MARKET REACTION & VALUATION OF IFRS

RECONCILIATION ADJUSTMENTS:
FIRST EVIDENCE FROM THE UK

Joanne Horton
j.horton@lse.ac.uk
London School of Economics
Department of Accounting & Finance
London WC2A 2AE UK
George Serafeim
gserafeim@hbs.edu
Harvard University
Harvard Business School
Boston 02163 MA

This version: 26th February, 2007

J. Horton and G. Serafeim 2007.

Electronic copy of this paper is available at: http://ssrn.com/abstract=923582

MARKET REACTION & VALUATION OF IFRS

RECONCILIATION ADJUSTMENTS:
FIRST EVIDENCE FROM THE UK

ABSTRACT

This paper investigates whether there is any market reaction to and value relevance of
the information contained in transitional documents required by IFRS 1 First Time
Adoption of International Financial Reporting Standards. These documents detail the
reconciliation adjustments necessary to a firms previously reported UK GAAP
accounts to achieve compliance with IFRS. We find statistically significant negative
abnormal returns for firms reporting a negative reconciliation adjustment on UK
GAAP earnings. A finer model reveals that adjustments attributed to impairment of
goodwill, share based payments, employee benefits and deferred taxes are
incrementally value relevant. The results are consistent with IFRS altering investors
beliefs about stock prices.

JEL Classification: M41, G14, G15.

Keywords: IFRS, event study, value relevance, disclosure strategy.

2
Electronic copy of this paper is available at: http://ssrn.com/abstract=923582

I.

INTRODUCTION

European law requires all UK listed companies to adopt International Financial

Reporting Standards (IFRS), as endorsed for use in the European Union, from 1
January 2005 and onwards. Moreover, companies have to restate their previous years
financial statements according to IFRS in order to provide investors with
comparability, continuity and to aid them in the evaluation of corporate performance
over time.
IFRS 1 First Time Adoption of International Financial Reporting Standards
generally requires that the accounting policies adopted are compliant with IFRS and
that these policies are applied retrospectively to all periods presented. Hence, every
entity must present a number of reconciliations in order to explain the transition to
IFRS. These include a reconciliation of the balance sheet and income statement from
UK GAAP to IFRS for the date of transition. In addition, an explanation of the main
adjustments made to restate the cash flow statement under UK GAAP; and disclosures
in relation to any impairment losses or reversals of impairment losses recognised for
the first time when preparing, its opening IFRS balance sheet are required.
UK firms have produced various forms of reconciliation documents when
reporting their comparative (i.e. previous year) figures, some being more detailed
than others, however all the statements provide a set of precise measures of the
differences created by alternative accounting practices. They generally all start with
earnings (shareholders equity) under UK GAAP and then state both the classification
differences (i.e. those adjustments that have a zero effect on the net amounts
disclosed) and the material adjustments necessary to calculate earnings (shareholders
equity) under IFRS.

Where firms do significantly diverge is in the timing of these disclosures. Many

firms delayed disclosing their reconciliations until their interim or final results, or
other important announcements, 1 whilst other firms disclosed the transition report
earlier and separately from any other announcements. These latter cases provide the
authors with a clean event to assess the accounting effect of applying IFRS relative to
applying UK GAAP, since the firms had already disclosed these results earlier under
UK GAAP. 2 Thus we are able to isolate the pure accounting change from the
underlying performance of the firms, given the market will already have reacted to the
disclosure of their accounts reported under UK GAAP.
These transitional/reconciliation documents enable the authors to address and
investigate several important questions. First for those firms who disclosed earlier or
separately is there any abnormal trading activity around the announcement date of
the restated figures? And, given that the transitional documents represent a pure
accounting change for a previous perioddid the reconciliation of accounting data to
IFRS reveal new information to investors? To answer these questions we conduct an
event study and investigate the markets reaction to these announcements.
Second, are the differences in UK GAAP and IFRS as summarized in the
aggregate reconciliations of earnings and shareholders equity value-relevant? That is,
does the reconciliation of accounting data to IFRS increase the association between
accounting measures and market value? Third, which of the reconciliation
components are incrementally value relevant, over and above the accounting numbers
already reported? Answering this question will give us insights into the value
relevance of specific measurement and recognition alternatives. To provide evidence
of value-relevance we construct models similar to Amir et al. (1993) and Harris et al.
(1999) and investigate the market valuation of IFRS and UK GAAP amounts. To date

