Do Investors Overestimate Comparability Benefits of Financial Reporting Harmonization?
50 Pages Posted: 8 Feb 2021 Last revised: 20 Sep 2021
Date Written: September 9, 2021
We find that global financial reporting harmonization is associated with investors overreacting to peer firms’ earnings announcements. Using a sample of 35,116 firm-pair-years from 51 countries between 2000 and 2010, we show that heightened information transfers due to financial reporting harmonization are followed by predictable price reversals when investors observe own-firm earnings. However, overreactions are not present for international firm pairs that follow different accounting standards. Further, the same-standards overreactions are significantly stronger for firms with lower reporting incentives and weaker information environments. Additional tests suggest that these overreactions cause significant excess volatility, which results in economically meaningful costs. Collectively, our findings document a potential cost of harmonization in the form of perceived comparability that can cause investors to overreact to peer information.
Keywords: financial reporting harmonization, transnational information transfers, investor overreactions, predictable return patterns
JEL Classification: G15, G41, M40
Suggested Citation: Suggested Citation