Earnings expectations, firm valuation and risk assessment using foreign and restated accounting data

Scope and method of study. The Securities and Exchange Commission currently requires non-Canadian foreign firms to provide restated (U.S. based) accounting numbers in addition to those prepared under the foreign firms' home country standards. The purpose of the present study is to empirically assess the relevance of the two sets (restated and foreign) of accounting numbers in two capital market contexts: security valuation and risk assessment. The study is conducted using 57 firms from 12 countries which were listed on the New York and American Stock Exchanges for two or more years from 1981 to 1991.;Findings and conclusions. In phase I, earnings expectations are formulated and used in security valuation. In these tests the difference between foreign and restated net income is the basis of the earnings expectations. Restated net income did not provide additional information relative to foreign data alone. In Phase II, direct tests of the association are conducted. In this phase, the individual restated income statement and balance sheet items are considered, in addition to the net income differences. For the one and three day intervals surrounding the release of the restated data, the restated data was shown to be provide incremental explanatory power for security returns. The second set of tests considered the two sets of accounting variables in systematic risk assessment. The restated data adds statistically significant explanatory power for systematic risk assessment. Taken as a whole, the results suggest that restated net income is not sufficient to provide incremental information, however, when the restated data set is expanded to include the full set of restated income statement and balance sheet items, explanatory power is increased relative to both firm valuation and risk assessment.