臺大管理論叢 NTU Management Review VOL.30 NO.2

73 NTU Management Review Vol. 30 No. 2 Aug. 2020 1. Introduction In December 2007, the U.S. Securities and Exchange Commission (SEC) adopted Securities Act Release No. 33-8879, “Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Accounting Standards without Reconciliation to U.S. GAAP (SEC, 2007).” 1 The new rule applies to financial statements issued for fiscal years ending after November 15, 2007, and interim periods after the effective date. Of note is that the move indicates the SEC’s confidence that IFRS is a set of high-quality accounting standards, and that financial reports prepared under IFRS are as informative and useful as those prepared under U.S. GAAP. Although the SEC ruling is a step toward convergence between IFRS and U.S. GAAP, the decision to waive the U.S. GAAP reconciliation requirement and provide the IFRS option is controversial. The SEC’s reconciliation requirement is often perceived as costly, unnecessary to protect investors’ interests, and potentially misleading for market participants. The need for reconciliation is predicated on the concept that financial reporting for the same accounting event is materially different under IFRS and U.S. GAAP. To the extent that the two standards are identical (that is, completely converged), a reconciliation requirement would be debatable. Although there is a substantial literature comparing properties of accounting amounts internationally as well as capital-market effects of IFRS adoption, the evidence is inconclusive regarding the relative quality of IFRS and U.S. GAAP (e.g., Barth, Landsman, Lang, and Williams, 2012; Bartov, Goldberg, and Kim, 2005; Byard, Mashruwala, and Suh, 2017; Leuz, 2003; Lin, Riccardi, and Wang, 2012; Mestelman, Mohammad, and Shehata, 2015). This paper extends the current literature by investigating whether cross-listed non-U. S. firms trading on U.S. exchanges use the increased discretion that comes from removing the reconciliation requirement to manage their earnings and thus provide less informative financial statements. Alternatively, eliminating the reconciliation may reduce managers’ incentives to choose accounting policies closer to U.S. GAAP, allowing firms to make accounting choices that maximize the informativeness of their reported earnings (Chiu and Lee, 2013; Hansen, Pownall, Prakash, and Vulcheva, 2014). Reported earnings that exhibit 1 IFRS, overwhelmingly perceived as “principles-based” rather than “rules-based,” is a body of accounting standards issued by the International Accounting Standards Board (IASB). Approximately 149 nations and reporting jurisdictions permit or mandate IFRS for domestic listed companies; approximately 122 countries fully conform with IFRS as promulgated by the IASB.