Accounting and Finance Seminar: Bjørn Jørgensen, CBS

Presenter: Bjørn Jørgensen, CBS

Title: Do Accounting Standards Affect Financial Statements? Evidence from Twin Firms

Abstract: We investigate the effect of accounting standards on commonly used financial statement figures holding fixed underlying transactions. Specifically, we study a novel sample of EU-domiciled firms that are listed in the U.S. markets and that each year report two separate annual reports with different consolidated financial statements, one based on U.S. Generally Accepted Accounting Principles (U.S. GAAP) to the U.S. Securities and Exchange Commission (SEC) and the other based on International Financial Reporting Standards (IFRS) to their home country in the EU. These firms with twin financial statements allow us to document differences in financial statement figures between U.S. GAAP and IFRS. These differences in turn affect common accounting-based ratios such as ROE and ROA. We also use this sample to document differences in discretionary earnings management between U.S. GAAP and IFRS. Since commonly used matching techniques are based on financial statements figures that we show differ for our twin firms (such as total assets), we demonstrate that matching of twin firms that report using U.S. GAAP (IFRS) does not identify its twin among all IFRS- (U.S. GAAP-) reporting firms more than 60 percent of the time. This infrequent matching results in statistically significant differences in discretionary earnings management comparisons between U.S. GAAP and IFRS, relative to within twin comparisons. Our results suggest that differences in financial statement figures between U.S. GAAP and IFRS affect matching when applied across accounting standards.

Host: Nikolaj Niebuhr Lambertsen