistent with investors perceiving the

elimination of the reconciliation as a net benefit to the average IFRS filer.

6 We identify these dates through the SEC’s website which contains details of its open meetings and press releases. Investors can watch the SEC’s open meetings through webcasts. 7 Inferences remain the same when we estimate market returns using either the S&P 500 index or a firm-specific CAPM market model.

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Because the costs and benefits of the reconciliation likely vary across the sample firms to

the extent IFRS and US GAAP differ, we separately examine the event returns across our

HIGHDIF and LOWDIF firms in Panel B. For example, the costs of preparing the reconciliation

should be higher for HIGHDIF firms so the expected savings associated with eliminating the

reconciliation should be higher for HIGHDIF firms than LOWDIF firms. This would suggest

that HIGHDIF firms would have a more positive stock price response. But the information

conveyed by the reconciliations of the HIGHDIF firms is likely more useful to investors than

that conveyed by the LOWDIF firms, suggesting the HIGHDIF firms would suffer greater

information loss and would therefore have a less positive stock price response. Accordingly, for

completeness, we examine the abnormal returns separately for the HIGHDIF and LOWDIF firms

but without predicting the sign of any differences in the abnormal returns across the two groups.

For the LOWDIF firms the mean (median) abnormal returns over the three events are a

significantly positive 3.54% (3.07%) while for the HIGHDIF firms the mean (median) abnormal

returns are not significantly different from zero. Furthermore the abnormal returns for the

LOWDIF firms are significantly greater than those of the HIGHDIF firms on June 20, July 2,

and for the sum of all three events. Our results indicate that the net benefit of eliminating the

reconciliation accrues to firms who have small differences between IFRS and US GAAP rather

than those with large differences. This suggests that for HIGHDIF firms investors perceive that

the large cost savings associated with not having to prepare the reconciliation are offset by the

loss of information.

Cost savings associated with eliminating the reconciliation from IFRS to US GAAP

Foreign private issuers (FPIs) are required to file their 20-Fs within six months of the

fiscal year end. They are given the full six months to file their 20-Fs because of the additional

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time needed to compile the reconciliation as well as other information in the 20-F that is

incremental to that required in their home countries. As an example of the costly nature of

preparing the reconciliation, Diageo (the seller of Guinness and Baileys) states that it spent 1,700

hours preparing its reconciliations for 2007 (Diageo 2007).

Many investors argue that six months is too late for the 20-F to be of much use (SEC

2007c). A potential benefit of eliminating the reconciliation is that IFRS filers may be able to

file their 20-Fs sooner. In fact, in the summer of 2007, when the SEC was considering

eliminating the reconciliation, it considered shortening the filing date. No action was taken at

that time, but in October 2008, the SEC decided to shorten the filing date of the 20-F to four

months starting in fiscal years ending on or after December 15, 2011, in part because of the prior

decision to remove the reconciliation requirement (SEC 2008).

To investigate if the removal of the reconciliation allowed IFRS filers to file their 20-Fs

sooner, we collected 20-F filing dates from Compustat for 2007 and 2008 for 83 of our sample

firms.8 We drop two of the 83 firms from the analysis because they filed for extension on their

20-F filings and these outliers may have undue influence on our analysis.9 As reported in Table

5, Panel A, in 2007 the mean (median) IFRS filer took 122 (115) days after the fiscal year end to

file its 20-F. Presumably, if preparing the reconciliation consumes a great deal of time and effort,

a consequence of eliminating the reconciliation should be accelerated 20-F filings in 2008.

Consistent with this notion, the mean (median) IFRS filer filed its 2008 20-F in 112 (101) days

after its fiscal year end, suggesting a mean (median) decline of 10 (2) days (p < 0.001).

8 We dropped the five firms not covered by CRSP for the remainder of our tests. In the future we will include these firms to the extent we have the necessary data for each test. 9 One firm delayed its 20-F because it had difficulties auditing a subsidiary and the other due to difficulties complying with SOX 404.

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To help assess whether this decline in the time needed to file the 20-F reflects time

savings associated with the elimination of the reconciliation, we performed two more tests. First,

we test whether there is any decline in the number of days after their fiscal year-ends that IFRS

filers release their earnings as reported by Compustat between 2007 and 2008. Because the

preparation of the reconciliation should not impact the timing of annual earnings releases, we do

not expect earnings releases to accelerate in 2008. As reported in Table 5, Panel B, there is little

change in the firm’s earnings announcement dates between 2007 and 2008. The average

earnings announcement date is 63 days after the fiscal year end, regardless of whether a

reconciliation was prepared or not.

As our second test, we assess cross-sectional differences in filing dates based on the

extent to which IFRS and US GAAP differ for each of our IFRS filers. We expect firms with

large IFRS and US GAAP differences (i.e., those with more time-consuming reconciliations to

prepare) to be able to accelerate their 20-F filings in 2008 more than those with smaller

differences between IFRS and US GAAP. Accordingly, we look at the decline in the number of

days it takes to file the 20-F across our LOWDIF and HIGHDIF firms between 2007 and 2008.

