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In 2007, the U.S. Securities and Exchange Commission voted to eliminate the 20-F reconciliation requirement for foreign issuers listing their stocks or bonds in the U.S. capital markets and preparing their financial statements under International Financial Reporting Standards (IFRS). Distinct from prior research focusing on the equity market, we investigate the impact of eliminating the 20-F reconciliation on the cost of debt in the U.S. listed foreign bond market. Employing a difference-in-differences approach, we document that bond yield spread increases for foreign IFRS bond issuers after the elimination of 20-F reconciliation. The results suggest that bondholders, on average, view the elimination of 20-F reconciliation as an information loss. Cross-sectional analyses reveal that the positive association between the elimination of 20-F reconciliation and bond yield spread is more pronounced for firms with greater stock return volatility, lower institutional ownership, weaker reporting incentives, and higher country-level investor protection. JEL Classifications: M41; G15; G18.

This study examines whether religious identity has an impact on two types of funding, donations and government grants, received by nonprofit organizations. We argue that religious nonprofits attract more donations because (1) donors feel an affinity or special tie to religious organizations and/or (2) donors regard religious organization as having good stewardship. Using 54,917 organization-year observations we find that 18% of the largest U.S. nonprofit organizations have some religious identity and that these organizations receive more donations than their non-religious counterparts. We further find that the association is more pronounced for nonprofits in more religious geographic areas, those with unrestricted donations, and organizations with better stewardship. Conversely, we find that government grants are negatively associated with religious identity, a result consistent with the separation between church and state established under U.S. law and tradition. This negative relationship, however, is mitigated for nonprofits with better stewardship. Our results should be of interest to donors and policymakers who seek to understand the impact of religion on nonprofit funding as well as the role of donor affiliation and stewardship in the fundraising process.

In this study, we examine the association between acquirers’ use of fairness opinions and subsequent goodwill impairment charges. Understanding both fairness opinions and goodwill impairments are of interest to investors, analysts, auditors, and regulators. Using a large sample of manually collected data, we find that when an acquirer purchases a fairness opinion, goodwill is more likely to be impaired and to be impaired with a greater amount, suggesting that acquirers purchase fairness opinions to justify overpayment and provide legal protection. Additionally, for acquirers with fairness opinions, we find some evidence that acquirers that purchase multiple fairness opinions and opinions from top financial advisors and advisors with smaller contingent fees are less likely to impair their goodwill and impair with a smaller amount. Our results are robust after controlling for endogeneity and using hazard model. Overall, we identify the existence of fairness opinions and opinion-related characteristics as an oversight mechanism that is associated with subsequent goodwill impairments.

We present evidence on the benefits of accounting conservatism of the target firm in a merger and acquisition transaction. The use of conservative accounting serves as a mechanism that reduces the likelihood of acquiring underperforming assets for the acquirer, making the target more valuable due to the reduced risk. In addition, the monitoring benefit of accounting conservatism can increase the competition for the target in the acquisition market. Lastly, managers of conservative firms may be more risk averse and demand greater compensation to exit the firm. Consistent with these arguments, we find that the target’s accounting conservatism increases the deal premium received. Furthermore, we find that the target’s accounting conservatism increases the announcement returns for both the target and the acquirer. In support of acquiring firms having preference for conservative targets, we find that targets with greater accounting conservatism are more likely to receive bids. Overall, these results indicate that accounting conservatism provides benefits to both sellers and buyers of equity.

SUMMARY This paper considers the potential impact of internal audit incentive-based compensation (IBC) linked to company performance on the external auditor's assessment of internal audit objectivity. We posit that external auditors will view IBC as a potential threat to internal audit objectivity, thus reducing the extent of reliance on the work of internal auditors and increasing the assessment of control risk. The increase in risk and external auditor effort should result in higher audit fees. We hypothesize that the form of incentive-based compensation, namely stock-based versus cash bonuses, moderates the association between IBC and external audit fee. Finally, we consider whether underlying financial reporting risk mitigates the external auditor's potential sensitivity to IBC. We find a positive association between external audit fees and internal audit compensation based upon company performance. The association is acute to IBC paid in stock or stock options as opposed to cash bonuses. We also find evidence consistent with the IBC associations being mitigated by the company's financial reporting risks. Data Availability: Individual survey responses are confidential. All other data are derived from publicly available sources.

