ANALYSTS’ IFRS KNOWLEDGE, FORECAST ERROR, AND SEC’S ELIMINATION OF THE 20-F RECONCILIATION

What the paper says

Foreign private issues (FPI) with trading shares in the United States needed to reconcile their annual financial reports (20-F) to the U.S. Generally Accepted Accounting Principles (GAAP) if they prepare the statements with International Financial Reporting Standards (IFRS). However, in November 2007, the SEC eliminated the 20-F reconciliation requirement. Prior studies have investigated the consequences of removing the reconciliation from country-level as well as firm-level characteristics, and have found mixed results. In this paper, we test the effect of the elimination on analyst forecast error based on analystindividual characteristics. Specifically, we examine whether the effect varies with analysts’ knowledge of IFRS. If there is any information loss from removing the reconciliation, the negative impact would be stronger for analysts without IFRS expertise. Therefore, these analysts’ forecast error might become larger after the elimination, relative to before the elimination. We test our conjecture with a set of hand-collected data of analysts who follow foreign IFRS filers from 2005 to 2009. Results suggest that, in general, there is no significant change in terms of analysts’ forecast error before and after eliminating the reconciliation. However, for analysts who do not have knowledge of IFRS, their forecast error significantly increased in the post-elimination period, while this change is not observed in analysts with IFRS knowledge. Our results not only provide supporting evidence to prior studies and the SEC’s Final Rule (2007), but also highlight the importance of analysts’ individual characteristics on their forecast properties.