As reported in Table 5, Panel B, our average (median) HIGHDIF firms file their 20-Fs 17 (6)

days earlier in 2008 than in 2007. This decline is significantly different from zero (p < 0.001).

In contrast, the average LOWDIF firms with less complex reconciliations accelerate their 20-F

filings by only 2 days, which is not statistically different from zero. In addition, the decline by

the HIGHDIF firms in reporting days is significantly greater than the decline by the LOWDIF

firms (p = 0.001). These findings suggest firms with the more complex reconciliation benefit the

most from eliminating the reconciliation in terms of accelerating their 20-F filings.

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Another cost associated with the reconciliation is the related audit effort. The SEC

estimates that eliminating the reconciliation will save the average IFRS filer 132 hours of work

by employees and outside professionals. Assuming that 75% of the work is done by outside

professionals with an average cost of $400 per hour, the SEC estimated that the average IFRS

filer would save $40,000 in fees paid to auditors and other outside professionals (SEC 2007, 85).

If the SEC’s estimates are accurate, the cost-saving is likely too small for us to detect especially

because many firms report audit fees in the unit of millions. We investigate this issue because

many IFRS filers claim that the reconciliation required a substantial amount of audit effort and

audit fee and that the SEC’s estimate of the potential savings is significantly understated (see e.g.,

Syngenta 2007).

If the elimination of the reconciliation greatly reduced audit effort and audit effort is

increasing in the complexity of the reconciliation, then we would expect auditing fees to decline

more (or increase less) in 2008 for HIGHDIF firms than for LOWDIF firms. We collect audit fee

data and the year of SOX 404 compliance for 82 of our 83 firms from Audit Analytics. We

eliminate a firm that underwent a large merger in 2008, which caused its audit fee to quadruple.

We eliminate another 18 firms that complied with SOX 404 for the first time in 2006 or 2008.10

We believe focusing our analysis on firms that complied with SOX 404 for the first time in 2007

will reduce the extent to which our results are confounded by SOX 404 because research

suggests that audit fees increase substantially in the first year of complying with SOX 404 and do

not decrease in the second year.11 The final sample for the audit fee analysis includes 63 IFRS

filers who complied with SOX 404 in both 2007 and 2008.

10 Five (13) of our sample firms complied with SOX 404 in 2006 (2008) for the first time. 11 Bhamornsiri, Guinn, and Schroeder (2009) find that US firms’ audit fees (in terms of dollar amounts) on average increase by 66% in the first year of reporting internal controls and increase another 1% in the second year.

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Table 6, Panel A reports the audit fee analysis for the 63 IFRS filers. The average audit

fees (as a percentage of total assets) significantly decrease from 0.039% in 2007 to 0.035% in

2008 (p< 0.05). When we break down the sample into HIGHDIF and LOWDIF groups, we find

that firms with small differences between IFRS and US GAAP reduce their audit fees by 0.6 (0.2)

basis points in mean (median) with two-tailed p-value equals 0.06 (0.01), while firms with large

differences do not reduce audit fees. These findings are not consistent with the notion that audit

fees decreased as a result of eliminating the reconciliation. We are not comfortable, however,

drawing conclusions regarding the impact of the elimination of the reconciliation on audit fees

because we believe that we need a more complete model of audit fees in this setting.

Information loss associated with eliminating the reconciliation from IFRS to US GAAP

Our next set of tests examines whether the information content of the filings made by

IFRS filers decreased in 2008 more so for the HIGHDIF firms than the LOWDIF firms due to

the absence of the reconciliation. We argue that if the absence of the reconciliation reduces the

level of publicly available information we should observe a smaller reaction to the release of the

annual filings by both investors and information intermediaries, especially for the HIGHDIF

firms. Critical to this analysis is identifying when our IFRS filers first filed their reconciliation

in 2007. As pointed out by Chen and Sami (2008) some foreign issuers report their

reconciliation in a 6-K filing, along with their domestic annual report, which is released earlier

than the 20-F. To identify when our sample firms released their reconciliation in 2007, we

examined the 6-Ks filed by our sample firms in 2007 and identified 18 (out of 82) firms that

included their reconciliations in their 6-K.12 Accordingly, when we compare responses to filings

12 On average, these 6-Ks are filed 47 days earlier than the 20-Fs. Note that when we omit these 18 firms that included their reconciliation in their 2007 6-K from our earlier analysis on changes in the 20-F filing date, we find that the acceleration of the filing date is 2 days earlier than that reported for the HIGHDIF firms. It is also worth

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made by our sample firms with and without the reconciliation, we focus on the 6-K or the 20-F,

whichever first contained the reconciliation in 2007. Specifically, if in 2007 a firm reported its

reconciliation in its 6-K (20-F), then in 2008 we used the release of the 6-K (20-F) as the event

date. For ease of exposition, we will, however, refer to the event date as the release of the 20-F.