The U.S. SEC adopted a rule in December 2007 to eliminate the 20-F reconciliation requirement for foreign private issuers preparing financial statements under IFRS as issued by the IASB. In this paper we examine whether eliminating the reconciliation is associated with information asymmetry for such foreign issuers during the 2005–2008 sample period. We find that information asymmetry decreases after such firms discontinue the 20-F reconciliation. Moreover, information asymmetry reduction is more pronounced for firms with higher reconciliation constraint proxied by higher pre-rule disclosure incentive and for firms with higher cost savings proxied by more reductions in audit fees in the post-rule period. We also document that foreign IFRS firms change accounting policies more frequently than foreign non-IFRS firms after the relaxation of the reconciliation constraint. Together, these findings provide empirical evidence supporting the SEC's decision to eliminate the 20-F reconciliation.

SYNOPSIS We examine the association between goodwill impairment charges and analysts' forecast accuracy and dispersion. We compare a test sample of firm-quarters with reported goodwill impairment charges during 2003–2007, and two control samples (matched on propensity scores and performance) of firm-quarters that do not report impairment charges. We find that analysts' forecasts are less accurate and more dispersed for the impairment sample than for the control samples. The magnitude of impairment charges is also negatively associated with forecast accuracy and positively associated with forecast dispersion. However, two forms of monitoring, auditor industry specialization and institutional ownership, reduce the adverse effect of goodwill impairments on analyst forecast dispersion. JEL Classifications: G14; M41; M44

This paper examines shareholder wealth effects in U.S. and home-country markets relating to the Securities and Exchange Commission's (SEC) decision to eliminate the Form 20-F reconciliation. During the period of examined events, we find positive cumulative abnormal returns for the treatment sample of U.S. cross-listed firms that prepare financial statements under International Financial Reporting Standards (IFRS), but no such effects for our control sample comprising cross-listed non-IFRS, U.S. domestic, or home-country firms. We find the stock market impact for our treatment sample to be positively related to our proxy for cost savings and negatively related to the pre-adoption reconciliation magnitude from IFRS to U.S. GAAP. This suggests shareholders place some value on reconciliation information, but the costs of preparing and auditing reconciliations generally outweigh concern about information loss. Moreover, we find that information loss is less pronounced for firms having used IFRS for a longer period, suggesting the learning effect mitigates information loss. Data Availability: Data are publicly available from sources identified in the article.

SUMMARY Section 404 of the Sarbanes-Oxley Act requires managers to assess, and their auditors to express an opinion on, the effectiveness of internal controls over financial reporting (ICFR). Policymakers expect the ICFR audits to enhance the credibility of firms' financial statements. Prior research argues that audit characteristics that enhance the credibility of financial reporting are associated with stronger earnings-return associations. We examine whether earnings accompanied by the first-time Section 404 ICFR reports were associated with higher informativeness compared with earnings in the prior year when only financial statement audit reports were available. We conduct our analysis for a test sample of accelerated filers with clean ICFR reports and clean previous Section 302 disclosures. Using a difference-in-differences approach, we compare the change in earnings informativeness for the test sample with that for a control sample of non-accelerated filers. We find that earnings informativeness for companies with clean internal control reports was greater in the Section 404 adoption year than in the previous year, while there was no change in earnings informativeness for the non-accelerated filers. Also, there is no difference in the increase in earnings informativeness across firms with small and large compliance costs (measured by change in audit fees), suggesting that both groups benefited from the Section 404 ICFR audits.

The U.S. SEC voted in November 2007 to accept financial statements prepared under IFRS as issued by the IASB without reconciliation to U.S. GAAP for foreign firms. We find that earnings reconciliation from IFRS to U.S. GAAP is positively and significantly associated with abnormal trading volume in the U.S. markets around the release of earnings reconciliation from 2005 to 2006. However, the relation between abnormal trading volume and earnings reconciliation during this period is driven by first-time IFRS users with low institutional holdings. In addition, we do not find any evidence that such a relation depends upon whether a firm applies IFRS as issued by the IASB or jurisdictional versions of IFRS. Extending our sample to 1995-2006 period, we document that the information content of earnings reconciliation is smaller for firms with high institutional holdings than for firms with low institutional holdings. Overall, our evidence provides some insight to the SEC when evaluating its decision to eliminate the reconciliation and contemplating to allow the use of IFRS by U.S. domestic firms.

