Security Returns and Volume Responses around International Financial Reporting Standards (IFRS) Earnings Announcements (Digest Summary)

The key conclusion of the author is that both sets of financial reporting standards (IFRS and US GAAP) provide information that can be used for valuing securities. The results reveal a considerable number of trading responses around both types of earnings announcement dates. These responses tend to occur over a couple of days, suggesting that some investors need more time to adapt and react to certain announcements. The immediate price reaction over a three-day announcement window is, on average, 41.8% in the case of IFRS earnings news and 79% for US GAAP earnings news. This suggests that US GAAP earnings information has a wider market effect and/or that IFRS contains less unexpected informative news relative to US earnings disclosures. Despite this difference in price reaction, the evidence supports IFRS-based earnings announcements as sufficient to produce information important and valuable to investors. Further, trading volume responses, which reflect changing individual investor sentiment, around both types of earnings announcements demonstrate that both types of announcements trigger a market reaction.

These results should be of interest to regulatory bodies that aim to reduce informational asymmetries arising from differences in accounting standards. The author also suggests that US multinationals, obliged to produce financial reports under different jurisdictions, pay particular attention to IFRS reports. Other beneficiaries of this research are securities analysts interpreting company results of international and domestic companies that are valued against international peers.

The author concentrates on IFRS disclosures of UK firms cross-listed in the United States and traded with American depositary receipts (ADRs), whereas most of the prior empirical research concentrates on EU countries with mandatory IFRS adoption. Using an event study approach, the author investigates the price and volume responses around the dates of IFRS earnings disclosures in the US market. If the IFRS announcement contains new earnings information available to investors, that information should be reflected in the price and trading volume of the announcing firm.

The overall sample includes daily price and trading volume data over 2005–2009. The UK sample includes companies registered in the United Kingdom and cross-listed on the NYSE/AMEX with sponsored ADRs. These companies are identified through the Global Researcher-SEC Database, Lexis/Nexis, and the NYSE Fact Book. The author uses keyword searches across several news archives to identify earnings announcements with potential IFRS-based information. Using this process, the author generates 70 firm-year earnings press releases. The final sample consists of 57 UK cross-listed firms’ earnings announcements. The mirroring sample of US firms consists of 195 firm-year observations.

The author reveals his perspective when he asks whether the convergence of the two sets of accounting standards can actually succeed. Even though the reporting rules will be similar, there still may be differences that stem from the economic, institutional, and legal differences between countries. Even if the standards are imposed, they may not hold in the long term owing to a lack of enforceability. A successful convergence may require an international agreement and the establishment of an international accounting body with powers sufficient to override country-level interests.

CFA Institute has issued several comments regarding IFRS adoption in the United States. In one comment, it designed a roadmap in which it suggested full adoption with no specific date. It suggested that global markets would benefit from a single set of standards, with full compliance on the regulator and company sides. One issue that needs to be addressed is the funding plan for the IASB, which at its current state is not a fully independent institution.

The convergence process has already been going on for a number of years. The proponents of the process proclaim that it will result in greater clarity, simplicity, transparency, and comparability of financial reports across countries, which should facilitate the international flow of capital and wealth transfers as well as greater security. But the process will somehow have to recognize these national differences and adapt to various economic and legal environments. In the end, substantial differences will remain, though their nature will change. And it may not be necessary to carry out a convergence of principle-based standards. Financial information is influenced mostly by the working rules, developed by accountants and auditors involved in the preparation of financial statements, and the standards are more a form of guidance than strict regulation.

Regardless of the doubts surrounding the convergence process, this paper was a very interesting read. The author proves that the convergence process may have considerable leverage in the securities markets. Thus, he contributes to the literature by raising several implications that should not be missed by regulators and accounting standards–setting bodies, particularly in the common-law countries.

A limitation of the study is the author’s lack of insight into the nature of investor reactions. In particular, it is unclear whether investors fully understand the IFRS-based disclosures or simply follow general market reactions.