We first consider abnormal trading volume around the release of the 20-F in 2007 and

2008. Abnormal trading volume is often used in the literature to detect information content of

accounting disclosures (Bamber 1987; Bamber and Cheon 1995; Beaver 1968). As previously

discussed, Chen and Sami (2008, 2009) demonstrate that prior to 2007 abnormal trading volume

is increasing in the absolute value of the IFRS-US GAAP net income difference. Accordingly,

we construct two abnormal trading volume measures. The first measure, similar to Chen and

Sami (2008, 2009), is the median-adjusted abnormal trading volume (denoted ATRVOL). This

is the difference between 1) a firm’s daily shares traded as a percent of total outstanding shares,

cumulated from one trading day before to one trading day after the event date and 2) the median

trading volume over a 247-day period ending two days prior to the event date. The second

measure of abnormal trading volume, which is a standardized measure, is similar to that used by

Landsman and Maydew (2002) and DeFond, Hung and Trezevant (2007). This measure,

denoted ST_ATRVOL, is the difference between 1) the three-day cumulative daily percentage of

shares traded around the event date and 2) the mean daily percentage of shares traded over a 247-

day period ending two days prior to the event date, deflated by the standard deviation of the daily

percentage of shares traded over a 100-day period ending 21 days prior to the event date.

Another common measure of information content is abnormal return volatility (Beaver

1968, Landsman and Maydew 2002). Following Landsman and Maydew (2002), we measure

noting that our LOWDIF firms were more likely than HIGHDIF firms to include their reconciliations in their 6-K filings (61% of the 18 firms are LOWDIF firms).

16

abnormal return volatility (denoted ARETVOL) as the three-day abnormal return variance

around the event date, deflated by the abnormal return variance over a 100-day period ending 21

days prior to the event date. Abnormal return is the difference between actual return and the

expected return estimated through a market model using returns over the 100-day period ending

21 days prior to the event date.

Table 7 reports results on the analyses of abnormal trading volume and abnormal return

volatility around the event date. Panel A of Table 7 shows that on average, abnormal trading

volume around 20-F filing date does not decrease in 2008 relative to 2007 but actually increases

and in some cases significantly so. The average abnormal return volatility around the 20-F filing

date slightly decreases in 2008 relative to 2007, but the decrease is not statistically significant.

Cross-sectional analyses reported in Panel B of Table 7 further indicate that there are no

significant differences in the changes in abnormal trading volume or abnormal return volatility

between the HIGHDIF and LOWDIF firms. Taken together, changes in abnormal trading

volume and abnormal return volatility around the 20-F filing date do not seem to indicate any

difference in the information loss for HIGHDIF and LOWDIF IFRS filers after eliminating the

reconciliation between IFRS and US GAAP.

To assess whether the absence of the reconciliation had an impact on information

intermediaries, we examine how analyst behavior changes around IFRS filers’ 20-F filings in

2008 relative to 2007 across our HIGHDIF and LOWDIF firms. Lang and Lundholm (1996)

find that analyst coverage is positively associated with firms’ disclosure quality (measured as the

AIMR score). Barron et al. (2002) show that public disclosures such as quarterly earnings

announcements can trigger financial analysts to revise their annual earnings forecasts. If analysts

utilize the reconciliation information in forming their forecasts, then eliminating the

17

reconciliation would cause analysts to drop coverage and/or reduce the incidence of new

forecasts issued during the period surrounding the release of reconciliation information. Note

that it appears that analysts are forecasting IFRS accounting numbers for IFRS filers not US

GAAP accounting numbers, so it is not clear what impact if any the absence of the reconciliation

would have on the analysts making forecasts of IFRS accounting numbers.13

Using I/B/E/S Detail History file, we measure analyst coverage through the number of

individual analysts who provide any types of forecasts, including new or revised annual earnings,

long-term growth, and sales forecasts during a 21-day period that begins seven days prior to the

20-F filing date and ends 14 days after. We only consider the 40 sample firms that have activity

by at least one analyst in both 2007 and 2008.14 We measure the incidence of forecasts issued as

the total number of forecasts issued during the same window.15 Panel A of Table 8 shows that on

average there are three analysts releasing forecasts during our event period for our sample firms

in both 2007 and 2008. The average number of forecasts released is 40 in 2007 and 38 in 2008.

This difference is not statistically significant. Panel B of Table 8 suggests that the changes in

analyst coverage and the number of forecasts issued around the 20-F filings do not differ across

HIGHDIF and LOWDIF firms. This suggests that eliminating the reconciliations does not

significantly alter analyst activity.

4. CONCLUSIONS

We investigate the controversial SEC decision in 2007 to remove the requirement that

IFRS filers include a reconciliation between IFRS and US GAAP in the 20-F. We address the

potential for cost savings and information loss. Using data on 88 IFRS filers, we first analyze

13 In the future we plan to investigate whether changes in analyst target price or changes in analyst recommendations are fewer after the release of the 20-F in 2008 relative to 2007. 14 We plan to redo this test including all firms that have analyst activity in at least one of the two years. 15 Our inferences remain the same if we also focus on specific types of forecasts.

