The Impact of Eliminating The Form 20-F Reconciliation On Shareholder Wealth - Evidence From U.S. Cross-Listed Firms

THE ACCOUNTING REVIEW American Accounting Association
Vol. 90, No. 1 DOI: 10.2308/accr-50893

2015
pp. 199–228
The Impact of Eliminating the Form 20-F

Reconciliation on Shareholder Wealth:
Evidence from U.S. Cross-Listed Firms
Lucy Huajing Chen
Villanova University
Inder K. Khurana
University of Missouri–Columbia
ABSTRACT: This paper examines shareholder wealth effects in U.S. and home-country
markets relating to the Securities and Exchange Commission’s (SEC) decision to
eliminate the Form 20-F reconciliation. During the period of examined events, we find
positive cumulative abnormal returns for the treatment sample of U.S. cross-listed firms
that prepare financial statements under International Financial Reporting Standards
(IFRS), but no such effects for our control sample comprising cross-listed non-IFRS,
U.S. domestic, or home-country firms. We find the stock market impact for our treatment
sample to be positively related to our proxy for cost savings and negatively related to the
pre-adoption reconciliation magnitude from IFRS to U.S. GAAP. This suggests
shareholders place some value on reconciliation information, but the costs of preparing
and auditing reconciliations generally outweigh concern about information loss.
Moreover, we find that information loss is less pronounced for firms having used IFRS
for a longer period, suggesting the learning effect mitigates information loss.
Keywords: earnings reconciliation; U.S. cross-listing; disclosure regulation; IFRS; Form

20-F reconciliation.
Data Availability: Data are publicly available from sources identiﬁed in the article.
We thank Bin Ke (editor), John Harry Evans III (senior editor), two anonymous reviewers, Christopher Armstrong, Steve
Kaplan, David Larcker, Steve Lin, Raynolde Pereira, Dan Taylor, Qiuhong Zhao, Jerry Zimmerman, and workshop
participants at the 2010 American Accounting Association Annual Meeting, 2013 European Accounting Association
Annual Congress, Arizona State University, Lehigh University, and University of Missouri for their valuable comments.
Professor Chen gratefully acknowledges the research support provided by the Center for Global Leadership at Villanova
School of Business.
Editor’s note: Accepted by Bin Ke.
Submitted: July 2011
Accepted: June 2014
Published Online: August 2014
199
200 Chen and Khurana
I. INTRODUCTION
O
n November 15, 2007, the U.S. Securities and Exchange Commission (SEC) voted to
eliminate the reconciliation requirement for foreign registrants that prepare their financial
statements in accordance with International Financial Reporting Standards (IFRS) as
published by the International Accounting Standards Board (IASB). Prior to the promulgation of
this rule, such foreign registrants were required to file a Form 20-F within six months after the fiscal
year-end to reconcile its earnings and shareholders’ equity to U.S. GAAP under item 17 or 18.1
This study examines the stock price reaction in the U.S. and home-country markets to the
announcements pertaining to the elimination of 20-F reconciliation.
There is an ongoing debate in the literature about the costs and benefits of 20-F reconciliations.
Proponents for elimination of the reconciliation requirement argue that direct costs of preparing and
auditing the reconciliation are substantial and ‘‘there is no clear evidence of any corresponding
benefit to justify forcing all foreign-listed companies to incur these costs’’ (Jamal et al. 2008).
Surveys of foreign corporate managers deciding whether to list in the U.S. most often cite the
process of reconciling U.S. and home-country reporting and disclosure standards as a substantial
challenge.2 The implication is that investors are likely to react positively to the new rule, because
eliminating the reconciliations can save significant costs by not preparing and auditing earnings and
book-value reconciliations. However, others, such as Hopkins et al. (2008), argue that it is too early
to eliminate the reconciliation, because reconciliations provide potentially valuable information for
U.S. investors to assess the financial conditions of foreign firms. They cite prior research, including
Chen and Sami (2008) and Henry, Lin, and Yang (2009), that finds U.S. investors use 20-F
reconciliation in their investment decisions. Hence, when the SEC makes announcements, investors
could view the loss of reconciliation information negatively. If 20-F reconciliations generate more
costs than benefits, then we expect their elimination to increase shareholder value. In contrast, if the
20-F reconciliations are typically value-enhancing, then we expect their elimination to decrease
shareholder value due to information loss.
To shed light on how investors perceive the SEC’s elimination of the reconciliation rule, we
employ an event-study methodology and focus on four key events relating to the SEC’s 2007
decision. Moreover, we use the Sefcik and Thompson (1986) approach to analyze the cross-
sectional variation of stock market reaction and to provide further evidence on the benefits, such as
compliance cost savings, and costs, such as information loss of eliminating reconciliation. Our test
sample consists of cross-listed firms that use IFRS as their primary reporting standards and
reconcile to U.S. GAAP in Form 20-F in the year prior to the SEC’s decision. Since not all U.S.
cross-listed firms are subject to the new rule, we use a control sample consisting of matched cross-
listed firms that do not prepare financial statements under IFRS, and thus are not subject to the rule
change. We select either U.S. domestic firms or firms from our test firms’ home countries as
alternative benchmarks.
Our results indicate that U.S. cross-listed firms preparing financial statements in accordance
with IFRS in 2006 experience a positive U.S. stock price response to the SEC’s announcements of
eliminating 20-F reconciliation. To rule out the possibility that the statistical relations are
attributable to a general trend, unrelated to the SEC’s 20-F reconciliation elimination, we employ a
1
If a foreign registrant chooses its home-country generally accepted accounting principles (GAAP) as its primary
reporting standard, then it still needs to reconcile to U.S. GAAP. A foreign registrant could also prepare its financial
statements under U.S. GAAP, in which case, there was no reconciliation requirement before or after the rule.
2
Fanto and Karmel (1997) report that the top difficulty with a U.S. listing is accounting reconciliation, as cited by 15
percent of listing managers and 21 percent of non-listing managers. Similarly, the Group of 100, which represents
major CFOs and senior finance executives in Australia, commented that preparing the reconciliation between home-
country GAAP and U.S. GAAP constitutes the most significant requirement in Form 20-F (Group of 100 2007).
The Accounting Review

January 2015
Eliminating 20-F Reconciliation on Shareholder Wealth: Evidence from U.S. Cross-Listed Firms 201
Monte Carlo simulation to benchmark our results against those obtained from randomly selected
nonevent periods. The results suggest that the relations we document are unique to the event periods
examined. Moreover, these test firms experience a similar response in stock price around the four
key events in their home countries, although the reaction is somewhat delayed. In contrast, there are
no such effects for the control groups. Overall, these results indicate that investors generally
perceive the cost savings of eliminating reconciliation as outweighing the concern of information
loss.
Our cross-sectional analysis reveals that the positive U.S. stock market impact of the SEC’s
rule is greater for firms with more cost savings. In contrast, we find that the stock market reaction is
negatively related to the magnitude of the pre-adoption reconciliation from IFRS to U.S. GAAP,
suggesting that investors perceive eliminating reconciliation as leading to an information loss.
Moreover, we find this negative relation to be greater for firms that used IFRS for a shorter period,
indicating the importance of learning effects in investors’ assessment of the SEC’s rule. We also
find that the cross-sectional stock market reaction results in the home countries of cross-listed IFRS
firms mirror those in the U.S. Our results suggest that investors consider both cost savings and
information loss in their response to the SEC’s rule change, although the costs savings effect
generally dominates. We emphasize that these results are contingent on the construct validity of our
empirical proxies.
Our paper contributes to several strands of accounting literature. Our study adds to research
on the 20-F reconciliation requirement for cross-listed companies. Much of this research
investigates the information effects related to this regulatory change. For instance, Harris and
Muller (1999) find that Form 20-F reconciliations from International Accounting Standards
(IAS) earnings to U.S.-GAAP earnings are value-relevant. More recently, Jiang, Petroni, and
Wang (2010) document no changes in abnormal trading volume, abnormal return volatility, or
bid-ask spread following the decision. Separately, Kim, H. Li, and S. Li (2012) find no evidence
that reconciliation removal is negatively associated with a firm’s market liquidity, probability of
informed trading, or cost of equity. Based on this evidence, they conclude that the SEC’s
decision to end the 20-F reconciliation requirement did not result in information loss or greater
information asymmetry for the affected firms.3 In contrast, Byard, Mashruwala, and Suh (2011)
find that removal of the 20-F reconciliation has a detrimental effect on affected firms’
information environment. In particular, they find the positive ‘‘information transfer’’ effects
around quarterly earnings announcements for foreign private issuers drop dramatically after the
SEC’s decision. These studies only investigate the information effect and provide mixed
evidence on that decision. They also do not study the costs of reporting and auditing 20-F
reconciliations.4
3
There are several potential explanations for why we detect some information loss while Kim et al. (2012) do not.
First, we base our analyses on the investor perceptions at the time of the SEC’s announcements, while Kim et al.
(2012) focus on market consequences after firms actually prepare financial statements without reconciliations.
Second, although there is some information loss, the loss of information may not be substantial enough to generate
market liquidity effects. Third, costs of preparing and auditing the reconciliations may lead firms to forgo the benefits
associated with the continuation of reconciliations. Fourth, although Kim et al. (2012) suggest no information loss,
Byard et al. (2011) indicate a negative effect on the information environment. Fifth, firms may provide more timely
information as evidenced by improved reporting lag in the Form 20-F in Jiang et al. (2010), increase their disclosure
level in 20-F about IFRS-based earnings, and/or improve reporting quality of IFRS information to compensate for the
loss of reconciliation information.
4
A notable exception is Jiang et al. (2010), who provide indirect evidence of cost savings by showing that IFRS firms
accelerated their 20-F filings by 9.6 days in 2008. However, their analysis is based on a univariate analysis and, thus,
does not control for other firm characteristics that are associated with the IFRS filers’ decision to accelerate their 20-
Fs in 2008. Moreover, the examination of cost savings in Jiang et al. (2010) is isolated from their examination of the
information effect.

