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Do IFRS Reconciliations Convey Information? The Effect of Debt Contracting

41 Pages Posted: 16 Oct 2009 Last revised: 12 Aug 2014

Hans Bonde Christensen

University of Chicago - Booth School of Business

Edward Lee

University of Manchester - Alliance Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

Date Written: July 6, 2009

Abstract

We examine whether UK GAAP to IFRS earnings reconciliations convey information. As a result of debt contracting, mandatory accounting changes are expected to affect the likelihood of violating existing covenants based on rolling GAAP, leading to a redistribution of wealth between shareholders and lenders. Consistent with this prediction, we find significant market reactions to IFRS reconciliation announcements. These market reactions are more pronounced among firms that face a greater likelihood and costs of covenant violation and early announcements. While the association between later announcements and weaker market reactions is consistent with contractual implications of technical changes to earnings, which investors quickly learn to predict, it is inconsistent with IFRS forcing all firms in the sample to reveal firm-specific information through accruals. Thus, by showing that mandatory IFRS also affects debt contracting, we expand on existing IFRS research that focuses on how accounting quality and cost of capital are impacted.

Keywords: debt contracting, mandatory accounting change, International Financial Reporting Standards

JEL Classification: M41, M48

Suggested Citation

Christensen, Hans Bonde and Lee, Edward and Walker, Martin, Do IFRS Reconciliations Convey Information? The Effect of Debt Contracting (July 6, 2009). Journal of Accounting Research vol. 47(5), pages 1167-1199, December 2009. Available at SSRN: https://ssrn.com/abstract=997800

Hans Bonde Christensen (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

Edward Lee

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

Martin Walker

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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