previous research addressing the market impact of IFRS as endorsed by the European
Union is virtually non-existent, so this paper is unique and provides the first evidence
of the direct association between firms value and the accounting change to IFRS
from UK GAAP.
The remainder of the paper is organised as follows. We provide a background
discussion of the issues raised regarding the stock market impact of the transition to
IFRS in Section II. Section III describes our hypotheses, the empirical approaches we
used and the sample selection procedure. Sections IV and V present our research
design and the corresponding results. A discussion of the major key differences
between UK GAAP and IFRS is provided in section VI, followed by the results
derived from the related disaggregated model. Section VII concludes.

II. BACKGROUND
Undoubtedly, the most important topic for the accounting profession today both
outside and potentially inside the USA, given the roadmap for IFRS/US GAAP
convergence, is the transition to IFRS. It has been characterised as the biggest
accounting change in a generation (PwC 2004a). To-date there has been limited
research conducted into the effects/implications of IFRS adoption, especially in
relation to UK firm-specific reactions.
Prior to firms disclosing their detailed reconciliation documents investors have
found it rather hard to assess the impact of IFRS on individual company numbers.
This is true especially given that some industries were not yet fully ready for the
transition to IFRS, 3 whilst some firms appeared to be more prepared than others. 4
Announcements provided by firms about possible impacts of IFRS adoption on their
financial statements were generally vague. PwC (2004b) found that:

Only 4% of companies had released any broad picture to the markets by

September 2004, and the disclosures that have been made are often very limited in
scope.
The perceived implications and effects of shifting compliance to IFRS from UK
GAAP have been and will continue to be debated. Several surveys conducted by the
large auditing firms have suggested that the effects will be far reaching, in particular
analysts and commentators perceptions.. [compliance] will significantly affect
accounting systems, employee compensation, mergers or acquisitions, possibly
tax, and many other areas (Deloitte 2004).
Fund managers 5 surveyed by PwC (2005) stated that IFRS numbers are having a
real impact on their investment decisions. 6 On the other hand almost all firms made
explicit statements that they did not anticipate that IFRS compliance should/would
alter investors opinions and beliefs, given that IFRS has no effect on their firms
strategy, business performance or free cash flows and a minimal effect on their net
debt.
Previous research into the effects of IFRS adoption has been limited. Harris and
Muller (1999) have investigated the market valuation of earnings and book value
amounts prepared under International Accounting Standards (IAS) and US GAAP.
Their sample consisted of foreign firms listed in the US that prepared their home
country financial statements using IASC standards and reconciled from IAS to US
GAAP in their Form 20-F fillings. They found evidence that the US GAAP earnings
reconciliation adjustment is value relevant for the market value and returns models.
Ashbaugh and Pincus (1998) tested whether the adoption of IAS improved the
usefulness of accounting information for predicting future earnings. They found, after
controlling for analysts following and firm size, that for their non-US firm sample
who adopted IAS between 1990 and 1993, there was a significant increase in the
accuracy of analysts forecasts in the year after adoption. Armstrong et al. (2006)
investigated the general market reaction to events surrounding the probable adoption

of IFRS in Europe. They found that investors generally responded positively to events
that increased the likelihood of adoption to IFRS, and negatively to events that
decreased this likelihood, thus suggesting that investors perceived the expected
benefits of more comparable financial reports and the prospect of increased capital
flows to outweigh the expected costs of implementation. On the other hand De Jong et
al. (2006) explored the possible economic implications for Dutch firms arising from
compliance with IAS 32. One of IAS 32s requirements imposes a change in the
accounting treatment of preference shares, from an equity classification to a liability
classification. They found that IAS 32 changed the capital structure of firms, and
caused a shift towards a more equity-based capital structure in the Netherlands.
Our findings indicate that firms decreasing their earnings in the reconciliation
document experience a negative abnormal return at the date of the announcement.
Moreover, for those firms we also observe an abnormal increase in trading activity.
These results are mainly driven by firms which are not traded in US and therefore do
not report under US GAAP as well. IFRS earning reconciliation adjustments are
incrementally value relevant after controlling for UK GAAP figures. It may be noted
that the value relevance is not dependent on the disclosure strategy of the firm when
reporting their transitional documents. The specific adjustments in respect of goodwill
impairment, share based payments, employee benefits, financial instruments and
deferred taxes are associated with stock prices. However the value relevance of
employee benefits adjustment is found to be dependent on the firms previous
disclosure policy under UK GAAP i.e. recognized in the balance sheet (FRS 17) or
disclosed in the notes to the accounts (SSAP 24).