18

how the market generally perceives the overall cost-benefit of the elimination of the

reconciliation. We document significant positive stock returns for our IFRS filers around the

event dates in 2007 when the SEC indicated that it would eliminate the reconciliation

requirement, suggesting that the market views the removal of the reconciliation as beneficial on

average. Surprisingly, given that investor groups argued that the reconciliation is very useful,

none of the IFRS filers voluntarily provide the reconciliation in 2008.

To further investigate the impact of eliminating the reconciliation we analyze changes

over 2007 to 2008 in the costs and the information environment across firms that we expect to be

more or less affected based on the extent to which IFRS and US GAAP differ. We find that

IFRS filers that have greater differences between IFRS and US GAAP are able to file their 20-Fs

17 days earlier in 2008 relative to 2007 and find no significant reduction in the filing date of the

firms with lesser differences. We do not, however, observe that the audit fees of the firms with

the greater differences are reduced more so than the audit fees of firms with lesser differences.

Our lack of finding a decrease in audit costs for firms with greater IFRS-US GAAP differences

may be because the SEC ruling occurred so late in 2007. Firms that have a December 31 year-

end did not learn until the second to last month of their fiscal year that the reconciliation could be

eliminated. That meant that during most of 2007, the firm thought that it would be preparing the

reconciliation. It may be that extensive interim work by the auditor on the reconciliation was

performed by the auditor well in advance of the year-end and included in audit fees even though

ex-post it was not necessary.

Given the evidence from prior research on the usefulness of the reconciliation (Harris and

Muller 1999; Chen and Sami 2008; Henry et al. 2009), it is possible that eliminating the

reconciliation caused a loss of information, especially for firms with larger reporting differences

19

between IFRS and US GAAP. So we further analyze whether IFRS filers experience changes in

abnormal trading volume, changes in abnormal return volatility, and changes in analyst behavior

between 2008 and 2007. Our findings reveal no significant decreases in abnormal trading volume

or abnormal return volatility around the 20-F filing between 2008 and 2007, even for our firms

with greater IFRS-US GAAP differences. Our evidence on analyst behavior also indicates no

changes in either analyst coverage or the incidence of forecasts newly issued or revised around

the 20-F in 2007 and 2008, regardless of the magnitude of the reporting differences between

IFRS and US GAAP.

Taken together, our results suggest that eliminating the reconciliation requirement was

beneficial to the average IFRS filer. First, stock price increased for the average IFRS filer during

the SEC deliberations. Second, eliminating the reconciliation expedited information

dissemination for those IFRS filers with greater IFRS-US GAAP differences as evidenced by the

accelerated 20-F filing. But we do not observe any systematic changes in abnormal trading

volume, abnormal return volatility, or analyst behavior around 20-F filings, which is consistent

with no economically important loss of information.

Given that we rely on a difference-in-difference research design, we believe the correct

formation of comparison groups is critical. As a result, in the future we plan to evaluate the

extent to which our HIGHDIF and LOWDIF distinction is adequately capturing the differences

in the likely costs and usefulness of the reconciliation. In other words, we seek to determine if

our LOWDIF and HIGHDIF firms are the appropriate comparison groups to help us isolate the

impact of this change in regulation. We also plan to consider other measures that might better

capture changes in the information environment brought about by the elimination of the

reconciliation.

20

References

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Bamber, L. S., and Y. S. Cheon. 1995. Differential price and volume reactions to accounting earnings announcements. The Accounting Review 70 (3): 417–41.

Barron, O., D. Byard, and O. Kim. 2002. Changes in analysts' information around earnings announcements. The Accounting Review 77(4): 821-846.

Beaver, W. 1968. The information content of annual earnings announcements. Journal of Accounting Research 6 (Supplement): 67–92.

Bhamornsiri, S., R. Guinn and R. Schroeder. 2009. International implications of the cost of compliance with the external audit requirement of section 404 of Sarbanes-Oxley. International Advances in Economic Research 15: 17-29.

CFA Institute. 2007. Comment letter to SEC dated October 2, 2007. Re: File No. S7-13-07. Available from http://sec.gov/comments/s7-13-07/s71307-125.pdf

Chen, L. and H. Sami. 2008. Trading volume reaction to the earnings reconciliation from IAS to U.S. GAAP. Contemporary Accounting Research 25 (1): 15–53.

Chen, L. and H. Sami. 2009. Trading volume reaction to the earnings reconciliation from IFRS to U.S. GAAP: Further Evidence. Working Paper, Arizona State University.

DeFond, M., M. Hung, and R. Trezevant. 2007. Investor protection and the information content of annual earnings announcements: international evidence. Journal of Accounting and Economics 43: 37-67.

