International differences in accounting principles and the information content of earnings

Strict registration, reporting and disclosure requirements imposed by the Securities and Exchange Commission (SEC) are considered to be relatively restrictive barriers for foreign firms wishing to raise capital in the U.S. market. The SEC's position appears to assume that the public benefits of regulation outweigh the private costs of compliance. This position has been recently challenged, mostly by the major U.S. stock exchanges competing in the global arena.; The purpose of this study is to provide more empirical evidence relevant to the debate over measurement and disclosure requirements for foreign registrants in the U.S. Two major themes are pursued. First, the market's ability to cope with foreign GAAP reporting is investigated. Second, the problem of alternative reporting practices exercised by foreign firms is addressed and the potential differences in the market's perceptions of these practices are tested.; This study draws on the rich tradition of returns-earnings research in accounting. It concentrates on several aspects of the information content of earnings numbers generated under foreign and/or U.S. GAAP and utilizes a methodology typical for market study. An original classification of reporting practices exercised by foreign firms was developed as a prerequisite for the test of hypotheses. Data was collected from CRSP tapes, SEC Forms 20-F and 10-K, and Compustat and Disclosure data bases. Multiple regression analysis and analysis of variance were utilized to test hypotheses derived from the theory and prior empirical research.; The obtained results lead to the following major conclusions: (1) U.S. GAAP earnings are promptly inferred from the announced foreign GAAP earnings, long before the reconciliation is disclosed in the Form 20-F filed with the SEC; (2) lagged earnings reconciliation values are used in the approximation of U.S. GAAP earnings; and (3) although present SEC regulation results in diversified reporting practices exercised by foreign issuers, there is no difference in the information content of earnings under different reporting modes.