January 2015
In contrast, our study focuses on how the elimination of the 20-F reconciliation requirement
impacts shareholder wealth. We take a wider view of the information effect and match it against the
cost savings related to this regulatory change. This approach allows us to directly quantify the
expected overall net impact to the shareholders (Schwert 1981). In addition, prior literature
investigates the ex post consequences of the SEC’s ruling, which only captures a portion of the
decision’s potential effects, such as the liquidity effect in Kim et al. (2012). Our ex ante event study
can shed light on both direct and indirect cash flow effects resulting from the elimination of 20-F
reconciliation, although we cannot speak to the eventual costs and benefits faced by the sample
firms. Our results indicate that investors measure the information role of reconciliation against cost
savings and view the benefit of cost savings as outweighing the concern for information loss.
More broadly, our study also contributes to the research examining the wealth effects
associated with regulatory changes. For example, Fernandes, Lel, and Miller (2010) find that U.S.
cross-listed firms experience a negative stock market reaction around the SEC’s decision to make it
easier for foreign firms to deregister and thereby terminate their U.S. disclosure obligation. We
focus on the wealth effects associated with the removal of the 20-F reconciliation requirement. To
the best of our knowledge, no other study speaks to this issue. Our evidence suggests that relaxing
the disclosure regulation for cross-listed firms is positively associated with shareholder wealth in
our context.
The final contribution of our study is policy-based. The SEC (2012) postponed the deadline to
transition to IFRS for the U.S. domestic registrants based on the concern for the significant
difference between IFRS and U.S. GAAP. We report that investors react positively to the events
associated with the SEC’s rule to remove the reconciliation, suggesting that cost savings generally
outweigh the concern for information loss. Hence, our results lend support to the SEC’s decision to
remove the reconciliation.
Next, Section II develops the testable hypotheses. Section III provides the sample selection
procedure. In Section IV, we present the time-series analysis, and in Section V, we present the
cross-sectional analysis. The last section concludes the paper.
II. HYPOTHESES DEVELOPMENT

The purpose of this paper is twofold: to examine the market reaction surrounding the event
dates in 2007 that are associated with the SEC’s decision to eliminate the 20-F reconciliation
requirement (hereafter, no-reconciliation rule), and to analyze specific factors that are associated
with the benefits and costs of the no-reconciliation rule. We build our hypotheses using two
competing views on how investors of cross-listed IFRS firms react to the events leading to the rule.
One view predicts investors of cross-listed firms that issue IFRS financial statements react
positively to the movement toward reconciliation elimination. Multiple disclosures increase costs
for foreign issuers to list in U.S. financial markets (Financial Accounting Standards Board [FASB]
1999). In the context of the IFRS-U.S. GAAP reconciliation, the cost incurred by foreign issuers in
preparing and disclosing reconciliation is a key consideration in entering the U.S. market (Pagano,
Roell, and Zechner 2002). In responding to the SEC’s proposal, Merrill Lynch (2007) characterizes
reconciliation as a significant reason for its client firms to delist from the U.S. stock exchanges.
Removing the reconciliation requirements lowers the cost of preparing and auditing the earnings
and book-value reconciliations from IFRS to U.S. GAAP. For example, the AXA Group claimed
that it spent approximately $25 million to prepare the 20-F reconciliation disclosures each year
(White 2007). Thus, investors of cross-listed IFRS firms could potentially react positively to
significant cost savings arising from not preparing and auditing the earnings and book-value
reconciliations under the no-reconciliation rule.

January 2015
An alternative view predicts U.S. investors of cross-listed firms that prepare financial
statements based on IFRS react negatively toward the SEC’s elimination of the reconciliation
requirement. The negative response can occur for several reasons. First, if investors view earnings
reconciliation from IFRS to U.S. GAAP as containing useful information (Chen and Sami 2008,
2013; Harris and Muller 1999; Henry et al. 2009), then the loss of reconciliation is bad news for
investors. Second, even if IFRS are high-quality accounting standards, the subsequent financial
reporting quality can be low due to inadequate enforcement environments (Ball, Robin, and Wu
2003). This is especially a concern since IFRS are more principles-based than U.S. GAAP and
allow more leeway in interpreting and implementing the accounting standards. Hence, the use of
IFRS without reconciliation to U.S. GAAP can induce more uncertainty about the credibility of
reported IFRS numbers (Hail, Leuz, and Wysocki 2009). Third, absent the reconciliation
requirement, cross-listed firms may choose accounting policies that are further away from U.S.
GAAP and, thus, are less comparable to U.S. GAAP (Pownall and Schipper 1999).
Therefore, the direction of the net stock price reaction to the no-reconciliation rule is an
empirical issue, and our first hypothesis is:
H1: The security price response of U.S. cross-listed firms that provide reconciliations from
IFRS to U.S. GAAP changes following announcements that increase the probability of
eliminating the reconciliation requirement.
H1 specifies the mean security price response to the elimination of the reconciliation
requirement. Additional evidence on the consequences of this change can be obtained by analyzing
cross-sectional variations in security price response to the announcements. We develop five
additional hypotheses by analyzing how the impact of adopting the no-reconciliation rule varies
among different firm characteristics.
The first firm characteristic is the potential cost savings from the elimination of reconciliation.
As discussed previously, the cost savings from not preparing and auditing the reconciliation is the
most dominant rationale for the SEC’s approval of the no-reconciliation rule (SEC 2007a).
Consistent with this argument, H2 predicts that shareholders of firms with larger savings in
compliance costs will experience a larger wealth increase at the announcement events relative to
shareholders of firms with smaller cost savings.
H2: The security price response to the events that increase the probability of eliminating the
reconciliation requirement is positively related to the potential savings in compliance
costs.
We also hypothesize that pre-adoption reconciliation magnitude could account for the cross-
sectional variation in the rule’s wealth impact. Henry et al. (2009) find that net income
reconciliation from IFRS to U.S. GAAP during the period of 2004–2006 is value-relevant using a
market valuation model. In a similar vein, Chen and Sami (2008) document a significant positive
relation between the magnitude of the income-reconciling amount from IFRS to U.S. GAAP and
abnormal trading volume. Consistent with these two studies, we employ the pre-rule earnings
reconciliation magnitude to proxy for the level of reconciliation information. We argue that the
larger the reconciliation amount, the more the information loss absent the reconciliation. From this
perspective, H3 predicts that the security price effect will be negatively related to the pre-adoption
reconciliation magnitude.
H3: The security price response to the events that increase the probability of eliminating the
reconciliation requirement is negatively related to the pre-adoption reconciliation
magnitude from IFRS to U.S. GAAP.

January 2015
Prior literature (e.g., Francis and Wang 2008) argues that financial reporting quality is shaped
not only by accounting standards, but also by the auditor enforcement at a firm level. As discussed
in prior literature (DeAngelo 1981; Palmrose 1988), the quality of an audit is not public information
and cannot be directly observed by an external user of financial statements. Consequently, users
impute audit quality based on the auditor characteristics (Francis 2011). Reichelt and Wang (2010)
examine the effects of office-level industry expertise on audit quality within the U.S. and find that
auditors’ national network synergies and individual auditors’ deep industry knowledge at the office
level are important factors in delivering higher audit quality. Outside the U.S., the Big 4 firms have
sought to extend the benefits of having multiple offices worldwide by forming networks consisting
of national member audit firms. Thus, the Big 4 firms add value for their clients by marshaling their
industry-specific expertise both nationally and globally. Kwon, Lim, and Tan (2007) find that
auditors who are industry experts in the U.S., in another country, or in both are associated with
higher earnings quality. Carson (2009) suggests that global-level industry specialists earn an audit
fee premium. The implication is that industry-specialist auditors play a role in affecting the
information environment of cross-listed firms. Therefore, H4 predicts that investors perceive the
information loss to be less for clients of industry-specialist auditors.
H4: The negative relation between the security price response to the events that increase the
probability of eliminating the reconciliation requirement and the pre-adoption
reconciliation magnitude from IFRS to U.S. GAAP is less pronounced for firms audited
by industry specialists.
Next, we examine the conditioning effect of country-level enforcement on the association
between earnings reconciliation and stock market reaction. We argue that a country’s legal
enforcement can either alleviate or strengthen the association between earnings reconciliation and
stock market reaction. On one hand, prior literature suggests that the quality of a country’s legal
enforcement is critical in determining firms’ accounting quality (Ball, Kothari, and Robin 2000;
Ball et al. 2003). Following this line of research, Leuz, Nanda, and Wysocki (2003) show that
earnings management is lower in countries with stronger enforcement. To the extent that earnings
based on IFRS exhibit higher quality for cross-listed firms from countries with stronger
enforcement, such firms have less need to reconcile to U.S. GAAP. As a result, the information loss
from the elimination of 20-F reconciliation is likely to be less for firms in stronger enforcement
countries.
On the other hand, Lang, Raedy, and Wilson (2006) find that reconciled earnings for cross-
listed firms exhibit less value relevance and more earnings management than those for U.S.
domestic firms, and the gap in these metrics between cross-listed and U.S. firms is larger for firms
from weak enforcement countries. The implication is that if reconciled earnings still reflect more
earnings management for firms from weaker enforcement countries, then the earnings
reconciliations of firms from these countries provide less useful information than those of firms
from stronger enforcement countries. Consistent with this view, El-Gazzar, Finn, and Jacob (2002)
find that earnings reconciliation to U.S. GAAP is more value-relevant for firms from stronger
enforcement countries than for firms from weaker enforcement countries. Thus, taking away the
useful reconciliation information may be more of a loss for firms from stronger enforcement
countries. In light of the conflicting predictions of the two arguments, we do not make a directional
prediction. Our fifth hypothesis follows:
reconciliation magnitude from IFRS to U.S. GAAP is associated with the strength of
country-level enforcement.