III. METHODOLOGY, HYPOTHESES AND SAMPLE

An Event study and Value Relevance Study
Our first approach in evaluating any information content of the restatements is to
consider the price and volume reaction, given that in a semi-strong efficient market
we expect stock prices to reflect any published value relevant information (Fama
1991). 7 Initially we employ an event study methodology and investigate the price
reaction to the publication of the transitional document that had not been reported in
conjunction with other information by the firms. This is therefore a clean accounting
event given that our sample consists only of those firms that decided to publish the
documentation separately from any other announcement. The IFRS restatement has
information content if and only if Pjt E(Pjt / t-1), where Pjt is the efficient price
incorporating t; t-1 is the information set just before the information disclosure; t
represents the information set including the disclosure of IFRS restatement and t-1
t. The findings will be of great interest since they may provide some evidence as to
whether there is any new information revealed by IFRS over and above the UK
GAAP information which the market already knew.
The vast body of previous research would suggest that if, as the companies state,
IFRS adoption is a pure accounting change then in an efficient market one would not
expect any effect on security prices (Beaver 1981). If however there are contracting
and political consequences, as hinted at by practitioners, or new information that may
signal future cash flow effects, 8 then there may be real economic consequences from
the announcement of these transitional documents, 9 and hence a market reaction.
Thus our hypothesis to be tested is as follows:
Ha1: the restatement of the accounts according to IFRS is associated with
abnormal returns and/ or trading activity.

In addition to the event study we also conduct a value-relevance study. In a

similar vein to both Amir et al. (1993) and Harris et al. (1999), we investigate the
value-relevance, incremental, and relative association of IFRS measures of earnings
and owners equity, versus UK GAAP measures. Furthermore we investigate which
differences in accounting practices summarised in the components of the
reconciliation are value-relevant. Addressing this second issue provides insights about
the value relevance of alternative measurement practices. Thus the hypotheses to be
tested are as follows:
Hb1: the restatement disclosures are incrementally value-relevant over UK GAAP
accounting earnings and owners equity
Hc1: the components of the reconciliation adjustments are incrementally valuerelevant over UK GAAP accounting earnings and owners equity

Limitations and Caveats

There are a number of caveats that may limit our conclusions. Firstly although the
news may be value-relevant, it may be completely anticipated and as such the
announcement itself occasions no surprise. However, to-date we are not aware of any
announcements by companies about the explicit effects of compliance, only vague
statements. Amir et al. (1993) noted that some US GAAP reconciliation items could
be anticipated, for example purchased goodwill amortisation, and therefore the market
would not react on the announcement day to these reconciliations items. For our study
there is a possibility that a number of the adjustments could be anticipated. For
example, companies who previously complied with the transitional provisions of FRS
17 Retirement Benefits would already have disclosed in their notes the gains and
losses on their pensions liabilities, while IAS 19 Employee Benefits now requires

these, under certain conditions, 10 to be reported in the main accounts. However, we

do not have evidence to suggest the market could anticipate all initial (or transitional)
reconciliation adjustments. For example, IFRS3/IAS38 requires impairment reviews
of goodwill rather than automatic amortisation, thus in order to anticipate the
adjustment necessary the market would need to be able to predict whether the
goodwill has been impaired. To-date no firm, within our sample, gave any indication
of possible impairments prior to the reconciliation document. Indeed, Hayn and
Hughes (2006) find disclosures did not provide investors with adequate information in
order to predict future impairments of goodwill. Therefore, it would not be unrealistic
to consider for example, goodwill write-offs following implementation of IFRS as
unexpected information.
A second caveat when considering any market reactions, is that efficiency
assumes that the market will understand the implications and effects of IFRS
compliance and act accordingly. But even if the new information communicated to
the market is value-relevant, it may not react if investors are unable to process this
information. A PwC (2005) study found 84 per cent of fund managers confirming that
they know a great deal or a fair amount about the new standards and a similar
percentage feeling very or fairly confident in their understanding of the impact of
IFRS on the companies they invest in. However, Deloitte (2004) survey reports that
if current practices are maintained, companies may find themselves applying the
standards in very different ways and that the potential impact on market sentiment
and valuations could be significant, especially if there is a risk that the investment
community may not properly understand what the changes mean. In addition a
survey conducted by Citigate Dewe Rogerson (2005), found that 75per cent of the
analysts working for the 12 largest investment banks in London have not received any

