The SEC's Elimination of 20-F Reconciliation and the Cost of Debt

45 Pages Posted: 11 Jan 2013

See all articles by Lucy Huajing Chen

Lucy Huajing Chen

Villanova University

Saiying Deng

Kent State University

Parveen P. Gupta

Lehigh University - Department of Accounting

Heibatollah Sami

Lehigh University

Date Written: January 10, 2013

Abstract

The SEC adopted a rule in December 2007 to eliminate the 20-F reconciliation requirement for foreign private issuers preparing financial statements under IFRS as issued by the IASB. We examine whether the SEC’s elimination of the 20-F reconciliation affects the cost of debt for such foreign issuers during the 2005-2008 period. On one hand, the reconciliation can provide debt holders useful information to assess firm default risk, and hence eliminating the reconciliation leads to information loss, which is associated with increased cost of debt. On the other hand, significant cost savings from not reconciling earnings and book value can enhance firm value, which decreases cost of debt. We find evidence that the interest expense ratio decreases after such firms discontinue the 20-F reconciliation. Moreover, the cost of debt reduction is driven by firms with higher pre-rule reconciliation magnitude or larger pre-rule number of reconciling items, which is consistent with cost savings dominating the information loss. Lastly, we find evidence of the information loss for firms with higher market uncertainty and limited evidence of information loss for firms with lower bank monitoring incentive. Taken together, our paper provides insight into the SEC’s decision to eliminate the 20-F reconciliation and the SEC’s consideration to adopt IFRS for U.S. domestic firms.

Keywords: eliminating the reconciliation, IFRS, cost of debt

JEL Classification: M41

Suggested Citation

Chen, Lucy Huajing and Deng, Saiying and Gupta, Parveen P. and Sami, Heibatollah, The SEC's Elimination of 20-F Reconciliation and the Cost of Debt (January 10, 2013). CAAA Annual Conference 2013, Available at SSRN: https://ssrn.com/abstract=2198994 or http://dx.doi.org/10.2139/ssrn.2198994

Lucy Huajing Chen

Villanova University ( email )

United States
610-519-6321 (Phone)

Saiying Deng

Kent State University ( email )

College of Business Administration
P.O. Box 5190
Kent, OH 44242-0001
United States
3306721213 (Phone)

Parveen P. Gupta

Lehigh University - Department of Accounting ( email )

621 Taylor Street
RBC #37
Bethlehem, PA 18015
United States
610-758-3443 (Phone)
610-758-5992 (Fax)

HOME PAGE: http://www.lehigh.edu

Heibatollah Sami (Contact Author)

Lehigh University ( email )

Bethlehem, PA 18015
United States
610-758-3407 (Phone)

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