January 2015
In its final decision to remove the reconciliation, the SEC (2007b) recognizes the importance of
the learning experience and familiarity with IFRS. El-Gazzar et al. (2002) argue that investors can
infer the current-year earnings reconciliation from that of the prior year. Similarly, Chen and Sami
(2013) find that the information content of earnings reconciliation for traders is stronger for first-
time IFRS users than for continuous IFRS users, confirming a learning effect associated with
reconciliation information. If earnings reconciliations provide valuable information for investors
before the SEC’s no-reconciliation rule, then H6 predicts that any information loss of reconciliation
information after the rule should be less pronounced for firms having used IFRS longer.5
reconciliation magnitude from IFRS to U.S. GAAP is less pronounced for firms using
IFRS for a longer period.
III. SAMPLE AND DATA

Our initial sample consists of all foreign firms listed in the U.S. at the ends of years 2006 and
2007 from the SEC website. A firm is included in the test sample if it conforms to IFRS and
reconciles its earnings to U.S. GAAP, as explicitly stated in Form 20-F.6 Overall, we identified 136
non-U.S. issuers that provided reconciliations in net income and shareholders’ equity from IFRS to
U.S. GAAP in the year prior to the SEC’s decision, including fiscal year-ends from November 15,
2006 to November 14, 2007 to match the effective date of November 15, 2007. For brevity, we
refer to year 2006 (2007) as the fiscal year from November 15, 2006 (2007) to November 14, 2007
(2008) to match the effective date of November 15, 2007. Our sample is comparable to the SEC’s
preliminary estimate of 140 companies that would be affected by the rule change (SEC 2007a).
The earnings and book value under IFRS and U.S. GAAP in the pre-adoption year are hand-
collected from Form 20-Fs. The amounts reported under home-country currencies are translated
into U.S. dollars using exchange rates specified in Form 20-F. U.S. stock price and return data are
obtained from CRSP, and home-country return and index data are from Compustat Global. After
excluding missing data, the final test sample consists of 98 firms. To benchmark our test firms, we
select 98 control firms by matching the test firms with 579 cross-listed firms that prepare financial
statements in accordance with either U.S. GAAP or home-country GAAP. We match based on
whether the control firm is listed in the same two-digit Global Industry Classification Standard
(GICS) industries and is the closest in firm size based on the natural logarithm of 2006 total assets
as the test firm.7 For cross-sectional tests, we obtain 85 cross-listed IFRS firms with available
financial data from Compustat and audit fee data from Audit Analytics.
5
Garcia Osma and Pope (2011) suggest that international firms adopting IFRS for the first time strategically adjust
financial statement items because of the discretion allowed under IFRS. If earnings reported at the time of IFRS
adoption are of lower quality, then the learning effects of IFRS may be weaker in subsequent years. Nevertheless,
earnings reconciliation may be more value-relevant in the first year than in the later years due to the lower quality of
IFRS earnings in the first year.
6
If Form 20-Fs are not available from either the SEC website or LexisNexis, then we search the companies’ websites
or contact the companies directly.
7
We do not match on the country of origin because during our sample period, several countries required firms in their
jurisdiction to adopt IFRS; hence, there are not enough observations to match our test sample with a control sample
from the same country. As a sensitivity test, we reestimate our regression models with country and industry fixed
effects to control for potential industry and country effects and find that our inferences remain unchanged.
Specifically, the coefficients on the test variables were of the same signs with the same significance levels as those
reported in Table 5.

January 2015
Table 1 reports the sample distribution and descriptive statistics for our test and control
samples. The frequency distribution by country in Panel A reveals that the number of unique firms
varies across the sample countries. A total of 24 and 25 different countries are represented in our
test and control samples, respectively. For the test sample, 26 firms are from the U.K., followed by
nine firms from France and eight firms from China. For the control sample, 28 firms are from
Canada, followed by 13 firms from Japan and six firms each from Mexico and South Korea. We
note that 12 control firms come from the European Union (EU), even though the EU mandatorily
adopted IFRS in 2005. These 12 firms did not adopt IFRS in the year prior to the SEC’s no-
reconciliation rule because they were subject to either EU regulation 1606-2002 or country-specific
exemptions from applying IFRS until at least 2007.8
Panel B of Table 1 shows the industry composition of test and control firms. Because we match
on two-digit GICS industries, the industry composition of the two samples is identical. The top
three industries represented in the two samples are financials, energy, and telecommunication
services industries.
Panel C of Table 1 presents the descriptive statistics for the test and control samples. For
the test (control) sample, the natural logarithm of total assets has a mean of $10.070 ($10.034)
million and a median of $10.241 ($9.934) million. The difference in size between test and
control samples is not statistically significant. Also, the mean and median returns on assets for
the test sample, which are 0.058 and 0.061, respectively, are not statistically different from
those for the control sample, 0.056 and 0.043, respectively, similar to the results in Kim et al.
(2012, Table 1). In addition, the test sample has lower mean and median book-to-market ratio,
higher median sales growth, and lower median return volatility than the control sample. The test
and control samples are not different in terms of the number of years cross-listed in the U.S.
exchanges.
IV. TIME-SERIES ANALYSIS

This section investigates whether the observed security market reaction is consistent with H1.
Event Dates
We focus on the calendar year 2007 to select event dates corresponding to when the SEC
considered allowing foreign firms to report financial statements under IFRS without reconciliation
to U.S. GAAP.9 Table 2 lists a detailed chronology of four events in 2007.10 These four events were
identified based on a search of the research literature (e.g., Barth 2008), financial press, and the SEC
website. Moreover, we selected the events before conducting any abnormal performance tests.
8
As a sensitivity test, we remove these 12 EU firms that were exempted from mandatory IFRS adoption prior to 2007
and repeat our analyses. We find consistent results to those reported in Table 3. Specifically, the mean differences in
cumulative abnormal returns (CARs) between test and control samples over four events and three events are 0.454
percent and 0.622 percent, respectively, and both are positively and statistically significant (p , 0.01).
9
The SEC also announced some general steps toward eliminating the reconciliation before 2007. For example, on
February 8, 2006, SEC Chairman Cox and EU Commissioner McCreevy affirmed their commitment to eliminate the
reconciliation from IFRS to U.S. GAAP. We find that the difference in CARs between test and control samples is
positive and statistically significant (p , 0.05). However, we focus on the events in 2007, because events before
2007 are mostly general statements without a concrete deadline. Hence, to the extent that the markets may impound
some economic consequences of the likely elimination of reconciliations before 2007, our results represent a lower
bound on the stock market effects of eliminating 20-F reconciliations.
10
Although the final rule was approved on November 15, 2007, the release date was December 21, 2007. We do not
include December 21 as an event date because there is no new information about the rule on December 21, 2007.
Untabulated results indicate that the mean CAR around this event for the test sample is negative, but not statistically
significant, and the difference between mean CARs for test and control samples is not significant.

January 2015
TABLE 1
Sample Distribution and Descriptive Statistics
Panel A: Sample Distribution by Country

Cross-Listed Matched Cross-Listed
Country IFRS Firms Non-IFRS Firms Total
Argentina 0 1 1
Australia 4 0 4
Belgium 1 0 1
Bermuda 3 2 5
Brazil 0 5 5
Canada 0 28 28
Cayman Islands 0 2 2
Chile 0 4 4
China 8 0 8
Denmark 2 0 2
Finland 2 0 2
France 9 0 9
Germany 3 2 5
Greece 0 3 3
Hong Kong 0 4 4
Hungary 1 0 1
India 0 1 1
Ireland 5 3 8
Israel 0 1 1
Italy 3 0 3
Japan 0 13 13
Liberia 0 1 1
Luxembourg 5 0 5
Mexico 1 6 7
The Netherlands 7 3 10
Netherlands Antilles 0 1 1
New Zealand 1 0 1
Norway 0 1 1
Panama 0 1 1
Papua New Guinea 1 0 1
Portugal 1 0 1
Russia 1 1 2
South Africa 3 3 6
South Korea 0 6 6
Spain 5 0 5
Sweden 2 0 2
Switzerland 3 4 7
Taiwan 0 1 1
Turkey 1 0 1
United Kingdom 26 1 27
Total 98 98 196
(continued on next page)

January 2015
TABLE 1 (continued)
Panel B: Sample Distribution by Industry

Matched
Two-Digit Cross-Listed Cross-Listed
GICS Code GICS Industry IFRS Firms Non-IFRS Firms Total
10 Energy 14 14 28
15 Materials 13 13 26
20 Industrials 6 6 12
25 Consumer Discretionary 9 9 18
30 Consumer Staples 7 7 14
35 Health Care 11 11 22
40 Financials 16 16 32
45 Information Technology 3 3 6
50 Telecommunication Services 14 14 28
55 Utilities 5 5 10
Total 98 98 196
Panel C: Descriptive Statistics

Matched
Cross-Listed Cross-Listed
IFRS Firms Non-IFRS Firms
Wilcoxon
Variable Mean Median Mean Median t-stat Z-stat
Size 10.070 10.241 10.034 9.934 0.13 0.42
Return on assets 0.058 0.061 0.056 0.043 0.10 1.44
Book-to-market ratio 0.425 0.387 0.492 0.456 1.84* 2.33**
Sale growth 0.242 0.187 0.185 0.137 1.16 2.48**
Return volatility 0.018 0.016 0.019 0.018 0.81 1.87*
The number of years since cross-listing 12.316 10.000 14.286 9.000 1.21 0.09
*, ** Represent significance at the 10 percent and 5 percent levels (two-tailed), respectively.
The sample distribution and descriptive statistics are based on 98 cross-listed IFRS firms and 98 matched cross-listed
non-IFRS firms based on the same two-digit GICS code and closest size. The t-stats are for difference in sample means.
The Wilcoxon Z-stats test for difference in location, that is, whether the observations in the cross-listed IFRS firms and
matched cross-listed non-IFRS firms are from populations with different medians.
Variable Definitions:
Size ¼ natural logarithm of total assets at the end of 2006;
Return on assets ¼ net income of 2006 divided by total assets at the end of 2006;
Book-to-market ratio ¼ book value of equity over the market value of equity at the end of 2006;
Sale growth ¼ percentage change of sale from 2005 to 2006;
Return volatility ¼ standard deviation of daily stock return during 2006; and
The number of years since cross-listing ¼ number of years since cross-listing in U.S. in 2006.
These events represent the key events in 2007 when market participants could have revised their
expectations concerning the passage of the no-reconciliation rule.
Measurement of Abnormal Returns

