The SEC's elimination of 20-F reconciliation and information asymmetry

Abstract

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.