Market Reaction to ADRs Quarterly Earnings: The GAAP Effect

In November 2007, Securities and Exchange Commission (SEC) discontinued its requirement for Form 20-F reconciliation to US GAAP for IFRS filers. While harmonization of accounting standards has eliminated many of the major differences between US GAAP and IFRS, some differences remain. The accounting procedure used for determining interim earnings for IFRS and US GAAP is one of those differences. This study examines the relative information content associated with quarterly earnings prepared under US GAAP (integral earnings) and IFRS (discrete earnings). Integral earnings are associated with greater forecast accuracy, higher abnormal trading volume, and higher abnormal return volatility. Based on these findings, we conclude that integral earnings are associated with significantly higher information content than discrete earnings.