To test H1 concerning the market reaction for cross-listed IFRS firms, we compute
cumulative abnormal returns (CARs) from one trading day before to one trading day after the
identified event dates based on the market model for both test and control samples. Froot and

January 2015
TABLE 2
Key Events in 2007 Associated with the SEC’s Ruling of Eliminating Reconciliation
Requirement for Non-U.S. Registrants
Event Event Date
Num. in 2007 Description
1 April 24 The U.S. SEC announced a series of next steps that it would take to eliminate the
reconciliation requirement for non-U.S. registrants that prepare financial
statements under IFRS as published by the IASB.
2 June 20 The Division of Corporate Finance and the office of Chief Accountant of the
U.S. SEC recommended to the Chairman of the SEC to publish a proposal to
accept financial statements under IFRS as published by the IASB without
reconciliation for non-U.S. registrants.
3 July 2 The U.S. SEC issued the proposal to accept financial statements under IFRS as
published by the IASB without reconciliation for non-U.S. registrants
4 November 15 The U.S. SEC voted to accept the rule proposed on July 2, 2007.
Dabora (1999) show that the returns for cross-listed firms in the U.S. markets reflect the
information not only in the U.S. markets, but also in the cross-listed firms’ home-country
markets. As a result, we estimate firm-specific return variation using a two-factor international
model as in Morck, Yeung, and Yu (2000), which includes both the U.S. and the home-country
market index returns, as follows:
RETi;t ¼ a0 þ a1 RETUS;t1 þ a2 RETUS;t þ a3 RETUS;tþ1 þ a4 RETHC;t1 þ a5 RETHC;t
þ a6 RETHC;tþ1 þ et ; ð1Þ
where RET is the raw return of a firm; RETUS is the return on the CRSP equally weighted market
index; RETHC is the return on the home-country market equity index obtained from Compustat
Global; and subscripts i and t refer to firm and day.11 Following Dimson (1979), we adjust for
nonsynchronous trading by including the market index the day before, the day of, and the day
after the event date. The market model is estimated over the preannouncement period from 249
days before to two days before the event date to obtain the market parameter for the expected
returns.12 We then obtain CAR value for each firm-event by cumulating the abnormal return,
computed as the difference between the raw return and expected return over the three-day event
window. We also calculate mean and median cumulative abnormal returns for each firm over
three (excluding the April 24 event) or four (including the April 24 event) events, because the
SEC also announced its plan to publish a conceptual release for U.S. domestic firms to prepare
financial statements under IFRS on April 24. In addition, we report the percentage of positive
returns over the event period.
To test H1, we assess the significance of CARs for the test and control samples separately
and the differences in CARs between the test and control samples using a methodology
11
The return on the home-country market equity index is the index’s daily close price rate of return, reflecting price
appreciation. In cases where more than one index was available, we selected the one that was the most representative
in terms of the number of stocks covered by the index.
12
The estimation period for the later events does not include the three-day event window for earlier event(s). For
example, the pre-announcement period for the November 15 event excludes the three-day event windows around
April 24, June 20, and July 2.

January 2015
developed by Schipper and Thompson (1983) to account for cross-sectional dependencies in

return data.13 This method involves estimating a seemingly unrelated regression (SUR) that
explicitly accounts for the cross-correlation of error terms across equations. In this approach, a
regression system is estimated simultaneously for test and control firms in a SUR framework to
derive CARs for individual test and control firms.14 We then employ the F-statistic based on
Theil (1971) to evaluate the significance of CARs for the test sample, CARs for the control
sample, and the differences in CARs between the test and control samples.
Event Study Results

Table 3 presents the average cumulative abnormal return during each of the four events
identified in Table 2, as well as the average CAR value over the three or four event periods.
Columns (3)–(6) relate to cross-listed IFRS firms, and columns (7)–(10) relate to the matched
cross-listed non-IFRS firms. The mean and median CARs around event one (April 24) for cross-
listed IFRS test firms are 0.102 and 0.093, respectively. We also assess the significance of the
CAR using the seemingly unrelated regression technique of Schipper and Thompson (1983) to
control for cross-sectional dependence. The F-statistic on column (6) indicates that the mean
CAR on April 24 for cross-listed IFRS firms is not significantly different from zero (p . 0.10).
The mean and median CARs for the same event for cross-listed non-IFRS control firms are
positive. The F-statistic in column (10) is significant for cross-listed non-IFRS firms on April 24.
However, the F-statistic based on the seemingly unrelated regression technique of Schipper and
Thompson (1983) in column (13) is 2.13, which is not statistically significant, suggesting that the
difference in CARs between test and control firms is not significant after controlling for cross-
sectional dependencies. This is not surprising because of the confounding news for the U.S.
domestic firms on April 24. This result demonstrates that the difference in CAR between test and
control samples after controlling for market returns can potentially yield statistically insignificant
results.
The mean and median CARs in Table 3 for cross-listed IFRS test firms around June 20 and
July 2 are positive and statistically significant (p , 0.10) and they range from 0.430 percent to
0.943 percent. The mean and median CARs for cross-listed non-IFRS control firms are not
significant around the same two events. Moreover, the mean and median differences in CARs
between test and control samples are positive, ranging from 0.852 percent to 1.045 percent. The
F-statistic using the Schipper and Thompson (1983) methodology confirms that there are
significant differences in CARs for the June 20 and July 2 events (F-statistic ¼ 7.70 for June 20
and F-statistic ¼ 6.95 for July 2). For the November 15 event, the mean and median differences
in CARs are not significant, suggesting that the investors revised their expectations and
incorporated these revised expectations into stock prices before the final approval of the rule.
The average CARs over the three events of June 20, July 12, and November 15, and over the
13
Thompson (1985) and Binder (1998) provide a survey of regression-based event studies. More recently, Fernandes et
al. (2010) examine the stockholder wealth effects of the 2007 SEC rule 12h-6 that made it easier for foreign firms to
deregister with the SEC.
14
Specifically, we condition the return-generating process on the presence of regulatory change. For example, to derive
CAR for the first event period, we estimate the following equation within the SUR framework over a period of 249
days before and one day after the first event: RETi,t ¼ ai0 þ bi1RETUS,t1 þ bi2RETUS,t þ bi3RETUS,tþ1 þ bi4RETHC,t1
þ bi5RETHC,t þ bi6RETHC,tþ1 þ ciDt þ ei. D is a dummy variable that equals 1 for the first event window, and 0
otherwise, and all other variables are defined as before. The event parameters ci in the regression system vary across
firms and measure the CAR over the first event period for firm i, while taking into account any potential
contemporaneous correlation. We employ the F-statistic to test whether the mean of the event parameter coefficients ci
is equal to 0 for the cross-listed IFRS (or cross-listed non-IFRS) firms, and whether the mean of the event parameter
coefficients ci for the cross-listed IFRS firms is equal to that of the cross-listed non-IFRS firms.

January 2015
TABLE 3
Cumulative Abnormal Return (CAR) from One Trading Day before to One Trading Day after the Four Key Events for Cross-Listed IFRS
Firms and Matched Cross-Listed Non-IFRS Firms
January 2015
Cross-Listed Matched Cross-Listed
IFRS Firms Non-IFRS Firms Difference in CARs

(3) (4) (5) (7) (8) (9) (11) (12)
(1) (2) Mean Median % of Mean Median % of Mean Median
Event Event Date CAR CAR Positive (6) CAR CAR Positive (10) Difference Difference (13)
Num. in 2007 (%) (%) CAR F-Stata (%) (%) CAR F-Stata (%) (%) F-Stata
1 April 24 0.102 0.093 55.1 0.81 0.631 0.651 59.2 3.25* 0.529 0.526 2.13
2 June 20 0.679 0.430 60.2 3.18* 0.173 0.154 43.9 0.09 0.852 0.881 7.70***
3 July 2 0.943 0.662 63.3 6.46** 0.102 0.036 51.0 0.99 1.045 0.940 6.95***
4 November 15 0.443 0.690 59.2 1.74 0.114 0.060 50.0 0.25 0.329 0.374 0.77
Average of 3 events (Excluding event 1) 0.688 0.703 66.3 8.67*** 0.127 0.095 48.0 1.28 0.561 0.610 10.51***
Average of 4 events (Including event 1) 0.542 0.580 69.4 8.26*** 0.148 0.059 53.1 0.01 0.394 0.436 5.41**
*, **, *** Represent significance at the 10 percent, 5 percent, and 1 percent levels (two-tailed), respectively.
a
F-statistic is calculated using the seemingly unrelated regression technique of Schipper and Thompson (1983).
The results are obtained from 98 cross-listed IFRS firms and 98 matched cross-listed non-IFRS firms based on the same two-digit GICS code and closest firm size. Cumulative
abnormal return is computed using market model described in the paper. The pre-event period to compute market parameters extends from 249 days before to two days before each
event date.
Eliminating 20-F Reconciliation on Shareholder Wealth: Evidence from U.S. Cross-Listed Firms
211
four events including April 24, indicate that the sample of 98 test firms experiences an average
of above normal rate of return of 0.688 percent and 0.542 percent, respectively. In contrast, the
mean CARs for the three events and for all four events pertaining to the matched control firms
are 0.127 percent and 0.148 percent, respectively, which are not significantly different from
zero. The mean and median values of the differences in CARs of the test and control samples
are all positive and statistically different from zero, based on F-statistics in column (13),
estimated over either three or four events.15
Overall, the results in Table 3 indicate that the SEC’s action of eliminating IFRS
reconciliations results in significant abnormal returns for U.S. cross-listed firms that provide
reconciliations from IFRS to U.S. GAAP. Specifically, the positive stock market reaction to the
events leading to the no-reconciliation rule indicates that investors generally perceive cost savings
to outweigh the effect of information loss for cross-listed IFRS firms.16,17
V. CROSS-SECTIONAL ANALYSIS
Cross-Sectional Regression Model