Delhaize Group. 2007. Comment letter to SEC dated September 17, 2007. Re: File No. S7-13-07. Available from http://sec.gov/comments/s7-13-07/s71307-26.pdf

Diageo PLC. 2007. Comment letter to SEC dated September 24, 2007. Re: File No. S7-13-07. Available from http://sec.gov/comments/s7-13-07/s71307-50.pdf

Fitch Ratings. 2007. Comment letter to SEC dated September 25, 2007. Re: File No. S7-13-07. Available from http://sec.gov/comments/s7-13-07/s71307-101.pdf

Harris, M., and K. Muller. 1999. The market valuation of IAS versus US-GAAP accounting measures using Form 20-F reconciliations. Journal of Accounting and Economics 26 (1–3): 285–312.

Henry, E. S. Lin, and Y. Yang. 2009. The European-U.S. “GAAP Gap”: IFRS to U.S. GAAP Form 20-F reconciliations. Accounting Horizons 23:121-150.

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Hopkins, H., C. Botosan, M. Bradshaw, C. Callahan, J. Ciesielski, D. Farber, L. Hodder, M. Kohlbeck, R. Laux, T. Stober, P. Stocken, T. Yohn. 2008. Response to the SEC release, "Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards without Reconciliation to U.S. GAAP File No. S7-13-07". Accounting Horizons 22: 223-240

Jamal, K., G. Benston, D. Carmichael, T. Christensen, R. Colson, S. Moehrle, S. Rajgopal, T. Stober, S. Sunder, R. Watts. 2008. A perspective on the SEC's proposal to accept financial statements prepared in accordance with International Financial Reporting Standards (IFRS) without reconciliation to U.S. GAAP. Accounting Horizons 22: 241-248

Ke, B., K. Petroni, and Y. Yong. 2008. The effect of regulation FD on transient institutional investors’ trading behavior. Journal of Accounting Research 46 (4): 853-883.

Landsman, W., and E. Maydew. 2002. Has the information content of quarterly earnings announcements declined in the past three decades? Journal of Accounting Research 40: 797–808.

Lang, M., and R. Lundholm. 1996. Corporate disclosure policy and analyst behavior. The Accounting Review 71 (4): 467-492.

Securities Exchange Commission. 2007a. Concept release on allowing U.S. issuers to prepare financial statements in accordance with international financial reporting standards. Release No. 33–8831. 34-56217 File No. S7-20-07

Securities Exchange Commission. 2007b.Acceptance from foreign private issuers of financial statements prepared in accordance with International Financial Reporting Standards without reconciliation to U.S. GAAP. Release Nos. 33–8879; 34–57026. File No. S7-13-07

Securities Exchange Commission. 2007c. SEC staff roundtable on the International Financial Reporting “roadmap”. Available from http://www.sec.gov/spotlight/ifrsroadmap/ifrsroadmap-transcript.txt.

Securities Exchange Commission. 2008. Foreign issuer reporting enhancements: final rule. Release Nos.33-8959; 34-58620. File No. S7-05-08

Syngenta, 2007. Comment letter to SEC dated September 24, 2007. Re: File No. S7-13-07. Available from http://sec.gov/comments/s7-13-07/s71307-43.pdf

Yohn, T. 2007. Testimony of Teri Yohn, Associate Professor of University of Indiana before the Subcommittee on Securities, Insurance, and Investment. (US. Senate Banking, Housing and Urban Affairs Committee, October 24, 2007).

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Table 1 Sample firm distribution

Panel A: Distribution of our sample IFRS filers across countries

Country FrequencyCumulative

FreqUnited Kingdom 24 24Australia 9 33China 9 42France 8 50Netherlands 7 57Ireland 4 61Germany 3 64Luxembourg 3 67Switzerland 3 70Denmark 2 72Italy 2 74Spain 2 76Belgium 1 77Bermuda 1 78Finland 1 79Hungary 1 80Mexico 1 81New Zealand 1 82Papua New Guinea 1 83Portugal 1 84Russia 1 85South Africa 1 86Sweden 1 87Turkey 1 88

Panel B: Distribution of our sample IFRS filers across industry sectors (GICS)

Sector_name FrequencyCumulative

Freq Financials 16 16 Energy 14 30 Telecommunication Services 14 44 Health Care 12 56 Materials 9 65 Consumer Discretionary 8 73 Industrials 6 79 Consumer Staples 3 82 Information Technology 3 85 Utilities 3 88

23

Table 2

Descriptive statistics on the reconciliations between IFRS and US GAAP net income for 88 IFRS filers, 2005-2007.

Variable Mean Median Std Dev Lower Quartile

Upper Quartile

#ITEMS 9 10 4 6 12 US-IFRS -312 -86 554 -362 0

US-IFRS%SALES -0.03 -0.01 0.08 -0.03 0 │US-IFRS%NI│ 0.59 0.16 2.42 0.09 0.3

#ITEMS=the average number of reconciling items between IFRS and US GAAP net income over the

three year period ending in 2007. US-IFRS =the average of US GAAP net income minus IFRS net income (in millions) over the three year

period ending in 2007. US-IFRS%SALES = the average of US GAAP net income minus IFRS net income deflated by sales over the

three year period ending in 2007. │US-IFRS%NI│ = the average of the absolute difference between US GAAP net income and IFRS net

income deflated by the absolute value of IFRS net income over the three year period ending in 2007.

