Market Reaction to ADRs Quarterly Earnings: The GAAP Effect

• In Event: Advanced topics - Forensics, Government and International Accounting

Abstract

We examine any systematic differences in market reaction to announcement of quarterly earnings for a sample of American Depository Receipts (ADRs) using either the integral approach (U.S. GAAP) or the discrete approach (IFRS) for their interim reporting. We provide evidence of significantly lower earnings forecast errors for ADRs using the integral approach under the U.S. GAAP. Regression analysis that controls for any indirect mediation effects of the analysts’ following factor and other firm-specific and country-specific factors (i.e., the legal system and the level of enforcement) shows that market reaction to unexpected quarterly earnings announcements is significantly lower for ADRs using the integral approach under the U.S. GAAP compared to those using IFRS. Our results indicate that the integral approach of interim reporting under the U.S. GAAP helps to smooth out the forecasting process of interim and annual earnings. This, in turn, leads to better market expectations and analysts’ forecasts that reduce the surprise element of announced earnings and, ultimately, measures of market response coefficients.

Authors

• Ahmed Ebrahim, Fairfield University

• Bruce Bradford, Fairfield University

• Rebecca Bloch, Fairfield University