20‐F Reconciliations and Investors' Perceptions of Risk, Financial Performance, and Quality of Accounting Principles

This paper investigates whether the increases and decreases to earnings and stockholders' equity presented in 20‐F reconciliations influence perceptions of the risk of investing, the quality of the accounting principles, and the financial performance of the reporting firm. The research results indicate that subjects perceive the risk of a hypothetical firm filing a 20‐F reconciliation with reconciliation decreases to be higher, and the quality of accounting principles lower, than a hypothetical firm either complying with U.S. GAAP or filing a 20‐F reconciliation with reconciliation increases. Additional analysis suggests that these significant effects are due to a negative effect from the reconciliation decrease consistent with the effects predicted by attribute framing theory. The findings have implications for the SEC as they consider whether foreign registrants on U.S. exchanges should be allowed to comply with International Accounting Standards (IAS) without reconciliation to U.S. GAAP. These findings also have implications for foreign registrants on U.S. exchanges. The results indicate that firms that have higher non‐U.S. GAAP earnings (and a consequent reconciliation decrease) should comply with U.S. GAAP as the reporting of a reconciliation decrease creates a negative perception of the firm.