24

Table 3 Descriptive Statistics of 88 IFRS filers across firms that have more different IFRS and US GAAP

(HIGHDIF) and firms that have more similar IFRS and US GAAP (LOWDIF)

Variable Mean Median Std Dev Lower Quartile

Upper Quartile

LOWDIF #ITEMS 6.61* 6.33* 3.41 3.67 9│US-IFRS%NI│ 0.14 0.1* 0.2 0.03 0.17 Market cap 45,010 11,774* 67,952 3,265 63,890 Sales 39,057 5,658* 70,311 484 40,274 MTB 4.74 2.55 7.37 1.85 4.73

HIGHDIF #ITEMS 12.02 11.67 2.96 10 14 │US-IFRS%NI│ 1.02 0.22 3.46 0.14 0.44 Market cap 54,770 32,949 50,949 12,172 94,986 Sales 38,115 19,922 39,955 8,103 61,561 MTB 3.15 2.76 2.03 1.75 3.5

LOWDIF (HIGHDIF) includes firms with the sum of the ranks of #ITEMS and │US-IFRS%NI│ in the

bottom (top) half of the sample distribution. Market cap= the market value (in millions) of IFRS common equity at the end of 2007. Sales= the IFRS sales revenue (in millions) at the end of 2007. MTB = market value of common equity divided by the IFRS book value of equity at the end of 2007. #ITEMS=the average number of reconciling items between IFRS and US GAAP net income over the

three year period ending in 2007. │US-IFRS%NI│ = the average of the absolute difference between US GAAP net income and IFRS net

income deflated by the absolute value of IFRS net income over the three year period ending in 2007.

*indicates whether the mean or median is significantly different between the LOWDIF and HIGHDIF groups at p<0.05.

25

Table 4 Stock market reactions to events leading to the elimination of reconciliation (n=83)

Panel A: Cumulative abnormal returns around events indicating elimination of reconciliation

CAR

(N=83) Mean Median Std Dev LowerQuartile

UpperQuartile Pr > |t| Pr > |S|

CAR_June 20 1.02 0.4 2.86 -0.67 1.54 0.002 0.005 CAR_July 2 1.01 0.67 2.38 -0.59 2.3 0.000 0.000 CAR_Nov 15 -0.09 -0.18 3.25 -2.03 1.61 0.797 0.592 Cum_CAR 1.94 1.49 5.33 -2.19 5.01 0.001 0.004 Panel B: Cross-sectional difference in cumulative abnormal returns around events indicating elimination

of reconciliation

CAR Mean Median Std Dev Pr > |t| Pr > |S| LOWDIF

CAR_June 20 1.7** 1.09*** 3.26 0.002 0.001 CAR_July 2 1.58** 1.09** 2.54 0.000 0.000 CAR_Nov 15 0.26 -0.06 3.69 0.651 0.874 Cum_CAR 3.54*** 3.07*** 5.62 0.000 0.000

HIGHDIF CAR_June 20 0.37 -0.09 2.25 0.300 0.907 CAR_July 2 0.45 -0.17 2.08 0.174 0.247 CAR_Nov 15 -0.44 -0.52 2.76 0.310 0.302 Cum_CAR 0.37 -0.21 4.58 0.601 0.849

CAR_June 20= the cumulative three day abnormal returns around June 20, 2007; CAR_July 2 = the cumulative three day abnormal returns around July 2nd, 2007; CAR_Nov 15 = the cumulative three days abnormal returns around November 15th, 2007; Cum_CAR= the sum of the nine-day abnormal returns around the three event dates. Pr > |t| =the p-value of two tailed T-test of whether the mean is different from zero. Pr > |S| = the p-value of two tailed Wilcoxon singed rank test of whether the median is different from zero. LOWDIF (HIGHDIF) includes firms with the sum of the ranks of #ITEMS and │US-IFRS%NI│ in the

bottom (top) half of the sample distribution. ***, ** and * indicate whether the mean or median is significantly different between the LOWDIF and

HIGHDIF groups at p<0.01, 0.05, and 0.10 respectively.