In time-series analysis, we employ cumulative abnormal return to infer the market reaction to
the SEC’s rule to eliminate 20-F reconciliation. However, this methodology does not separate the
costs from the benefits associated with the SEC’s rule (Leftwich 1981). As a result, we explore the
cross-sectional effect to gain insight on potential costs and benefits associated with the rule.
Specifically, we relate the returns and firm-specific variables using a weighted portfolio return
model of Sefcik and Thompson (1986).18 For the cross-sectional analysis, we only use the test
sample because the rule does not apply to the control sample and, hence, we cannot measure their
cost savings and information loss appropriately. Specifically, we estimate a series of time-series
regressions of the form:
WRETpt ¼ a0p þ b1p RETUS;t1 þ b2p RETUS;t þ b3p RETUS;tþ1 þ b4p RETHC;t1 þ b5p RETHC;t
þ b6p RETHC;tþ1 þ cp Dt þ ept ;
ð2Þ
15
We also check confounding news, including earnings announcement news, dividend announcement news, industry
news, and home-country news, during our event period through Factiva. The differences in CARs over three or four
events between test and control samples are positive and significant at least at the 5 percent level after removing these
confounding events. We report the main analyses before deleting any confounding news to preserve the number of
observations in our small sample setting.
16
In untabulated results, we also select alternative sets of control firms from a pool of either U.S. domestic firms or
firms in cross-listed IFRS firms’ home countries. We match U.S. domestic firms on the same two-digit GICS
industries and the closest firm size. For firms in cross-listed IFRS firms’ home countries, the matching criteria are
also the same two-digit GICS industries and the closest firm size. For either set of control groups, the differences in
CARs between test and control samples are positive and significant (p , 0.01 for the average of three events and
four events, except for the average of three events with matched U.S. domestic firms, where p , 0.05). These
results suggest a more positive overall reaction to the SEC’s no-reconciliation rule for the test sample than for the
control sample.
17
As a sensitivity test, we examine how the investors’ perception of the no-reconciliation rule differs between firms
using IFRS as published by the IASB and jurisdictional versions of IFRS in 2006. Untabulated results indicate that
mean cumulative abnormal return around the four events is not statistically different between the two groups,
suggesting that the type of IFRS used by foreign registrants was not crucial in investors’ assessment of the rule
change.
18
Sefcik and Thompson (1986) demonstrate that this method is equivalent to the more familiar cross-sectional
regression of cumulative abnormal firm return on firm-specific variables, and that this method has the additional
advantage of fully accounting for cross-correlations and cross-sectional heteroscedasticity in firms’ error terms.

January 2015
where WRETpt is the weighted portfolio return on day t over the 251 trading days ending on
November 16, 2007, one day after the date of event number four listed in Table 2, where D is the
indicator variable that equals 1 for each of the four event windows, and 0 otherwise, and all other
variables are defined as before. Specifically, a0p is the intercept term, b1p–b6p are the slope
parameters on the respective market returns, cp is the event parameter measuring abnormal return on
the event days, and ept is the error term. The weighted portfolio return for the N firms is calculated
by first forming an N 3 K matrix of firm characteristics, F, which consists of a column of ones and
(K-1) columns of firm characteristics. Next, a T 3 N matrix of daily firm returns, RET, is multiplied
by an N 3 K weight matrix, W 0 , the transpose of W ¼ (F 0 F)1F 0 . The resulting T 3 K matrix
consists of K column vectors of weighted portfolio returns that are the dependent variables in each
of the K regressions specified by Equation (2). The first column is denoted as the ‘‘intercept
portfolio’’ returns, and the estimate of the event parameter (c p) reflects the market effects unrelated
to firm characteristics. The event parameters estimated in the remaining regressions can be
interpreted as the market effects in pseudo-portfolios consisting of firms with only a single
characteristic, and they measure the relationship between abnormal returns and the specific
characteristic. The significance of the cross-sectional variable of interest’s effect can then be
assessed by using the t-statistic of the above portfolios’ event parameters. Firm characteristics used
in the cross-sectional analysis are described next.
Firm Characteristics
Cost Savings
H2 predicts that a firm saving more costs by not preparing and auditing the reconciliation will
experience a more positive stock market reaction around the events. The data to compute cost
savings from preparing the reconciliation are not publicly available. Hence, we focus on the
compliance cost savings from auditing the reconciliation. To be more specific, we use the change in
unexpected audit fees from the year prior to the SEC’s decision (2006) to the year of the SEC’s
decision (2007) as a proxy for cost savings. We focus on unexpected audit fees because this fee
measure controls for firm-level determinants of normal fees.19 Following prior literature
(Ashbaugh, LaFond, and Mayhew 2003; Simunic 1980; Hay, Knechel, and Wong 2006), we
estimate the following regression model by year for all Compustat firms in the U.S. and get the
parameters to compute expected audit fees for a year:20
LNAF ¼ a0 þ a1 BIG4 þ a2 LNMVE þ a3 MERGER þ a4 MB þ a5 LEVERAGE
X þ a6 ROA
þ a7 NEGATIVE ROA þ a8 SEGMENT þ a9 LNNONAF þ a10c Country dummies
þ e;
ð3Þ
where LNAF is the natural logarithm of audit fees; BIG4 is a binary variable equal to 1 if the
firm is audited by a Big 4 auditor, and 0 otherwise; LNMVE is the natural logarithm of market
value of equity; MERGER is a binary variable equal to 1 if the firm is engaged in a merger or
19
The average audit fee savings measured here only reflects the effect of the first year after the rule. The actual savings
over future years should be much larger than this number. Also, it does not include the cost of preparing 20-F
reconciliations, as preparing the reconciliation entails the most significant work effort in Form 20-F (Group of 100
2007). To the extent that our measure of COSTSAVE only captures the cost savings from auditing the 20-F
reconciliation and with bias, it will work against finding a significant result.
20
Equation (3) is estimated using all Compustat firms with available data because they consist of a much larger
population and enhance estimation accuracy. Alternatively, we estimate Equation (3) based on all U.S. cross-listed
firms, and we obtain similar results.

January 2015
an acquisition, and 0 otherwise; MB is the firm’s market-to-book ratio; LEVERAGE is the

firm’s total assets less shareholders’ equity of common shareholders divided by total assets;
ROA equals net income divided by total assets; NEGATIVE_ROA is a binary variable equal to 1
if the firm’s ROA is negative, and 0 otherwise; SEGMENT is the number of business segments
for the firm; and LNNONAF is the natural logarithm of nonaudit fees.
We include home-country fixed effects in Equation (3) to account for potential variation in
audit fees across different countries. The unexpected audit fees are the actual audit fees (before
log transformation) minus the expected audit fees computed from the above model (before log
transformation). We define COSTSAVE as the unexpected audit fees (in thousands) in 2006
minus the unexpected audit fees (in thousands) in 2007, deflated by total assets (in millions) in
2006.21 A higher value of COSTSAVE represents greater cost savings due to the elimination of
IFRS-U.S. GAAP reconciliations. Under H2, we predict a positive sign for the coefficient on
COSTSAVE.
Earnings Reconciliation Magnitude

Our proxy for pre-adoption earnings reconciliation magnitude under H3 is EARNREC.
Following prior research (e.g., Chen and Sami 2008), we define EARNREC as the absolute value of
earnings reconciliation over the beginning total assets in the year prior to the SEC’s decision.22 As
noted previously, the impact of the pre-adoption earnings reconciliation magnitude on shareholder
wealth is expected to be negative because a larger magnitude of pre-adoption earnings
reconciliation reflects an increase in uncertainty from the loss of reconciliation information.
Therefore, we predict a negative sign for the coefficient on EARNREC.
Auditor Enforcement
To test H4, we define AUDITSPEC as 1 for a home-country-level and global-level industry
specialist, and 0 otherwise. Similar to Carson (2009), we measure whether an auditor is a country-
level industry expert and a global-level industry expert based on total client sales. Specifically,
NAT_EXPERTxyt is measured as:

RðClient Salesxyzt Þ
NAT EXPERTxyt ¼ MAX ; ð4Þ
RðClient Salesxyt Þ
where x denotes a particular country, y denotes a particular industry, z denotes a particular
auditor, and t denotes the year, where industry classification is based on the two-digit GICS
industry code in Compustat Global.23 Consequently, we measure the total client sales audited
21
We delete one firm whose audit fee tripled from 2006 to 2007 due to an ongoing merger. Including this firm does not
change the sign and significance level for COSTSAVE.
22
If we additionally include BVREC, defined as the absolute value of book-value reconciliation deflated by beginning
total assets, then the coefficient on BVREC is not significant. In addition, the coefficient on EARNREC is negative and
significant (p , 0.05) and the coefficient on COSTSAVE is positive and significant (p , 0.05). We do not include
BVREC in the main analysis because Harris and Muller (1999) find earnings reconciliation from IAS to U.S. GAAP,
but not book-value reconciliation, value-relevant. In addition, Chen and Sami (2008) document that book-value
reconciliation is only weakly associated with abnormal trading volume. These results are consistent with the notion
that investors fixate on earnings (Sloan 1996).
23
Kwon et al. (2007) and Carson (2009) also use the GICS industry code in their studies of auditor industry
specialization. The Global Industry Classification Standard, which the Compustat variable GIND reflects, was
developed jointly by Morgan Stanley Capital International and Standard and Poor’s. Bhojraj, Lee, and Oler (2003,
745) argue that the GICS industry code is ‘‘significantly better at explaining stock return co-movements, as well as
cross-sectional variations in valuation multiples, forecasted and realized growth rates, research and development
expenditures, and various key financial ratios’’ for companies across countries.