10

IFRS training, and that one out of three analysts has received no communication about
the implications of IFRS from the companies they cover.
Another caveat of our study is related to behavioural versus economic
explanations of our results. Even if we find a reaction and specific components being
value relevant this may be attributed to framing 11 . Therefore, if the way companies
were presenting their reconciliation documents was highlighting certain adjustments
over others then we might find the former value relevant not because there is indeed
new information revealed but because of the way the results were presented. It is
worth noting though that not finding systematic differences, in terms of valuation,
between the combined disclosure firms and the separate disclosure firms give us
some confidence that the market was not affected by such framing biases.
We would like to highlight that we recognize the deficiencies of empirical
approaches and therefore we adopt a conservative approach in this paper. All of our
tests are two tailed and in our event study we expand the event window up to eleven
days, something which reduces the power of our tests (Brown & Warner 1985). As a
result finding significant market reaction and robust valuation properties of IFRS
numbers under different specifications, provides more credibility to this study.

Sample Description
Our sample consists of the firms included in London Stock Exchange FTSE350. From
this sample base of 350 companies, 53 were excluded for lack of data either because
they did not report IFRS/UK reconciliations, or the initial reconciliation document
could not be found or the reconciliation document was not detailed enough to obtain
all the relevant data. After excluding these firms, our main sample consists of 297
firms from a wide range of industries (see Table 1), the average market capitalisation

11

of this sample is 4,429m (standard deviation of 12,510m), with a maximum of

122m and a minimum of 211m (see Table 2, Panel A).
[Insert Table 1 here]
In order to conduct the event study we investigated which of these 297 firms
announced their transitional (reconciliation) documents to IFRS separately from any
other news items (separate disclosure firms). This was achieved by investigating the
firms individual web-pages, the London Sock Exchange Regulatory News Service
(RNS), Lexis-Nexis database, and all the major newspapers. Firms, who on the same
day as their reconciliation document also announced their interim or annual results or
other price-sensitive information, such as potential acquisitions, trading statements
etc., were excluded from the sample (combined disclosure firms). After excluding
these latter companies 12 our event study sample consists of 182 firms the average
market capitalisation of this sample is 5,663m (standard deviation of 15,162m),
with a maximum of 122m and minimum of 254m (see Table 2 Panel B).
[Insert Table 2 here]
The majority of the data was hand collected: the actual event day was obtained by
finding the press releases for each individual company, and the reconciliation
documents were downloaded primarily from the firms websites reviewed and the
relevant data collected from them. Other data such as share prices, dividends and
number of trades were obtained from Datastream.

IV. RESEARCH DESIGN

Event Study
In order to test Hypothesis a1 we need to ascertain whether the market reacted to the
announcement of the firms reconciliation document. We therefore investigated the

12

daily abnormal returns (DARs) and cumulative abnormal returns (CARs) for an 11
day event window, i.e. 5 days prior to and 5 days after the announcement, 13 where
day 0 represents the day that each firm publicly announced the impact of IFRS on
their previous years results and position.
A number of alternative methods were used to generate abnormal returns: the
market-adjusted model, the market model and the mean-adjusted model. 14 The pattern
of results is essentially similar under all generating methods, and only those under the
market-adjusted model are reported in detail here. The market-adjusted model is as
follows:
Uit = Rit - Rmt

(1)

where Uit is the abnormal return on security i in period t; Rit is the return 15 on
security i in period t; Rmt is the market return in period t.
Given the findings of Cready and Hurtt (2002) we also supplemented the returnsbased analysis with a volume-based analysis since the latter increases the likelihood
of correctly rejecting the null hypothesis of investor non-response 16 . Thus the
following volume model was also investigated:
yit = Tit - a i - b iTmt

(2)

where yit is the abnormal number of trades on security I, Tit = log (Number of Trades
it

+ 1) for stock i at time t 17 and Tmt is the log transformed number of trades for all

FTSE350 stocks. 18 Similar to the market model the estimation period was 120 days,
prior to the event window.

