Analyst Following and Forecast Accuracy after Eliminating the 20-F Reconciliation between IFRS and U.S. GAAP

• In Event: Financial Analysts II

Abstract

In 2007, the SEC decided to allow foreign private issuers to file financial statements prepared according to International Financial Reporting Standards (IFRS) without reconciliation to U.S. GAAP. Using a sample of foreign private issuers from 38 countries during the period 2005-2009, this paper investigates how the elimination of the 20-F reconciliation affects financial analysts. We find that it significantly reduces analyst coverage but has no impact on forecast accuracy. We show that the likelihood of terminating coverage of IFRS firms after the SEC’s rule is higher for analysts who revise their forecasts around the 20-F filing date and lower for analysts who cover both IFRS firms and U.S. GAAP firms. In addition, we hypothesize and find that eliminating the 20-F reconciliation has a greater impact on firms whose 20-F reconciliation is more useful to analysts. For these firms, the elimination of the 20-F reconciliation significantly reduces both analyst coverage and forecast accuracy. Overall, our results suggest that the elimination of the 20-F reconciliation imposes costs on financial analysts.

Authors

• Wen Li, Nanyang Technological University

• Huai Zhang, Nanyang Technological University