January 2015
by auditor z in industry y in country x during year t as a proportion of all client sales audited by
all auditors in the same country-industry-year. The auditor who audits the highest percentage of
client sales in a particular industry, country, and year is designated as a country-level industry
expert. Following Reichelt and Wang (2010), we impose a minimum threshold of 30 percent of
client sales for an auditor to be classified as a national industry expert.
The variable GLOB_EXPERTyt is calculated in a similar manner, except that total client sales
audited is calculated across all countries for which auditor and client sales data are available each
year. Following Carson (2009), we consider both the number-one- and number-two-ranked auditors
as calculated below to be global-level industry experts:

RðClient Salesyzt Þ
GLOB EXPERTyt ¼ MAX : ð5Þ
RðClient Salesyt Þ
Thus, the audit firms that audit the highest or the second-highest percentage of client sales across
all countries in industry y in year t are designated as global-level industry experts. Again, we
impose a minimum threshold of 30 percent for an auditor to be classified as a global industry
expert. In terms of H4, if investors perceive information loss to be less for firms with an audit
specialist, then the predicted sign for the variable AUDITSPEC EARNREC is expected to be
positive.
Legal Enforcement and Experience with IFRS

We include a country-level variable proxying for legal enforcement in the home country. We
use the rule of law (LAW) in the year prior to the SEC’s decision, derived from Kaufmann, Kraay,
and Mastruzzi (2009). Rule of law measures ‘‘the extent to which agents have confidence in and
abide by the rules of society and, in particular, the quality of contract enforcement, property rights,
the police, and the courts, as well as the likelihood of crime and violence’’ (Kaufmann et al. 2009,
4). Higher values of LAW represent countries with stronger enforcement regimes. We create a
dummy variable, DLAW, equal to 1 if LAW in a firm’s home country is greater than the sample
median, and 0 otherwise. Because of competing predictions under H5, we do not predict a sign for
DLAW EARNREC.
To test H6, we measure the number of years a firm has used IFRS. We then create
DYEARIFRS as a binary variable equal to 1 if the number of years that the firm has used IFRS is
above the sample median, and 0 otherwise. H6 predicts a positive sign for DYEARIFRS
EARNREC.
Other Control Variables

We include DYEARLIST, a binary variable equal to 1 when the number of years that the
firm has cross-listed in the U.S. stock markets is above the sample median, and 0 otherwise,
and its interaction term with EARNREC as additional control variables. Specifically, the
variables DYEARLIST and DYEARLIST EARNREC are intended to control for any potential
learning effect with cross-listing experience, but we do not predict any sign for either variable.
We measure firm size (SIZE) as the natural logarithm of total assets at the end of the fiscal year
preceding the SEC’s decision to eliminate reconciliations. We include firm size to control for
any unobservable size effects without predicting its sign.24
24
As a sensitivity test, we include stock exchange listing as an additional control variable. Including this variable does
not change the signs or significance levels relating to our test variables.

January 2015
TABLE 4
Descriptive Statistics and Pearson Correlation for Variables Used in Regression Analysis (n¼85)
Panel A: Descriptive Statistics

Variable Mean Std. Dev. Q1 Median Q3
CAR 0.005 0.014 0.005 0.006 0.013
COSTSAVEa 0.038 1.118 0.147 0.028 0.006
EARNRECa 0.021 0.055 0.001 0.005 0.014
AUDITSPEC 0.212 0.410 0.000 0.000 0.000
LAW 1.236 0.827 1.040 1.690 1.720
SIZE 10.099 2.467 8.714 10.242 11.777
YEARIFRS 3.588 3.103 2.000 2.000 4.000
YEARLIST 13.024 9.263 7.000 10.000 16.000
Panel B: Pearson Correlation

COST- EARN- AUDIT- YEAR- YEAR-
SAVE REC SPEC LAW SIZE IFRS LIST
CAR 0.254** 0.300*** 0.249** 0.086 0.003 0.027 0.037
COSTSAVEa 0.096 0.029 0.059 0.302*** 0.041 0.070
EARNRECa 0.082 0.137 0.361*** 0.157 0.073
AUDITSPEC 0.092 0.152 0.090 0.243**
LAW 0.141 0.511*** 0.182*
SIZE 0.164 0.157
YEARIFRS 0.189*
a
Both COSTSAVE and EARNREC are reported before log transformation, although their natural logarithm values are
used in the multivariate regression.
CAR ¼ cumulative abnormal return from one day before to one day after the events for each event;
COSTSAVE ¼ unexpected audit fees (in thousands) in 2006 minus the unexpected audit fees (in thousands) in 2007,
deflated by total assets (in millions) in 2006;
EARNREC ¼ absolute value of earnings reconciliation in 2006 divided by beginning total assets for 2006;
AUDITSPEC ¼ a binary variable equal to 1 if the firm is audited in 2006 by a home country-level and global-level
industry specialist, and 0 otherwise;
LAW ¼ rule of law score in 2006 by Kaufmann et al. (2009);
SIZE ¼ natural logarithm of total assets at the end of 2006;
YEARIFRS ¼ number of years that the firm has used IFRS; and
YEARLIST ¼ number of years since cross-listing in the U.S.
Cross-Sectional Results
Descriptive Statistics
Table 4, Panel A presents the descriptive statistics for the variables used in the cross-sectional tests.
The sample of 85 firms experiences a mean cumulative abnormal return of 0.5 percent during event
periods. Our sample firms, on average, save audit costs of approximately 0.0038 percent of their total
assets, although the median firm did not actually experience a decline in audit cost. The mean cost
savings is equivalent to an audit fee savings of $7.880 million for an average sample firm (0.038 times
the mean value of total assets $207.374 billion, untabulated for our sample). The mean absolute value of
earnings reconciliations scaled by beginning assets (EARNREC) is 0.021. Both mean COSTSAVE and

January 2015
mean EARNREC are greater than the median, suggesting the skewness of the distribution. As a result,
we log transform both variables in the regression analysis.25 Twenty-one percent of the firms are audited
by audit specialists. The first and third quartiles of rule of law score are 1.040 and 1.720, respectively,
indicating that there is considerable cross-sectional variation among our sample firms in terms of the
country-level enforcement. Although our sample firms have been cross-listed in the U.S. for an average
of 13.024 years, the average number of years that a firm has used IFRS is only 3.588 years.
Correlations
Table 4, Panel B reports the Pearson correlation for variables used in the multivariate tests. The
cumulative abnormal return (CAR) is positively correlated with cost savings (COSTSAVE) and
employing an audit specialist (AUDITSPEC), and negatively correlated with the earnings
reconciliation (EARNREC). Turning to the independent variables, the highest correlation in
absolute value is 0.511 between LAW and YEARIFRS.
Regression Results
Table 5 reports the regression results for alternative specifications of the cross-sectional
determinants of cumulative abnormal return. Consistent with Armstrong, Barth, Jagolinzer, and
Riedl (2010), we report the results with and without controlling for firm size. t-statistics are in
parentheses and computed from the Sefcik and Thompson (1986) approach described above.
Columns (1)–(4) are based on the average of four events. Analogously, columns (5)–(8) are based
on the average of three events, excluding the April 24 event. Adjusted R2s reported in Table 5 range
from 10.15 percent to 23.75 percent. The main effects for AUDITSPEC, DYEARLIST, and SIZE are
never statistically significant in any column. In addition, DYEARIFRS is always positive and
significant, suggesting that firms with zero reconciliation amounts and having used IFRS for a
longer period experience more positive market reaction. DLAW is negative and statistically
significant only when the dependent variable is based on three events in columns (7) and (8),
suggesting that abnormal stock returns during the three event windows are more negative (0.054 ¼
coefficient estimate of 0.018 times three) for firms from countries with stronger legal enforcement
(above sample median) and zero reconciliation amounts than for firms from countries with weaker
legal enforcement and zero reconciliation amounts.
In terms of our hypotheses, the inferences are the same whether we focus on three or four
events, and whether we include or exclude interaction terms and/or size control. In light of the
similarity of the results for our test variables across alternative specifications of the dependent
variable, we discuss results reported in Table 5, column (3).
Turning to our first test variable in Table 5, the coefficient on COSTSAVE is positive and
significant (p , 0.05), suggesting that investors of firms saving more costs after the elimination of
reconciliation react more positively to the SEC’s announcements of the no-reconciliation rule.26
This result supports our second hypothesis, H2. Economically, a one-standard-deviation increase in
COSTSAVE is related to a 5.123 percent increase in the three-day cumulative abnormal return for
cross-listed IFRS firms.27 As predicted under H3, the coefficient on EARNREC is negative and
25
We add a small number variable (e.g., 0.0001) to both variables to avoid taking the log of a non-positive number.
26
To further explore the effects of skewness in our COSTSAVE variable, we also reestimate our regressions by using a
square root transformation and by using the raw data without any transformation. In these reestimations, the
coefficients on COSTSAVE are significant at least at the 5 percent level, suggesting that our results are unlikely to be
driven by the skewness of the data.
27
The 5.123 percent savings is computed from [ln(0.038 þ 1.118) ln(0.038)] 3 0.015, where 0.038 is the mean value
of raw COSTSAVE from Table 4, 1.118 is the standard deviation of raw COSTSAVE from Table 4, and 0.015 is the
coefficient on COSTSAVE in column (3) of Table 5.

January 2015
218
TABLE 5
Regression Results
Four Events Three Events
Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient
Pred. (t-statistic) (t-statistic) (t-statistic) (t-statistic) (t-statistic) (t-statistic) (t-statistic) (t-statistic)
Variable Sign (1) (2) (3) (4) (5) (6) (7) (8)
Intercept ? 0.001 0.001 0.008 0.004 0.002 0.002 0.003 0.002
(1.43) (1.43) (1.43) (1.43) (1.46) (1.46) (1.46) (1.46)
COSTSAVE þ 0.015 0.015 0.015 0.014 0.016 0.016 0.010 0.010
(1.74)** (1.74)** (1.87)** (1.86)** (1.68)** (1.69)** (1.73)** (1.73)**
EARNREC 0.003 0.003 0.008 0.008 0.002 0.002 0.008 0.008
(2.09)** (2.05)** (2.27)** (2.29)** (2.40)** (2.18)** (2.43)*** (2.42)***
AUDITSPEC ? 0.004 0.004 0.004 0.004
(0.55) (0.46) (0.57) (0.57)
AUDITSPEC EARNREC þ 0.001 0.001 0.001 0.001
(1.02) (0.96) (1.12) (1.12)
DLAW ? 0.021 0.020 0.018 0.018
(1.34) (1.41) (1.74)* (1.74)*
DLAW EARNREC ? 0.003 0.003 0.004 0.004
(0.60) (0.61) (0.71) (0.71)
DYEARIFRS ? 0.023 0.023 0.023 0.023
(2.17)** (2.20)** (2.17)** (2.11)**
DYEARIFRS EARNREC þ 0.010 0.010 0.011 0.011
(2.57)*** (2.60)*** (2.59)*** (2.56)***
DYEARLIST ? 0.002 0.003 0.010 0.009
(0.25) (0.21) (0.56) (0.57)
DYEARLIST EARNREC ? 0.001 0.001 0.002 0.002
(0.22) (0.22) (0.56) (0.57)
SIZE ? 0.001 0.001 0.0002 0.0002
(0.18) (0.70) (0.50) (0.07)
Adjusted R2 11.37% 10.15% 22.96% 21.85% 12.58% 11.27% 23.75% 22.28%
n 85 85 85 85 85 85 85 85
January 2015
Chen and Khurana

