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 professionalsʹ 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 professionalsʹ expectations of earnings growth were significantly and positively associated with their investment recommendation.