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Review of Accounting Studies
Erschienen in: Review of Accounting Studies 4/2010

01.12.2010

Market reaction to and valuation of IFRS reconciliation adjustments: first evidence from the UK

verfasst von: Joanne Horton, George Serafeim

Erschienen in: Review of Accounting Studies | Ausgabe 4/2010

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Abstract

We investigate the market reaction to, and the value-relevance of, information contained in the mandatory transitional documents required by International Financial Reporting Standards 1 (2005). We find significant negative abnormal returns for firms reporting negative earnings reconciliation. Although the informational content of the positive earnings adjustments is value-relevant before disclosure, for negative earnings adjustments it is value-relevant only after disclosure. This finding is consistent with managers delaying the communication of bad news until IFRS compliance. A finer model shows that adjustments attributed to impairment of goodwill, share-based payments, and deferred taxes are incrementally value-relevant but that only the impairment of goodwill and deferred taxes reveal new information. Our results indicate that mandatory IFRS adoption alters investors’ beliefs about stock prices.
Nächster Artikel The new Form 8-K disclosures

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Fußnoten
1
We also investigate alternative measures of unexpected return, including market model, mean-adjusted, and size-adjusted models.
 
2
We note that many of the adjustments are industry specific, such as financial instruments for banks. Also, larger firms are more likely to have significantly larger pension and stock option plans. Similarly, BTM is a proxy for future earnings growth that may drive many of the adjustments, for example increased amounts of goodwill and stock-option expense.
 
3
We also carry out robustness checks by controlling for industry-fixed effects and by re-estimating Eq. (5) as an undeflated equity valuation model including various scale proxies Barth and Kallapur (1996).
 
4
IAS 19 does not require immediate recognition of actuarial gains and losses (“AGL”) unless the fluctuations in them are so great that deferral is not deemed appropriate. The standard defines a 10% corridor as the range of normal variations in gains and losses. Thus any fluctuations above 10% of either the fair value of the plan assets or the defined benefit are not recognized.
 
5
We also split the sample based on the sign of BV IFRS−UK . However we did not find any significant DARs for either sample.
 
6
All these results are robust to alternative measurement of unexpected returns (DARs).
 
7
The average adjusted R-squared in predicting the reconciliation components is 11%. Larger-value firms have higher reconciliations. The most predictable reconciliations are those due to IFRS2 (15%) and IFRS3 (40%). We also use leverage when predicting the amount of the reconciliation (Beattie et al. 2006). However, we find that leverage is not significantly associated with the reconciliations.
 
8
Due to their noisy nature, we exclude the amounts classified as miscellaneous from our calculation of the reconciliation component. In some instances these amounts are very large, which forces some of our observations to be outliers. Inclusion of these amounts does not alter our results qualitatively but reduces the statistical significance at the 10% level.
 
9
When we rerun the model by using alternative dates for P i : P i at time t (the event day), and P i at t+3mnths (3 months after the event day), our inferences are similar.
 
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Metadaten
Titel
Market reaction to and valuation of IFRS reconciliation adjustments: first evidence from the UK
verfasst von
Joanne Horton
George Serafeim
Publikationsdatum
01.12.2010
Verlag
Springer US
Erschienen in
Review of Accounting Studies / Ausgabe 4/2010
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI
https://doi.org/10.1007/s11142-009-9108-5

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