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

The Effects of Relaxing the Reconciliation Requirement in Foreign Private Issuers’ SEC Filings on Earnings Management Strategies: IFRS Adopters versus U.S. GAAPAdopters 90 attributable to the SEC’s decision to eliminate the reconciliation requirement. We classify the remaining firms into those that voluntarily changed their filing choice to either U.S. GAAP or IFRS after the elimination and those that did not change their accounting standards (i.e., companies that voluntarily adopted U.S. GAAP/IFRS prior to 2007 and companies that applied non-U.S./non-IFRS domestic standards during the sample period 2007-2010). We identify the accounting standards a foreign firm uses to prepare its financial statements and its industry based on an extensive manual collection of annual reports. 10 Specifically, to identify each sample firm’s filing choice, we examine the auditors’ opinions as well as the front of the annual reports, which indicate the basis of accounting the firm used to prepare the financial statements. Moreover, to ensure that we correctly identify the firm’s adoption year of its chosen accounting standards, we require, for instance, that each IFRS-reporting firm (i.e., a company that did not domicile in IFRS countries but voluntarily elected to do so during our sample period) has financial data for the year it adopts the accounting standards and for the year before. We also require sample firms to have the necessary Compustat/Datastream data from 2002 through 2010 (i.e., the accounting periods before, during, and after the elimination of the reconciliation requirement), and not fall within the banking or financial services industries (i.e., SIC 6000-6499 and SIC 6600-6999). 11 We remove banks and financial services companies from the sample because their characteristics differ from nonfinancial firms, and because their motivation for earnings management is relatively unclear compared to unregulated industries (Reitenga, Buchheit, Yin, and Baker, 2002). We also exclude companies in bankruptcy or reorganization, as well as start-ups and companies with changes in their fiscal year-ends. Our final sample consists of 161 firm-year observations representing 71 distinct firms from 16 countries, of which 31 (40) firms switched to U.S. GAAP (IFRS) voluntarily from domestic standards after the elimination of the reconciliation requirement. We limit our 10 We use the term ‘‘annual reports’’ to refer to all annual regulatory filings, including Forms 20-F, 40-F (for Canadian firms), and 10-K, with the SEC by non-U.S. firms. 11 The U.S. GAAP reconciliation sample years range from 2003 through 2006. The IFRS reporting sample years range from 2007 (with years ending after November 15, 2007) through 2010. The IFRS- permitted sample period is the focus of our analysis. We will examine the U.S. GAAP reconciliation sample period later in this paper. Given that some variables in our empirical analyses are measured using lagged data, all variables used in this study were gathered for the years ended 2002-2010.