For Better or Worse? Financial Reporting Harmonization and Transnational Information Transfers

• In Event: 1. Financial Reporting Comparability

Abstract

We analyze how global financial reporting harmonization affects investors’ use of peer-firms’ earnings information for investment decisions. Using a sample of 35,116 firm-pair-years between 2000 and 2010 from 51 countries, we find that financial reporting harmonization is associated with investors overreacting to peer-firms’ earnings announcements. Specifically, while investors react more strongly to foreign peer firm’s earnings announcements using the same accounting standards, these heightened information transfers are followed by predictable price reversals when investors observe own-firm earnings. These overreactions, however, do not exist for international firm-pairs that follow different accounting standards. We also find that these same-standards overreactions are significantly stronger for firms with lower reporting incentives and weaker information environments. Moreover, our results show overreactions only exist for firm-pairs with identical reporting standards and disappear for firm-pairs with more similar but non-identical reporting standards – although the latter also exhibit stronger spillovers. Hence, the label of reporting under identical standards seems to be a prerequisite for international overreactions. A difference-in-differences analysis around mandatory adoptions strengthens the identification of our main findings. Overall, this study is the first to document unintended consequences of harmonization in the form of investor overreactions to peer-firms’ earnings signals.

Authors

• Manuel Herkenhoff, University of Muenster

• Martin Nienhaus, Goethe University