26

Table 5 Days from fiscal year end to the 20-F filing date and earnings announcement date before and after

the elimination of reconciliation requirement (n=81)

Panel A: 20-F Filing Date and Earnings Announcement Date Changes for the Overall Sample

Variable Mean Median StdDev

LowerQuartile

UpperQuartile Pr > |t| Pr > |S|

20-FDAYS2007 122 115 46 85 173 20-FDAYS2008 112 101 42 78 144 Δ 20-FDAYS -10 -2 25 -16 2 0.001 0.000EADAYS2007 63 55 32 40 72 EADAYS2008 63 59 30 44 70 Δ EADAYS 0 -1 20 -2 5 0.874 0.912

Panel B: Cross-Sectional differences in 20-F filing date changes

Variable Mean Median Std Dev Pr > |t| Pr > |S|

LOWDIF 20-FDAYS2007 129 138 47 20-FDAYS2008 127*** 128*** 44 Δ 20-FDAYS -2*** 0*** 23 0.632 0.988

HIGHDIF 20-FDAYS2007 115 108 44 20-FDAYS2008 97 91 34 Δ 20-FDAYS -17 -6 25 0.000 0.000

20-FDAYSt = days from fiscal year end to 20-F filing date in year t. Δ20-FDAYS = 20-FDAYS2007– 20-FDAYS2008. EADAYSt= days from fiscal year end to earnings announcement date in year t. Δ EADAYS = EADAYS2007– EADAYS2008. Pr > |t| is the p-value of two tailed T-test of whether the mean is different from zero. Pr > |S| is the p-value of two tailed Wilcoxon singed rank test of whether the median is different from

zero. LOWDIF (HIGHDIF) includes firms with the sum of the ranks of #ITEMS and │US-IFRS%NI│ in the

bottom (top) half of the sample distribution. ***, ** and * indicate whether the mean or median is significantly different between the LOWDIF and

HIGHDIF groups at p<0.01, 0.05, and 0.10 respectively.

27

Table 6 Analysis of changes in audit fee before and after the elimination of reconciliation requirement

(n=63)

Panel A: Audit fee changes for IFRS Filers that comply with SOX 404 internal controls in 2007

Variable Mean Median Std Dev Lower Quartile

Upper Quartile Pr > |t| Pr > |S|

Auditfee2007 0.039 0.022 0.048 0.012 0.057 0.000 0.000

Auditfee2008 0.035 0.022 0.041 0.011 0.051 0.000 0.000

ΔAuditfee -0.004 -0.001 0.014 -0.006 0.001 0.026 0.011

Panel B: Cross-sectional differences in changes in audit fee

Variable Mean Median Std Dev Pr > |t| Pr > |S|

LOWDIF Auditfee2007 0.048 0.028 0.059 0.000 0.000 Auditfee2008 0.042 0.027 0.049 0.000 0.000 Δ Auditfee -0.006 -0.002* 0.017 0.055 0.010

HIGHDIF Auditfee2007 0.03 0.019 0.032 0.000 0.000 Auditfee2008 0.029 0.016 0.03 0.000 0.000 Δ Auditfee -0.002 0 0.009 0.274 0.388

Auditfeet= the total of audit fees and audit related fees as a percent of total assets for year t Δ Auditfee= Auditfee2008 –Auditfee2007. Pr > |t| is the p-value of two tailed T-test of whether the mean is different from zero. Pr > |S| is the p-value of two tailed Wilcoxon singed rank test of whether the median is different from

zero. LOWDIF (HIGHDIF) includes firms with the sum of the ranks of #ITEMS and │US-IFRS%NI│ in the

bottom (top) half of the sample distribution. * indicates whether the median is significantly different between the LOWDIF and HIGHDIF groups at

p<0.10.

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Table 7 Possible information loss reflected in changes in abnormal trading volume and abnormal return

volatility after eliminating reconciliation requirement (n=81)

Panel A: Analysis of changes in abnormal trading volume and abnormal return volatility around the 20-F filing

Variable Mean Median Std Dev Lower Quartile Upper Quartile Pr > |t| Pr >|S|ATRVOL2007 0.86 0.2 1.82 -0.07 1.11 0.000 0.000ATRVOL2008 1.64 0.5 2.79 0.15 2.91 0.000 0.000ΔATRVOL 0.78 0.31 2.59 -0.3 1.77 0.008 0.007 ST_ATRVOL2007 0.67 -0.27 3.15 -1.28 1.26 0.061 0.939 ST_ATRVOL2008 1.33 -0.06 3.97 -0.95 1.99 0.004 0.132 ΔST_ATRVOL 0.66 0.43 3.99 -1.12 2.15 0.140 0.064 ARETVOL2007 4.86 2.19 8.07 0.9 4.08 0.000 0.000 ARETVOL2008 4.65 2.17 7.81 0.93 3.98 0.000 0.000 ΔARETVOL -0.21 -0.24 10.21 -2.35 2.22 0.852 0.771

Panel B: Cross-Sectional differences of changes in abnormal trading volume and abnormal return

volatility Variable Mean Median Std Dev Pr > |t| Pr > |S|

LOWDIF ATRVOL2007 0.91 0.08 1.64 0.001 0.019 ATRVOL2008 1.71 0.61 2.39 0.000 0.000 ΔATRVOL 0.80 0.33 1.88 0.011 0.017 ST_ATRVOL2007 0.62 -0.44 3.21 0.227 0.625 ST_ATRVOL2008 1.29 0.35 3.91 0.044 0.270 ΔST_ATRVOL 0.66 0.32 3.77 0.272 0.333 ARETVOL2007 4.60 1.63 9.03 0.003 0.000 ARETVOL2008 4.52 2.22 6.14 0.000 0.000 ΔARETVOL -0.08 -0.32 8.70 0.955 0.926