13

Value Relevance Study

Similar to previous value-relevance research examining reconciliations and other
disclosures (Kallapur and Kwan 2004) we adopt the following market value model
which relates a firms earnings and shareholders equity measured under UK GAAP
together with the respective IFRS reconciliation adjustments, to its market value:
MV it + 5 = 0 + 1 BV itUK + 2 ERN itUK + 3 BV itIFRS UK + 4 ERN itIFRS UK + 5 NOSH it + it

(3)

Where:
MVit +5

= market value of shareholders equity for firm i five days after the
restatement at time t; 19

BVitUK

= book value of shareholders equity under UK GAAP for firm i

included in the transitional report at time t;

ERN itUK

= earnings under UK GAAP for firm i included in the transitional

report at time t;

BVitIFRS UK

= difference between UK GAAP and IFRS book value of shareholders

equity for firm i included in the transitional report at time t;

ERNitIFRSUK = difference between UK GAAP and IFRS earnings for firm i included
in the transitional report at time t;
NOSHit

= number of shares outstanding at time t for firm i.

Also consistent with the suggestions of Barth and Kallapur (1996), equation (3) is
estimated undeflated with Whites (1980) correction for heteroskedasticity and a
separate variable to proxy for scale is included - the number of common shares
outstanding (NOSHit) 20 . However, in order to examine the robustness of our results to
alternative specifications, we also estimate equation (3) using the number of shares

14

outstanding as a deflator (i.e., a price-per-share specification). In addition consistent

with other value relevant studies and given the potential effect of implementing IFRS
GAAP may be industry specific we also modified equation (3) to include industry
fixed effects. 21
We predict positive coefficients for each variable. If the IFRS adjustments are
value relevant then 3 and/or 4 should be positively signed and significantly different
from zero. This would indicate that the reconciliation to IFRS is associated with
market values after controlling for owners equity and earnings reported under UK
GAAP. Following previous studies we define value relevance as the association
between accounting information and equity market values (Francis et al., 1999 and
Barth et al. 2001).
Given the model above is based on the full sample of 297 firms (both separate
and combined disclosures firms) we are assuming that the reconciliation adjustments
have similar properties irrespective of the firms disclosure strategy and hence the
market will view the reconciliation information in the same way. To capture any
possible selection bias the above model is refined to also examine whether the
information is weighted differently by the market due to the firms chosen disclosure
strategy.
Equation (3) will therefore be modified to allow for different coefficients in
relation to separate or combined disclosure to give the following model:
MV it + 5 = 0 + 1 DS + 1 BV itUK + 2 ERN itUK + 3 BV itIFRS UK + 4 ERN itIFRS UK +

5 NOSH it + 6 DS * BV itUK + 7 DS * ERN itIK + 8 DS * BV itIFRS UK +

(4)

9 DS * ERN itIFRS UK + 10 DS * NOSH it + it

The variables are as described above (for equation 3) with an additional dummy
variable DS included. This takes the value of unity if the firm disclosed the
transitional document separately from other firm-specific information i.e. separate

15

disclosure firms (firms included in the event study above), and zero if the firm
disclosed the transitional document alongside other firm-specific information, i.e.
combined disclosure firms. The coefficients in equation (4) corresponding to the
combined disclosure firms are 0 (intercept) 1 through 5. The differences in
intercept and slope between these separate and combined disclosure firms are
represented by 1 and 6 through to 10. The coefficient for the separate disclosure
firms equals the coefficient for the combined disclosure firms plus the corresponding
DS coefficient. Thus the separate disclosure firm coefficient for BVitIFRS UK is (3+8)
in equation (4).
Using a similar process we also investigate the possibility that any value relevance
may be dependent on whether the firm also reports under US GAAP, since some
firms within our sample maintain a traded financial instrument in a US market. Under
SEC rules these firms currently provide, within their Form 20F fillings, the necessary
reconciliation adjustment to their UK GAAP accounts in order to report under US
GAAP. Equation (3) is therefore modified to allow for different coefficients in
relation to SEC listed or non-SEC listed firms to give the following model:
MV it + 5 = 0 + 1 SEC + 1 BV itUK + 2 ERN itUK + 3 BV itIFRS UK + 4 ERN itIFRS UK +

5 NOSH it + 6 SEC * BV itUK + 7 SEC * ERN itIK + 8 SEC * BV itIFRS UK

+ 9 SEC * ERN

IFRS UK
it

(5)

