Accounting Standards and Earnings Quality – Evidence from Registered ADRS

Alhaj-Yaseen, Y. S., Wu, K., & Fletcher, L. B. (2018). Accounting Standards and Earnings Quality—Evidence from Registered ADRs. Review of Pacific Basin Financial Markets and Policies, 21(04), 1850022.

40 Pages Posted: 12 Sep 2019

See all articles by Yaseen Alhaj-Yaseen

Yaseen Alhaj-Yaseen

University of Findlay

Kean Wu

Rochester Institute of Technology

Leslie Fletcher

Georgia Southern University

Date Written: July 31, 2017

Abstract

This paper examines the changes in earnings quality of registered ADRs as a result of switching accounting standards. We aim to shed light on the potential impact of IFRS adoption on US firms. A suboptimal approach to achieve this goal is through examination of US firms’ surrogates such as ADRs. Unlike previous studies, we made a distinction between registered and unregistered ADRs, and affirmed that registered ADRs are the closest surrogates with which to conduct our analysis because they are exclusively required to adhere to the SEC’s stringent disclosure requirements. When cross-listing their equity on the US exchanges, foreign issuers can file their financial reports with the SEC using IFRS, US GAAP, or their domestic GAAP with reconciliation to US GAAP. An improvement in earnings quality is documented when ADRs adopt US GAAP or IFRS versus domestic GAAP. However, when the comparison is made between US GAAP and IFRS, no difference in earnings quality is documented. These results indicate that switching to high-quality accounting standards is likely to improve earnings quality. This improvement is maximized when the difference between reporting standards is high and minimized if otherwise. Our conclusion is that the adoption of IFRS in the US is unlikely to change earnings quality of local issuers. Moreover, we drew a distinction between reconciliation with and adoption of high-quality accountings standards and find that while the former can enhance earnings quality, the latter can further improve it.

Keywords: Accounting Standards, American Depositary Receipts (ADRs), Earnings Quality, IFRS Adoption

JEL Classification: M40, M41, G15

Suggested Citation

Alhaj-Yaseen, Yaseen and Wu, Kean and Fletcher, Leslie, Accounting Standards and Earnings Quality – Evidence from Registered ADRS (July 31, 2017). Alhaj-Yaseen, Y. S., Wu, K., & Fletcher, L. B. (2018). Accounting Standards and Earnings Quality—Evidence from Registered ADRs. Review of Pacific Basin Financial Markets and Policies, 21(04), 1850022.. Available at SSRN: https://ssrn.com/abstract=3448102

Yaseen Alhaj-Yaseen (Contact Author)

University of Findlay ( email )

Hancock County, OH
United States

Kean Wu

Rochester Institute of Technology ( email )

Saunders College of Business
105 Lomb Memorial Drive
Rochester, NY 14623-5608
United States

Leslie Fletcher

Georgia Southern University ( email )

P.O. Box 8151
Statesboro, GA 30460-8151
United States

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