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Do IFRS Reconciliations Convey Information? The Effect of Debt Contracting

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  • HANS B. CHRISTENSEN
  • EDWARD LEE
  • MARTIN WALKER

Abstract

ABSTRACT We examine whether earnings reconciliation from U.K. generally accepted accounting principles (GAAP) to International Financial Reporting Standards (IFRS) convey information. As a result of debt contracting, mandatory accounting changes are expected to affect the likelihood of violating existing covenants based on rolling GAAP, leading to a redistribution of wealth between shareholders and lenders. Consistent with this prediction, we find significant market reactions to IFRS reconciliation announcements. These market reactions are more pronounced among firms that face a greater likelihood and costs of covenant violation and early announcements. While the association between later announcements and weaker market reactions is consistent with contractual implications of technical changes to earnings, which investors quickly learn to predict, it is inconsistent with IFRS forcing all firms in the sample to reveal firm-specific information through accruals. Thus, by showing that mandatory IFRS also affects debt contracting, we expand on existing IFRS research that focuses on how accounting quality and cost of capital are impacted. Copyright (c), University of Chicago on behalf of the Accounting Research Center, 2009.

Suggested Citation

  • Hans B. Christensen & Edward Lee & Martin Walker, 2009. "Do IFRS Reconciliations Convey Information? The Effect of Debt Contracting," Journal of Accounting Research, Wiley Blackwell, vol. 47(5), pages 1167-1199, December.
  • Handle: RePEc:bla:joares:v:47:y:2009:i:5:p:1167-1199
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    Cited by:

    1. De George, Emmanuel T. & Li, Xi & Shivakumar, Lakshmanan, 2016. "A review of the IFRS adoption literature," LSE Research Online Documents on Economics 67599, London School of Economics and Political Science, LSE Library.
    2. Ulf Br&?ggemann & J?rg-Markus Hitz & Thorsten Sellhorn, 2013. "Intended and Unintended Consequences of Mandatory IFRS Adoption: A Review of Extant Evidence and Suggestions for Future Research," European Accounting Review, Taylor & Francis Journals, vol. 22(1), pages 1-37, May.
    3. Igor Goncharov & Sander Triest, 2014. "Unintended Consequences of Changing Accounting Standards: The Case of Fair Value Accounting and Mandatory Dividends," Abacus, Accounting Foundation, University of Sydney, vol. 50(3), pages 341-367, September.
    4. repec:bla:acctfi:v:57:y:2017:i::p:255-276 is not listed on IDEAS
    5. repec:eee:joacli:v:38:y:2017:i:c:p:14-33 is not listed on IDEAS
    6. Pawel Bilinski & Danielle Lyssimachou, 2014. "Risk Interpretation of the CAPM's Beta: Evidence from a New Research Method," Abacus, Accounting Foundation, University of Sydney, vol. 50(2), pages 203-226, June.
    7. Chan, Ann L.-C. & Hsu, Audrey W.-H. & Lee, Edward, 2015. "Mandatory adoption of IFRS and timely loss recognition across Europe: The effect of corporate finance incentives," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 70-82.
    8. repec:eee:reacre:v:24:y:2012:i:2:p:90-95 is not listed on IDEAS
    9. Ray Ball & Xi Li & Lakshmanan Shivakumar, 2015. "Contractibility and Transparency of Financial Statement Information Prepared Under IFRS: Evidence from Debt Contracts Around IFRS Adoption," Journal of Accounting Research, Wiley Blackwell, vol. 53(5), pages 915-963, December.
    10. Beuselinck, C.A.C. & Joos, P.P.M. & Khurana, I.K. & van der Meulen, S., 2010. "Mandatory IFRS Reporting and Stock Price Informativeness," Discussion Paper 2010-82, Tilburg University, Center for Economic Research.
    11. Emmanuel T. De George & Xi Li & Lakshmanan Shivakumar, 2016. "A review of the IFRS adoption literature," Review of Accounting Studies, Springer, vol. 21(3), pages 898-1004, September.
    12. Beuselinck, C.A.C. & Joos, P.P.M. & Khurana, I.K. & van der Meulen, S., 2010. "Mandatory Adoption of IFRS and Analysts’ Forecasts Information Properties," Discussion Paper 2010-112, Tilburg University, Center for Economic Research.
    13. repec:eee:advacc:v:30:y:2014:i:1:p:241-250 is not listed on IDEAS
    14. Voulgaris, Georgios & Stathopoulos, Konstantinos & Walker, Martin, 2014. "IFRS and the Use of Accounting-Based Performance Measures in Executive Pay," The International Journal of Accounting, Elsevier, vol. 49(4), pages 479-514.
    15. Lionel Escaffre & Réda Sefsaf, 2013. "L'impact de l'évaluation IFRS des écarts d'acquisition sur la gestion des résultats : Cas de la France et du Royaume-Uni," Post-Print hal-00996787, HAL.
    16. Senteney, David L. & Bazaz, Mohammad S. & Senteney, Michael H., 2016. "Cross-market information transfers of ADR firms: An investigation of emerging market economies," Research in International Business and Finance, Elsevier, vol. 37(C), pages 655-677.

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