20-F reconciliations and investment recommendations by financial professionals

As part of the U.S. regulatory requirements, non-U.S. companies registered on U.S. stock exchanges (‘foreign registrants’) are required to compile financial reports that comply with U.S. Generally Accepted Accounting Principles (‘GAAP’) or provide a reconciliation of non-U.S. GAAP financial statements to U.S GAAP (20-F reconciliation). The objective of this study is to determine if identical information with respect to U.S. GAAP may be evaluated differently depending on whether the 20-F reconciliation information is presented in a positive (20-F reconciliation gain) or negative (20-F reconciliation loss) way. The research results indicate that the financial professionals' investment recommendations were significantly lower for a firm when it reports a reconciliation loss relative to when it reports a reconciliation gain or when it reports under U.S. GAAP, although the financial results were identical in all cases. Further, consistent with Bradshaw Bradshaw MT. How do analysts use their earnings forecasts in generating stock recommendations? Account Rev 2004;79(1):25-50.], the financial professionals' expectations of earnings growth were significantly and positively associated with their investment recommendation.