Accounting Standards Harmonization and Financial Statement Comparability: Evidence from Transnational Information Transfer

Clare Wang The Wharton School University of Pennsylvania wclare@wharton.upenn.edu Current Version: January 2011 Abstract This study investigates whether harmonization of accounting standards enhances the comparability of Önancial information across countries. First, I statistically deÖne and link comparability to Örm value in a two-Örm, sequential information release framework. I then empirically test the prediction that a Örm yet to announce earnings reacts more strongly to the earnings announcement of a foreign Örm when both report under the same rather than di§erent accounting standards. My analysis of abnormal price and volume reactions for a global sample of Örms supports this prediction. Next, in an attempt to control for the e§ects of changes in reporting quality, I use a di§erence-in-di§erences design around the mandatory introduction of International Financial Reporting Standards (IFRS). I Önd that mandatory adopters experience a signiÖcant increase in market reactions to the release of earnings by voluntary adopters compared to pre-mandatory adoption. This increase is not observed for non-adopters over the same period. Taken together, my study shows that accounting standards harmonization facilitates transnational information transfer, and suggests comparability as a direct mechanism.

I thank my dissertation committee members Brian Bushee, Luzi Hail, Catherine Schrand (Chair) and Robert Verrecchia for their continuous and invaluable guidance. I also thank Gus De Franco, Wayne Guay, Mirko Heinle, Ray Ke and Rick Lambert for their helpful comments. I gratefully acknowledge the Önancial support from the Wharton School and the Connie K. Duckworth Endowed Doctoral Fellowship.

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Introduction This study seeks to enhance our