Trading volume reaction to the earnings reconciliation from IAS to US GAAP

This paper examines trading volume reaction to the earnings reconciliation of international accounting standards (IAS) to U.S. generally accepted accounting principles (GAAP). The sample includes foreign firms listed in the United States that use IAS as their primary reporting standard and reconciled their earnings to U.S. GAAP during the period of 1995 - 2004. The research question is of particular interest to policymakers, especially the Securities Exchange Commission (SEC), when evaluating the necessity of reconciling the earnings from IAS to U.S. GAAP. We find that the absolute magnitude of earnings reconciliation is significantly and positively associated with abnormal trading volume both in the U.S. markets and in the local markets around Form 20-F filing dates. This supports the assertion that earnings reconciliation provides additional information content to investors beyond that provided by IAS earnings. We also find limited evidence that investors use book value reconciliations in their trading decisions. These findings also hold for various event windows. Additional analyses after the Core Standards Project and for several model specilications generally show a stronger, faster reaction in the U.S. markets than in the local markets. Our results have implications for recent SEC consideration of eliminating the reconciliation requirement for foreign firms that use international financial reporting standards in preparing their financial statements.