Effect of foreign GAAP earnings and Form 20-F reconciliations on revisions of analysts' forecasts

A controversial area of U.S. securities regulations involves the Securities and Exchange Commission's (SEC) financial reporting requirements for foreign firms, specifically, the necessity of providing a quantitative reconciliation to U.S. GAAP (Form 20-F). The results of earnings-returns research to date indicate that the release of foreign GAAP earnings provides important information. However, the results of earnings-returns studies using reconciled information are mixed. Instead of using an earnings-returns methodology adopted in prior research, this study utilizes analysts' revisions as a market indicator of the effect of information released in foreign GAAP earnings and the reconciled information in Form 20-F. Additionally, the study investigates the influence of four firm-specific variables in the firm's information environment—similarities of accounting systems, analyst following, difference between reconciled earnings and foreign GAAP earnings, and dispersion of analysts' expectations—on positive abnormal revision activities of financial analysts at the time of filing Form 20-F.The results indicate that the release of foreign GAAP earnings (at earnings announcement dates) and reconciled information (at the time of filing Form 20-F) contains relevant information as measured by analysts' revisions. Further, variables representing analyst following, change in reconciled earnings, and dispersion of analysts' expectations are significant in explaining the variation observed in positive abnormal revisions.