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

Joanne Horton () and George Serafeim ()
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Joanne Horton: London School of Economics
George Serafeim: Harvard Business School

Review of Accounting Studies, 2010, vol. 15, issue 4, No 1, 725-751

Abstract: 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.

Keywords: International Financial Reporting Standards; Event study; Value-relevance; Information (search for similar items in EconPapers)
JEL-codes: G14 G15 M41 (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1007/s11142-009-9108-5

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