HIGHDIF ATRVOL2007 0.80 0.28 2.00 0.014 0.001 ATRVOL2008 1.58 0.46 3.16 0.003 0.000 ΔATRVOL 0.78 0.21 3.17 0.125 0.133 ST_ATRVOL2007 0.71 0.06 3.12 0.155 0.588 ST_ATRVOL2008 1.37 -0.15 4.08 0.038 0.334 ΔST_ATRVOL 0.66 0.49 4.25 0.327 0.089 ARETVOL2007 5.12 2.68 7.11 0.000 0.000 ARETVOL2008 4.77 1.95 9.23 0.002 0.000 ΔARETVOL -0.35 -0.24 11.61 0.850 0.624

ATRVOLt = the three day cumulative difference between a firm’s daily shares traded as a percent of total

outstanding shares, cumulated from one trading day before to one trading day after the 20-F filing date or earlier 6-K filing in year t and the median trading volume over a 247-day period ending two days prior to the event date.

ΔATRVOL = ATRVOL2008 - ATRVOL2007.

29

ST_ATRVOLt = the three-day cumulative daily percentage of shares traded around the 20-F filing date or earlier 6-K filing date in year t and the mean daily percentage of shares traded over a 247-day period ending two days prior to the event date, deflated by the standard deviation of the daily percentage of shares traded over a 100-day period ending 21 days prior to the event date.

ΔST_ATRVOL = ST_ATRVOL2008 – ST_ATRVOL200.7 ARETVOLt = the three-day abnormal return variance around the event date, deflated by the abnormal

return variance over a 100-day period ending 21 days prior to the event date. Abnormal return is the difference between actual return and the expected return estimated through a market model using returns over the 100-day period ending 21 days prior to the event date for year t.

ΔARETVOL = ARETVOL2008 - ARETVOL2007. LOWDIF (HIGHDIF) includes firms with the sum of the ranks of #ITEMS and │US-IFRS%NI│

in the bottom (top) half of the sample distribution. Pr > |t| = the p-value of two tailed T-test of whether the mean is different from zero. Pr > |S| = the p-value of two tailed Wilcoxon singed rank test of whether the median is different from zero.

30

31

Table 8 Changes in analyst behavior for firms with analyst activity in both 2007 and 2008 (n=40)

Panel A: Changes in analyst coverage and incidence of newly issued annual forecast around 20-F filing

dates

Variable Mean Median Std Dev Lower Quartile

Upper Quartile Pr > |t| Pr >|S|

#ANALYTS2007 3 3 2 2 3 0.000 0.000#ANALYTS2008 3 2 2 1 4 0.000 0.000Δ#ANALYTS 0.03 0 2 -1 0 0.932 0.510 # FORECASTS2007 40 22 67 8 41 0.001 0.000# FORECASTS2008 38 13 58 6 53 0.000 0.000Δ# FORECASTS -1 1 40 -21 16 0.840 0.853

Panel B: Cross-Sectional differences in changes in analysts coverage and incidence of newly issued annual forecast around 20-F filing dates

Variable Mean Median Std Dev Pr > |t| Pr > |S|

LOWDIF #ANALYTS2007 3 3 2 0.000 0.000 #ANALYTS2008 3 3 3 0.000 0.000 Δ#ANALYTS 0.4 0 2 0.497 0.745 # FORECASTS2007 38 23 46 0.002 0.000 # FORECASTS2008 41 30** 35 0.000 0.000 Δ# FORECASTS 3 5* 41 0.781 0.221

HIGHDIF #ANALYTS2007 3 2 2 0.000 0.000 #ANALYTS2008 2 2 2 0.000 0.000 Δ#ANALYTS -0.3 0 1 0.315 0.136 # FORECASTS2007 41 20 83 0.035 0.000 # FORECASTS2008 36 9 74 0.037 0.000 Δ# FORECASTS -5 -5 39 0.581 0.192

#ANALYTSt = the number of individual analysts who issue forecasts in the 21-day period that begins

seven days prior to the 20-F filing date or earlier 6-K date and ends 14 days after in year t. Δ#ANALYTS= #ANALYTS2008 - #ANALYTS 2007 # FORECASTSt = the number of forecasts that are issued forecasts in the 21-day period that begins seven

days prior to the 20-F filing date or earlier 6-K date and ends 14 days after in year t. Δ# FORECASTS = # FORECASTS2008 - # FORECASTS2007 Pr > |t| is the p-value of two tailed T-test of whether the mean is different from zero. Pr > |S| is the p-value of two tailed Wilcoxon singed rank test of whether the median is different from

zero. LOWDIF (HIGHDIF) includes firms with the sum of the ranks of #ITEMS and │US-IFRS%NI│ in the

bottom (top) half of the sample distribution. ** and * indicate that the median is significantly different between the LOWDIF and HIGHDIF groups at

p< 0.05 and p<0.10, respectively.