This paper examines trading volume reaction to the reconciliation of IAS-based earnings to U.S. GAAP-based earnings. The sample includes foreign firms listed in the U.S. that use IAS as their primary reporting standards and reconcile their earnings to U.S. GAAP during the period of 1995-2004. The research question is of particular interest to policy makers, especially the SEC, when evaluating the necessity of reconciling the earnings from IAS to U.S. GAAP. We find that the absolute magnitude of earnings reconciliation is significantly and positively associated with abnormal trading volume both in the U.S. markets and in the local markets around Form 20-F filing dates, which supports the assertion that earnings reconciliation provides additional information content to investors beyond that provided by IAS earnings. We also find limited evidence that investors use book value reconciliations in their trading decisions. These findings also hold for various event windows. Additional analyses after the Core Standards Project and for several model specifications generally show a stronger and faster reaction in the U.S. markets than in the local markets. Our results have implications for recent SEC consideration of eliminating the reconciliation requirement for foreign firms that use IFRS in preparing their financial statements.

SYNOPSIS We examine the effect of accounting conservatism on earnings persistence and the stock market's valuation of earnings. Using a sample of U.S. companies during the period of 1988–2010, we find that firms with more conservative accounting generate less persistent earnings than firms with less conservative accounting. We also document that the pricing multiple on more conservative earnings is smaller than pricing multiples on less conservative earnings. Finally, we show that conditionally conservative earnings are less persistent than unconditionally conservative earnings, and the pricing multiple on earnings is smaller for conditionally conservative earnings than for unconditionally conservative earnings. Our results improve our understanding of the characteristics of conservatively reported earnings. JEL Classifications: M41; C23; D21; G38; N20

Using hand-collected data on fairness opinions from corporate filings, I show that acquirers that purchase independent fairness opinions outperform acquirers that purchase nonindependent opinions around merger announcements. Moreover, the amount of contingent fees that acquirers pay to investment bankers who provide fairness opinions is negatively associated with the same abnormal returns. Furthermore, acquirers with independent fairness opinions perform better in the stock markets until eighteen months after the announcement. Finally, contingent fees that acquirers pay are negatively associated with long-term operating performance. However, no evidence is found for targets except for long-term operating performance, possibly because both shareholders and investment bankers for targets share the same incentive for a higher price.

We examine the effect of the use of fairness opinions by acquirers on acquirers' short-term market performance. Our paper is the first to examine the effect of using fairness opinions on acquirers' abnormal returns around merger announcements. We hypothesize that acquirers purchase fairness opinions to reduce their potential litigation risk. Our results are consistent with this view that acquirers with fairness opinions underperform those without fairness opinions. The effect is more pronounced in the groups with higher litigation risk. Moreover, acquirers with higher litigation risk are more likely to purchase fairness opinions from investment bankers. Our paper raises the concern over the value of fairness opinions in mergers and acquisitions.

This paper examines the trading volume reaction to the reconciliation of IAS-based earnings to U.S. GAAP on Form 20-F filed during the period of 1995-2001. The sample includes all non-U.S. firms that use IAS as their primary reporting standards and reconcile their earnings to U.S. GAAP in their Form 20-F with available filing dates. The research question is of particular interest to policy makers when evaluating the necessity of reconciling the earnings. We find that the absolute magnitude of the earnings reconciliation is significantly and positively associated with trading volume around the Form 20-F filing dates, which supports the assertion that earnings reconciliation on Form 20-F provides additional information content to U.S. market investors beyond that provided by the IAS earnings. These findings also hold after the Core Standards Project and for various event windows. Moreover, the results indicate a stronger reaction for positive earnings reconciliation than for negative reconciliation.

This paper examines earnings management prior to stock option grants. Because the gain realized from a stock option is dependent on the difference between the exercise price determined on the stock option grant date and market price on the exercise date, management has the incentive to temporarily depress its share price immediately prior to the grant date (Yermack, 1997; Chauvin and Shenoy, 2001). This paper focuses on earnings management to decrease the exercise price prior to the stock option grants. Our results support this hypothesis, as we find a negative relation between discretionary accruals and subsequent stock option grants.