Market reaction to and valuation of IFRS reconciliation adjustments: first evidence from the UK
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We investigate the market reaction to, and the value-relevance of, information contained in the mandatory transitional documents required by International Financial Reporting Standards 1 (2005). We find significant negative abnormal returns for firms reporting negative earnings reconciliation. Although the informational content of the positive earnings adjustments is value-relevant before disclosure, for negative earnings adjustments it is value-relevant only after disclosure. This finding is consistent with managers delaying the communication of bad news until IFRS compliance. A finer model shows that adjustments attributed to impairment of goodwill, share-based payments, and deferred taxes are incrementally value-relevant but that only the impairment of goodwill and deferred taxes reveal new information. Our results indicate that mandatory IFRS adoption alters investors’ beliefs about stock prices.
KeywordsInternational Financial Reporting Standards Event study Value-relevance Information
JEL ClassificationG14 G15 M41
We thank our editor, Doron Nissim, and the two anonymous referees for their insightful comments. We are grateful to Michael Bromwich, Paul Healy, Michael Kimbrough, Wayne Landsman, Richard Macve, Claudine Madras, Sandra Sizer, İrem Tuna, Martin Walker, Wan Wong and seminar participants at the Manchester Business School conference: “The transition to IFRS: harmonization or discord 2007”, and others at London School of Economics for the helpful comments. We alone are responsible for any remaining errors.
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