Value relevance and market valuation of assets measured using IFRS and US GAAP in the US equity market

• DOI: https://doi.org/10.1108/IJAIM-06-2021-0126
• Published date: 16 December 2021
• Date: 16 December 2021
• Pages: 95-114
• Subject Matter: Accounting & finance,Accounting/accountancy,Accounting methods/systems
• Author: Michael Cipriano,Elizabeth T. Cole,John Briggs

Value relevance and market

valuation of assets measured

using IFRS and US GAAP in

the US equity market

Michael Cipriano

St Ambrose University, Davenport, Iowa, USA

Elizabeth T. Cole

University of South Carolina –Upstate, Spartanburg, South Carolina, USA, and

John Briggs

James Madison University, Harrisonburg, Virginia, USA

Abstract

Purpose –Studies show f‌irms reporting using Generally Accepted Accounting Principles in the United

States (US GAAP) and InternationalFinancial Reporting Standards (IFRS)are similarly valued in the market,

however,these studies are limited due to the noise presentin international studies from regulatorydifferences.

This study aims to eliminate much of this noiseby using a cleaner sample of all listings with the Securities

ExchangeCommission (SEC). This paper also looks at more detailedbook value f‌igures.

Design/methodology/approach –There have been previous studies on the differences in market

valuation of f‌irms reporting using IFRSvs US GAAP. Most of this research is confounded with diff‌iculties

due to different regulatoryenvironments and volatile time periods. The study uses cleaner data followingthe

SEC’s acceptanceof IFRS f‌inancials without a 20-F Reconciliation. The authorsuse a large sample of non-US

f‌irms trading on US exchanges choosing to use eitherUS GAAP or IFRS for SEC reporting purposes. The

sample periodstarts two years after the SEC’s acceptance of IFRS f‌inancials without a 20-Freconciliation and

is largerthan earlier samples.

Findings –The authors show that there is nodifference between IFRS and US GAAP f‌irms’overall value

relevance, however, earnings are more value relevant when measured using IFRS and book value is more

value relevant when measuredusing US GAAP. The authors f‌ind that the differencebetween US GAAP and

IFRS can be explained, at leastin part, by greater market multiples being placed on inventories and goodwill

using US GAAP.This is offset in part by greater multiples being placed on otherassets under IFRS.

Originality/value –The authors replicate earlierstudies but also extend with a better sample and more

detailedf‌inings.

Keywords IFRS, US GAAP, Value relevance, Inventories, Book value, Goodwill

Paper type Research paper

1. Introduction

Extant studies have studied differential value relevance of accounting variables under

International Financial Reporting Standards (IFRS) compared to Generally Accepted

Accounting Principles in the United States (US GAAP) in markets both outside and inside

the US (Leuz, 2003;Bartov et al.,2005;Van der Meulen et al.,2006;Barth et al., 2012;Eng

et al.,2014). For instance, Eng et al. (2014) f‌ind evidence that US GAAP is similar in value

relevance to IFRS using a small sample of f‌irms trading in the US through American

Depository Receipts (ADRs). Barth et al. (2012) document higher value relevance for US

Market

valuation of

assets

95

Received16 June 2021

Revised2 September 2021

Accepted16 October 2021

InternationalJournal of

Accounting& Information

Management

Vol.30 No. 1, 2022

pp. 95-114

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-06-2021-0126

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

https://www.emerald.com/insight/1834-7649.htm

GAAP f‌irms vs IFRS f‌irms but do so by examining IFRS f‌irms traded only on exchanges

outside of the US[1]. Both Eng et al. (2014) andBarth et al. (2012) focused on early adoptions

during a period (2007–2009) when the US equity market was f‌irst adjusting to the use of

IFRS.

This paper is set up similarly to both Eng et al. (2014) paper and the Barth et al. (2012),

however, it differs in a few material respects. First, we examine a later time period which

should have less noise provided by both the f‌irst year of f‌irms changing standards[2] and

the f‌inancial crisis that could have impacted both earlier studies. Additionally, in both

earlier studies, the value relevance model was a two-stage model where the f‌irst stage

regression attempted to extract variation beyond country and industry. Rather than using

the two-stage regression we restrict the sample to only f‌irms f‌iling in the US and deleted

mining and f‌inancial services industries which were overrepresented in our initial sample.

The representation of the remaining industries included in our sample is more balanced

between IFRS and GAAP.

Oursampleconsistsofnon-USf‌irms trading on US exchanges. The Securities Exchange

Commission (SEC) initially allowed foreign f‌irms to f‌ile using IFRS without a Form 20-F

Reconciliation in 2007. In 2008–2009, there was a worldwide f‌inancial crisis. In our sample

period, 2010 is Year 1 of the sample period for two reasons, namely, the f‌inancial crisis of 2008–

2009 makes those years unlikely to generalize to years without such a crisis and the SEC

allowed a two-year adoption period for those choosing IFRS. Limiting our sample to f‌irms that

all f‌ile on US exchanges –governed by the same enforcement agency, the SEC –controls for

regulatory effects similar to Eng et al. (2014), but with a much larger sample over a much longer

and later sample period. We f‌ind that earnings (book value) measured under IFRS are more

value relevant and valued at a higher multiple under IFRS (US GAAP). By breaking down

book value into components measured signif‌icantly differently under US GAAP and IFRS, we

f‌ind that valuation differences appear to be primarily driven by the market valuation of

goodwill and inventories and are somewhat offset by the market valuation of other assets (OA).

During the seven-year period of 2010–2016, 456 unique non-US f‌irms listed in the US

took the opportunity to avoid f‌iling a Form 20-F reconciliation by either adopting IFRS or

US GAAP and 257 (over 56%) chose US GAAP and 199 (almost44%) chose IFRS[3]. We use

well-known levels regressions on this sample to estimate the value that the US equity

market placed on the two traditional summary accounting variables, earnings and book

value, for both US GAAP and IFRS f‌irms. Consistentwith Eng et al. (2014), who f‌ind that US

GAAP is similar in overall value relevanceto IFRS in the 2007–2009 sample period, we f‌ind

that the overall f‌it measures (R) to also be similar between US GAAP and IFRS during our

sample period covering the next sevenyears (2010–2016).

Our f‌indings also indicate that earnings are valued at a higher multiple and with more value

relevance under IFRS while book value is assigned a higher market multiple and greater

relevance under US GAAP. To further investigate that latter f‌inding, a series of levels

regressions of market value is estimated on four important components of book value –

all four are assets –measured differently under the two sets of standards. Those assets are

Inventory, property plant and equipment (PP&E), Goodwill and Non-Current OA [4]. US equity

markets place signif‌icantly higher multiples on Goodwill and Inventory for US GAAP f‌irms

relative to IFRS f‌irms and signif‌icantly lower values on OA for US GAAP f‌irmsrelativeto

IFRS f‌irms. We did not f‌ind signif‌icant differences in PPE between IFRS and US GAAP f‌irms.

Possible explanations for this difference could be simply that US investors are less

comfortable with IFRS or it could be that the market discounts the write-upsallowed under

IFRS, but not allowed under US GAAP. Another interpretation is that the market places a

higher multiple on certain US GAAP measures because it believes them to be more

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