Market Reaction to and Valuation of IFRS Reconciliation Adjustments : First Evidence from the UK

This paper investigates whether there is market reaction to and value-relevance of information contained in the mandatory transitional documents required by IFRS 1 (2005). These documents detail the reconciliation adjustments necessary to a firm's previously reported UK GAAP accounts to achieve compliance with IFRS. We find significant negative abnormal returns and positive trading activity for firms reporting a negative reconciliation adjustment on UK GAAP earnings. Abnormal returns around the reconciliation announcement are associated with the magnitude of the earnings reconciliation. The informational content of the earnings adjustment is value-relevant and its valuation coefficient is significantly higher post disclosure. While the informational content of the positive earnings adjustments is value-relevant before disclosure, for negative earnings adjustments it is value relevant only post disclosure, consistent with managers delaying the communication of bad news until IFRS compliance. A finer model reveals that adjustments attributed to impairment of goodwill, share-based payments, employee benefits, financial instruments and deferred taxes are incrementally value relevant, but only impairment of goodwill and deferred taxes reveal new information. The results are consistent with mandatory IFRS adoption altering investors' beliefs about stock prices