TABLE 5 (continued)
*, **, *** Represent significance at the 10 percent, 5 percent, and 1 percent levels (two-tailed, unless a sign is predicted), respectively.
t-statistics are in parentheses and are computed based on Sefcik and Thompson (1986).
Variables not shown below are defined in Table 4.
January 2015
DLAW ¼ a binary variable equal to 1 if the variable LAW is above the sample median, and 0 otherwise;
DYEARIFRS ¼ a binary variable equal to 1 if the variable YEARIFRS is above the sample median, and 0 otherwise; and

DYEARLIST ¼ a binary variable equal to 1 if the variable YEARLIST is above the sample median, and 0 otherwise.
Eliminating 20-F Reconciliation on Shareholder Wealth: Evidence from U.S. Cross-Listed Firms
219
statistically significant (p , 0.05) in all specifications, indicating that firms with larger pre-adoption
reconciliation magnitude from IFRS to U.S. GAAP experience lower stock market reaction to the
announcements of the no-reconciliation rule.28 Economically, a one-standard-deviation increase in
EARNREC is associated with a 1.029 percent reduction in the three-day CAR for cross-listed IFRS
firms.29 This result is consistent with the notion that investors consider the information loss from no
reconciliation as an important factor, although on average, the cost savings consideration generally
outweighs the concern for information loss.
For H4, the coefficient on AUDITSPEC EARNREC in Table 5 is negative, but not statistically
significant (p . 0.10). The lack of statistical significance for the interaction of AUDITSPEC with
EARNREC suggests that investors do not regard audits by global and national industry specialists to
be related to their perception of the no-reconciliation rule change.
H5 predicts that the negative relation between the security price response and the pre-adoption
reconciliation magnitude from IFRS to U.S. GAAP is associated with the strength of country-level
enforcement. In Table 5, the coefficient on DLAW EARNREC is negative, but not statistically
significant (p . 0.10), which suggests that investors do not perceive the country-level enforcement
to be associated with investor reaction to the no-reconciliation rule. A potential explanation for the
insignificant result is that our level of enforcement may be a noisy proxy for the effectiveness of
IFRS (Christensen, Hail, and Leuz 2013).
For H6, the coefficient on DYEARIFRS EARNREC in Table 5 is positive and statistically
significant (p , 0.01), which is consistent with the view that firms with more experience on IFRS
encounter less negative security price response to information loss associated with the events that
increase the probability of adopting the no-reconciliation rule.30
Overall, our cross-sectional analysis reveals that firms with more cost savings experience more
positive market reaction to the announcement events that increase the probability of eliminating
reconciliations. Firms with larger earnings reconciliation amounts have more negative market reaction
to the same announcement events, supporting both cost savings and information loss arguments. In
addition, the negative stock market reaction due to information loss is less pronounced for firms with
more years of using IFRS before the no-reconciliation rule was instituted.31
Additional Analyses
Monte Carlo Simulation
Our cross-sectional analyses are based on the notion that, absent the SEC’s actions on the
no-reconciliation rule, cumulative abnormal returns are unrelated to cost savings and
information loss. However, it is possible that the documented relations between cumulative
abnormal returns and COSTSAVE and between cumulative abnormal returns and EARNREC are
28
To explore whether the sign of the reconciliation affects this relation, we identify 23 firms with positive reconciliation
amounts (earnings under U.S. GAAP is greater than earnings under IFRS) and 62 firms with negative reconciliation
amounts (earnings under U.S. GAAP is smaller than earnings under IFRS). When we account for the sign of
reconciliation amounts, we find that the relation between CAR and EARNREC does not depend upon whether the
reconciliation is positive or negative.
29
We multiply the coefficient on EARNREC (0.008) by [ln(0.021 þ 0.055) ln(0.021)], where 0.021 and 0.055
represent the mean and standard deviation of raw EARNREC from Table 4, and 0.008 is the coefficient on
EARNREC in column (3) of Table 5.
30
The coefficient on DYEARLIST EARNREC is positive, but not significant, suggesting that investors’ reaction to the
elimination of 20-F reconciliation does not depend on the number of years a firm has cross-listed in the U.S.
31
As a sensitivity test, we include a dummy variable, IFRSBYIASB, equal to 1 for firms that strictly used IFRS by the
IASB in the year prior to the rule, and 0 otherwise. The coefficient on IFRSBYIASB is not significant (p . 0.10). The
coefficient on COSTSAVE is positive and the coefficient on EARNREC is negative, and both are statistically
significant (p , 0.05).

January 2015
due to model misspecification and some omitted variables that are correlated with COSTSAVE
and EARNREC. As a result, we would observe cumulative abnormal returns to be related to
COSTSAVE and EARNREC even in the absence of the SEC’s actions.
To address this concern, we reestimate our regression models in the nonevent period, replacing
our test variable, CAR, with cumulative abnormal returns during the nonevent period (Larcker,
Ormazabal, and Taylor 2011). To be more specific, we randomly select four (three) nonevent days
from January 2006 through December 2007 (excluding April 24, June 20, July 2, and November 15
of 2007) and calculate three-day cumulative abnormal returns around these four (three) events.32
We then reestimate our cross-sectional regression model by using these newly obtained CARs and
retain coefficient estimates from these nonevent periods. We repeat this procedure 1,000 times. We
take a difference-in-differences approach to test whether the coefficient estimates from the event
period in Table 5 are statistically different from the average of the 1,000 estimated coefficients from
the 1,000 randomly selected nonevent periods. We report the results through this Monte Carlo
simulation in Table 6.
Columns (1)–(3) and columns (4)–(6) of Table 6 present the Monte Carlo simulation
results for four events when we include and exclude firm size, respectively. The last six
columns are related to three events. Since the results are consistent irrespective of whether we
include or exclude firm size and whether we report four or three events, we discuss our results
based on columns (4)–(6) for four events including firm size. Column (4) reports a, the
coefficient estimates from the event period. These coefficient estimates are the same as those
reported in Table 5. E(a), which is presented in column (5), is obtained from the average of
1,000 estimated coefficients from the nonevent periods using the empirical distribution of the
1,000 nonevent coefficients. p-value from column (6) is obtained from the test of whether a ¼
E(a). The statistical inferences from the Monte Carlo simulation procedure are consistent with
what we report in Table 5. The E(a) on COSTSAVE is 0.0008, and the difference between a
and E(a) for COSTSAVE is significant (p-value ¼ 0.033). In addition, the average coefficient
estimate on EARNREC from 1,000 randomly selected nonevent estimates is 0.0003. The
coefficient estimate on EARNREC from the event period, 0.008, is significantly different from
the 0.0003 (p-value ¼ 0.030). Moreover, the coefficient estimate on DYEARIFRS EARNREC
from the event period is also statistically different from the estimate obtained from the
nonevent periods. Overall, our results suggest that the variation in CAR that we document in
Table 5 is only related to the event period and does not extend to the nonevent period. Hence,
it is more likely that our proxies for cost savings and information loss, rather than model
misspecification and omitted variables, drive the cumulative abnormal return around the event
period.
Home-Country Returns
So far, we examine the capital market reaction in the U.S. stock markets. Blouin, Hail, and
Yetman (2009) find that when the barriers to cross-border arbitrage are low, security prices from
home countries closely mirror the prices of American Depository Receipts. Chen and Sami (2008)
document that before the elimination of 20-F, traders from home-country markets also react to the
earnings reconciliation from IAS to U.S. GAAP, but the reaction is delayed and smaller compared
32
Our nonevent period expands from January 1, 2006 to December 31, 2007. We draw 1,000 nonevent periods to obtain
the average estimated coefficients. Hence, similar to Larcker et al. (2011), one nonevent period can be repeated more
than once. As a result, we also extend our nonevent period from December 1, 2003 to December 31, 2007, and run
Monte Carlo ‘‘without replacement.’’ The coefficients on COSTSAVE and EARNREC are of the same signs and of the
same significance levels as those reported in Table 6.

January 2015
222
TABLE 6
Monte Carlo Simulation
Four Events Three Events
a E(a) p-value a E(a) p-value a E(a) p-value a E(a) p-value
Variable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
COSTSAVE 0.015 0.0007 (0.030)** 0.014 0.0008 (0.033)** 0.010 0.0003 (0.080)* 0.010 0.0005 (0.082)*
EARNREC 0.008 0.0003 (0.031)** 0.008 0.0003 (0.030)** 0.008 0.0005 (0.055)* 0.008 0.0004 (0.056)*
AUDITSPEC 0.004 0.0001 (0.769) 0.004 0.0001 (0.752) 0.004 0.0002 (0.759) 0.004 0.0002 (0.764)
AUDITSPEC EARNREC 0.001 0.0001 (0.420) 0.001 0.0001 (0.413) 0.001 0.0001 (0.413) 0.001 0.0001 (0.414)
DLAW 0.021 0.0006 (0.122) 0.020 0.0007 (0.140) 0.018 0.0006 (0.251) 0.018 0.0007 (0.256)
DLAW EARNREC 0.003 0.0003 (0.129) 0.003 0.0003 (0.137) 0.004 0.0004 (0.106) 0.004 0.0004 (0.109)
DYEARIFRS 0.023 0.0004 (0.137) 0.023 0.0005 (0.147) 0.023 0.00005 (0.337) 0.023 0.0002 (0.341)
DYEARIFRS EARNREC 0.010 0.0003 (0.002)*** 0.010 0.0003 (0.002)*** 0.011 0.0004 (0.007)*** 0.011 0.0004 (0.007)***
DYEARLIST 0.002 0.002 (0.988) 0.003 0.002 (0.975) 0.010 0.003 (0.490) 0.009 0.0024 (0.487)
DYEARLIST EARNREC 0.001 0.0004 (0.699) 0.001 0.0004 (0.690) 0.002 0.0004 (0.370) 0.002 0.0004 (0.370)
SIZE 0.001 0.0001 (0.484) 0.0002 0.0001 (0.988)
n 85 85 85 85
*, **, *** Represent significance at the 10 percent, 5 percent, and 1 percent levels, respectively (two-tailed, unless a sign is predicted).
p-values are in parentheses and are obtained from the test a ¼ E(a), where a represents the coefficient estimated obtained from the event period and E(a) represents the average of
the 1,000 estimated coefficients from the nonevent periods using the empirical distribution of the 1,000 nonevent coefficients.
Variables are defined in Tables 4 and 5.
January 2015
Chen and Khurana

