Assessing Investors' Abilities to Assimilate International Financial Reporting Standards (IFRS) Earnings Announcements Data

Abstract

[Abstract: To improve comparability of financial statements across countries, the US Securities and Exchange Commission (SEC) and International Accounting Standards Board (IASB) are involved in the convergence process for a single, high quality accounting standards. This paper examines the market’s reaction (price and volume) to IFRS-based earnings announcements of UK listed firms in the US equity markets and assess if US and IFRS accounting principles differences impair the ability of US investors to assess the information contained in IFRS accounting system output. Specifically, this paper tests whether US investors are able to interpret and use IFRS accounting reports in making trading and investment decisions. How US market participants react to IFRS earnings disclosures is important to regulators (e.g., the SEC and the FASB) in their task in improving comparability of financial reporting. This study may contribute to the debate on global convergence with IFRS, particularly convergence between IFRS and US GAAP with respect to earnings measurement. The results provide evidence that unexpected returns and volume of shares traded increased during IFRS-based earnings release dates. The price analyses indicate that US investors use information about UK’s firms IFRS earnings in valuation, and that the US market responses to IFRS earnings differ somewhat to the US earnings. Thus, US market participants do not appear to be confused by US/IFRS GAAP differences, and in fact use IFRS earnings in their valuation of UK firms.

Keywords: International Financial Reporting Standards (IFRS) earnings announcements, US GAAP Earnings Announcements, Trading and Price responses, Information Content

JEL Classification: M41