Impact of ADR Forms 20-F reconciliation on trading volume

• Published date: 03 August 2015
• Pages: 253-270
• DOI: https://doi.org/10.1108/IJAIM-03-2014-0014
• Date: 03 August 2015
• Author: David L. Senteney,Grace H. Gao,Mohammad S. Bazaz
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

Impact of ADR Forms 20-F

reconciliation on trading volume

David L. Senteney

Department of School of Business and Economics,

California State University, San Bernardino, California, USA

Grace H. Gao

Perley Isaac Reed School of Journalism,

West Virginia University, Morgantown, West Virginia, USA, and

Mohammad S. Bazaz

Department of Accounting and Finance, California State University,

San Bernardino, California, USA

Abstract

Purpose – This paper aims to investigate the impact of the ling of Form 20-F to the Securities and

Exchange Commission (SEC) on short-term trading volume and return by those foreign rms which list

their securities in the US Stock Exchanges.

Design/methodology/approach – The authors collected 402 American depository receipt (ADR)

rms from 38 different countries that listed their securities in the US Stock Exchanges over a 10-year

period of 2000-2009. A regression model was used to examine such impact, including the post year 2007

SEC elimination of reconciliation.

Findings – This paper found signicant abnormal trading volumes and abnormal returns one day,

two days and three days following the 20-F report for the sample rms whose nancial statements were

prepared under both home-country accounting principles and US generally accepted accounting

principles (GAAP). Firms originally using international nancial reporting standards (IFRS) do not

present abnormal return and abnormal trading volume. This indicates that US investors view IFRS to

be as high-quality as US GAAP.

Research limitations/implications – The ndings might be limited to this period and might not

draw statistical inference for the future period. This evidence offers support for the SEC’s elimination of

the reconciliation requirement to US GAAP.

Practical implications – This study was carried out with the aim to investigate whether the release

of Form 20-F by ADR rms offers any additional information useful to investors incorporating both

abnormal return and trading volume, which is thought to be more sensitive.

Originality/value – This paper investigates the short-term return and volume reactions caused by

the earnings and equity reconciliation from home-country accounting standards or IFRS to US GAAP

for foreign cross-listed rms in the USA.

Keywords ADR rms, Form 20-F, Short-term trading volume

Paper type Research paper

Introduction

This paper investigates the short-term return and volume reactions caused by the

earnings and equity reconciliation from home-country accounting standards or

international nancial reporting standards (IFRS) to US generally accepted accounting

The current issue and full text archive of this journal is available on Emerald Insight at:

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20-F

reconciliation

253

Received 3 March 2014

Revised 18 June 2014

Accepted 18 June 2014

InternationalJournal of

Accountingand Information

Management

Vol.23 No. 3, 2015

pp.253-270

©Emerald Group Publishing Limited

1834-7649

DOI 10.1108/IJAIM-03-2014-0014

principles (GAAP) for foreign cross-listed rms in the USA. This study investigates

whether the release of Form 20-F offers any additional information useful to investors.

We consider the existence of short-term (one-day, two-day and three-day) abnormal

trading volume and abnormal return as a measurement of additional information

following the release of Form 20-F. Chen and Sami (2010) also focus on short-term

trading volume response to the earnings reconciliation from international accounting

standards to US GAAP for American depository receipt (ADR) rms. They, however, do

not consider the impact of the Securities and Exchange Commission (SEC) elimination of

earnings reconciliation for those rms preparing their nancial statements based on

IFRS. The rest of the paper is organized as follows. We will rst review relevant

literature and then discuss the motivation and research methodology, followed by data

analysis and the results. A few concluding remarks are offered at the end of the paper.

Literature review

There is an extensive body of academic literature related to the implementation and

economic/statistical properties of nancial reporting using IFRS. Soderstrom and Sun

(2007) survey the extant research literature pertaining to accounting quality and IFRS

implementation and point out that the greatest number of studies focus on stock

price-related measures of accounting quality (e.g. value-relevance, information content,

timeliness, etc.). They conclude that these studies do not provide a comprehensive view

of the usefulness of IFRS, as they focus solely on how information is impounded in

equity market investors’ expectations. Bradshaw et al. (2010) nd that, even though both

IFRS and US GAAP represent high-quality accounting standards, material reconciling

items have persistently been uncertain: it remains unclear if IFRS are of equivalent or

higher quality than US GAAP.

The international accounting research literature examines the comparative

information content of accounting numbers generated using alternative accounting

principles before the advent of the EU 2005 wide-scale implementation of IFRS. An

increasingly sizable body of research has examined Form 20-F Item 17 and 18

reconciliations from non-US to US GAAP, establishing a solid historical foundation for

the interpretation of the value relevance of the Form 20-F reconciliations. In reviewing

the literature, Pownall and Schipper (1999) demonstrate that the differences are

value-relevant. Amir et al. (1993), for example, examine the value relevance of Form 20-F

reconciliation items between non-US domestic and US GAAP earnings and

shareholders’ equity from 1981 to 1991. Using a sample of 101 cross-listed companies,

they conclude that Form 20-F reconciliations are in aggregate and for certain specic

components (e.g. property revaluations and capitalized goodwill), equity share is

value-relevant. Harris and Muller (1999) investigate reconciliations of IFRS with US

GAAP for 31 companies from 1992 to 1996 and report that US GAAP earnings Form

20-F reconciliation is value-relevant, and US GAAP is more highly associated with

market variables after controlling for IFRS amounts in specic empirical statistical

models.

Similar to Chen and Sami (2008), we focus on trading volume reaction, as it represents

individual investors’ disagreements about future prices. In other words, each investor

may interpret the earnings reconciliation differently. For instance, Cready and Hurtt

(2002) and Chen and Sami (2008) argue that the trading volume response is more

powerful than the price-based one in the event study. Kandel and Pearson (1995) believe

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