to trading volume reaction from the U.S. market.33 Following this line of research, we also examine
the cumulative abnormal return in cross-listed IFRS firms’ home countries.
Table 7 reports the home-country cumulative abnormal return and the regression results using
CAR from home countries in Panels A and B, respectively. We estimate CAR using the regression
systems (1) and (2), except that dependent variables RET and WRET are the return from the home
country. We choose a five-day window rather than a three-day window because Chen and Sami
(2008) find the home-country traders are slower to react to earnings reconciliation information than
U.S. traders.34 In Panel A, the cumulative abnormal returns for individual events for cross-listed
IFRS firms are mostly positive, but only significant for the event on June 20. This is consistent with
Chen and Sami (2008), that home country markets have weaker reactions than U.S. markets to the
reconciliation information on Form 20-F. The cumulative abnormal returns over four events from
the home countries for the test sample (columns (3)–(4)) has a mean of 0.401 percent and a median
of 0.267 percent, and both are significantly different from zero. We use two sets of control samples.
The first control sample is matched home-country firms based on the same two-digit GICS
industries and closest firm size. The mean and median differences in CARs (columns (7)–(8))
between the test and this set of control samples are 0.510 percent and 0.328 percent, respectively,
and both are significantly different from zero. The F-statistic from the Schipper and Thompson
(1983) technique (column (9)) indicates the difference is significant at p , 0.05. We report the
results based on the second set of control samples of cross-listed non-IFRS firms in columns (10)–
(12). The mean difference in CARs over four events is positive and significant based on the F-
statistic using the Schipper and Thompson (1983) methodology. Overall, employing home-country
CARs does not affect statistical inferences in Table 3 that cross-listed IFRS firms react to the no-
reconciliation rule.
Table 7, Panel B presents the regression result when the dependent variable is CAR computed
from the home country. The results herein mirror closely the results reported in Table 5.
Specifically, the coefficient on COSTSAVE is positive and significant (p , 0.10) and the coefficient
on EARNREC is negative and significant (p , 0.01). In addition, the negative coefficient on
EARNREC is more pronounced for firms with above median rule of law scores and less pronounced
for firms with more years of using IFRS. Overall, our results support both cost savings and
information loss arguments, from a home-country perspective.
VI. CONCLUSIONS
This study examines the stock market reactions to the announcements relating to the SEC’s rule
to eliminate the reconciliation requirement for firms that prepare financial statements under IFRS,
and analyzes how firm characteristics are associated with investors’ valuation of the SEC’s
announcements. We find that, on average, U.S. cross-listed firms that prepare financial statements in
accordance with IFRS experience a positive stock price response in the U.S. and home-country
33
To assess the extent of trading volume for our test firms, we examine the percentage of trading volume in the U.S.
relative to that of its domestic counterpart. Untabulated results indicate that for the average company in our test
sample, the U.S. trading volume is about 40 percent of its domestic counterpart over the four events, although there is
variation across firms. This result is comparable to the result reported in Halling, Pagano, and Randl (2008) that for
the average company in their sample, U.S. trading volume is about 50 percent of its domestic counterpart immediately
after the cross-listing, declining to 25 percent within six years. Overall, our results suggest that during our event
periods, our test firms trade actively in the U.S. market compared with their home-country markets, which generates
the significant wealth effect even in the U.S. markets.
34
As a sensitivity test, we estimate CAR from home countries using a three-day window. The CARs are smaller than
those reported in Table 7. Also, in the regression analysis, the coefficient on COSTSAVE is not statistically significant
(p . 0.10), although the coefficient on EARNREC is negative and statistically significant (p , 0.10), suggesting the
home market’s delayed reaction to cost savings associated with the no-reconciliation rule.

January 2015
TABLE 7
Home-Country Analyses
Panel A: Home-Country Five-Day Cumulative Abnormal Return (CAR)
Difference in CAR of Cross-Listed IFRS Firms
and:
Cross-Listed Matched Home Matched Cross-Listed
IFRS Firms Country Firms Non-IFRS Firms
(3) (4) (5) (7) (8) (10) (11)
(1) (2) Mean Median % of Mean Median Mean Median
Event Event Date CAR CAR Positive (6) Diff. Diff. (9) Diff. Diff. (12)
Num. in 2007 (%) (%) CAR F-Stata (%) (%) F-Stata (%) (%) F-Stata
1 April 24 0.112 0.031 50.0 1.83 0.342 0.002 0.58 0.284 0.525 1.62
2 June 20 0.506 0.156 52.0 4.27** 1.011 1.283 5.02** 0.383 0.286 4.09**
3 July 2 0.146 0.232 44.9 0.23 0.179 0.149 0.32 0.462 0.366 3.91**
4 November 15 0.733 0.441 57.1 7.65*** 0.690 0.183 3.23* 0.449 0.228 1.19
Average of 4 events 0.401 0.267 60.2 4.55** 0.510 0.328 4.46** 0.407 0.277 4.29**
a
F-statistic is calculated using the seemingly unrelated regression technique of Schipper and Thompson (1983).
The results are obtained from 98 cross-listed IFRS firms and 98 matched home-country firms based on the same two-digit
GICS code and closest firm size, and from the same 98 cross-listed IFRS firms and 98 matched cross-listed non-IFRS
firms based on the same two-digit GICS code and closest firm size. Five-day cumulative abnormal return on the home
countries is computed using the market model described in the paper. The pre-event period to compute market
parameters extends from 249 days before to two days before each event date.
Panel B: Regression Results: Using Home-Country CAR as the Dependent Variable

Pred. Coefficient
Variable Sign (t-statistic)
Intercept ? 0.003
(0.14)
COSTSAVE þ 0.014
(1.63)*
EARNREC 0.009
(2.59)***
AUDITSPEC ? 0.007
(0.33)
AUDITSPEC EARNREC þ 0.003
(0.71)
DLAW ? 0.030
(1.65)
DLAW EARNREC ? 0.005
(1.99)**
DYEARIFRS ? 0.043
(3.75)***
DYEARIFRS EARNREC þ 0.014
(4.83)***
DYEARLIST ? 0.004
(0.35)

January 2015
TABLE 7 (continued)
Pred. Coefficient
Variable Sign (t-statistic)
DYEARLIST EARNREC ? 0.0005
(0.24)
SIZE ? 0.002
(1.82)*
Adjusted R2 37.67%
n 85
*, **, *** Represent significance at the 10 percent, 5 percent, and 1 percent levels, respectively (two-tailed, unless a sign
is predicted).
t-statistics are in parentheses and are computed based on Sefcik and Thompson (1986).
Variables are defined as in Tables 4 and 5, except that the dependent variable CAR is measured using home-country five-
day cumulative abnormal return.
markets to the announcements. There are no such effects for the control groups. These results
suggest that investors generally view the cost benefit from not preparing and auditing the
reconciliations to outweigh the concern for information loss.
Moreover, our cross-sectional analysis reveals that the positive stock market reaction to the
SEC’s rule is more pronounced for firms with more cost savings. In contrast, we find that the stock
market reaction is negatively related to the pre-adoption reconciliation magnitude from IFRS to
U.S. GAAP. We also find this negative relation to be more pronounced for firms having used IFRS
for a shorter duration. Last, we document that the negative association between earnings
reconciliation and cumulative abnormal return from the home country is more pronounced for firms
in a stronger enforcement environment.
The inferences drawn from this study are useful to regulators, especially when confronted with
the decision to allow U.S. domestic firms to adopt IFRS. The SEC (2012) indicated another delay to
transition to IFRS for the U.S. domestic registrants because of the concern that the differences
between IFRS and U.S. GAAP are still substantial. Although we do not directly focus on U.S.
registrants, our results, based on foreign registrants, highlight the importance of the learning effect
on information loss due to the differences between IFRS and U.S. GAAP.
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The Impact of Eliminating The Form 20-F Reconciliation On Shareholder Wealth - Evidence From U.S. Cross-Listed Firms

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THE ACCOUNTING REVIEW American Accounting Association

Vol. 90, No. 1 DOI: 10.2308/accr-50893

The Impact of Eliminating the Form 20-F

Keywords: earnings reconciliation; U.S. cross-listing; disclosure regulation; IFRS; Form

The Accounting Review

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II. HYPOTHESES DEVELOPMENT

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III. SAMPLE AND DATA

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IV. TIME-SERIES ANALYSIS

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Panel A: Sample Distribution by Country

(continued on next page)

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Panel B: Sample Distribution by Industry

Panel C: Descriptive Statistics

Measurement of Abnormal Returns

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developed by Schipper and Thompson (1983) to account for cross-sectional dependencies in

Event Study Results

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Cross-Sectional Regression Model

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an acquisition, and 0 otherwise; MB is the firm’s market-to-book ratio; LEVERAGE is the

Earnings Reconciliation Magnitude

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Legal Enforcement and Experience with IFRS

Other Control Variables

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Panel A: Descriptive Statistics

Panel B: Pearson Correlation

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Panel B: Regression Results: Using Home-Country CAR as the Dependent Variable

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Jamal, K., G. J. Benston, D. R. Carmichael, T. E. Christensen, R. H. Colson, S. R. Moehrle, S. Rajgopal, T.

The Accounting Review

The Accounting Review

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