+ 10 SEC * NOSH it + it

The variables are as described above (as for equation 3) with an additional dummy
variable SEC included. This takes the value of unity if the firm is registered with the
SEC and zero otherwise. The interpretation of the individual coefficients is similar to
equation 4, for example the coefficients in equation (5) corresponding to the non-SEC
listed firms are 0 (intercept) 1 through 5. The differences in intercept and slope
between these SEC and non-SEC firms are represented by 1 and 6 through to 10.
The coefficient for the SEC firms equals the coefficient for the non-SEC firms plus

16

the corresponding SEC coefficient. Thus the SEC firm coefficient for BVitIFRS UK is
(3+8) in equation (5).

V. DESCRIPTIVE STATISTICS AND RESULTS

Descriptive statistics are presented in Table 2 (Panels A & B). The mean
shareholders equity under UK GAAP (BVUK) for the full sample is approx 24m
(with a standard deviation of 9.7m). For the event study sample the mean increases
to 33m (with a standard deviation of 12.1m). The difference between reported UK
GAAP and IFRS shareholders equity is small indicating that IFRS book values are
very close to UK GAAP book values for our sample of firms (both for the full sample
and the event study sample). The mean reconciliation adjustment for shareholders
equity (BVIFRS-UK) relative to UK GAAP shareholders equity is only -4% (with a
standard deviation of 65%) for the full sample and -3% (with a standard of 73%) for
the event sample. This difference can be further reduced by removing the proposed
dividend adjustment required under IAS 10 Events After The Balance Sheet Date. The
mean earnings under UK GAAP (ERNUK) for the full sample is approximately
288,000 (with a standard deviation of 1,378,000) and approximately 383,000
(with a standard deviation of 1,713,000) for the event sample. Both the mean and
median earnings reconciliation adjustments (ERNIFRS-UK) for the full sample are very
high relative to UK GAAP earnings at 162% and 6% respectively 22 (For the event
study sample the means increases to 246%, with a median of 6%). In addition the
standard deviations are highly variable. 23

17

Event Study Results: Returns Analysis

The results for the event study are reported in Table 3. The results for the full sample
using the market-adjusted model indicate that the daily abnormal return (DARs) for
the event day (Day 0) is negative, although not statistically significant. In respect of
the cumulative abnormal returns (CARs), the CAR is positive for the event day,
although again not significant (see Table 3, Panel A).
[Insert Table 3]
Segmenting the sample based on the sign of the firms IFRS earnings
adjustment 24 (ERNIFRS-UK), provides us with statistically significant results for the
event day (Day 0, see Table 3 Panel B). We find that for those firms whose IFRS
earnings adjustment is negative (this represent approximately 27% of the sample) the
daily abnormal returns (DARs) for the event day is negative (DAR = -0.37%) and
statistically significant at the 5% level (see Panel A). Removing the SEC listed firms
from this sub-sample increases the abnormal returns (DAR = -0.40%) and it
significance to the 2% level. This is consistent with the view that for the SEC listed
firms their transitional documents would be unlikely to contain any new information
over and above their current Form 20F reconciliation document, whether reporting
negative or positive adjustment. 25 For the remaining sample, i.e. those firms with a
positive IFRS adjustment on earnings, we find that although the DARs for the event
day are positive they are not statistically significant, even after excluding the SEC
listed firms. However, returns at Day +3 and Day +5 were found to be negative and
significant at the 5% and 2% level respectively.

In respect of the cumulative

abnormal returns (CARs), again there is no significant CAR for the event day or
indeed for any other day.

18

The results hold true under both the market model and the mean-adjusted model.
Therefore, for those firms who published negative earning adjustments, the market
appeared to react unfavourably to the announcements, therefore the hypothesis cannot
be rejected for this sub-sample of firms - the event of publishing the reconciliation
statements does have an effect on the share prices. The significant market reaction to
firms reporting a decrease in earnings is consistent with results from the literature
investigating conservatism and asymmetric timeliness of accounting income with
respect to good and bad news (Ball et al. 2003).
The details of the statistical results are reported in Table 3 (Panel A) and those
significant DARs and CARs that do arise during the test period are discussed below.
Panel A reports the DARs for the sample as a whole. The pattern of DARs is
predominately negative throughout the event window, including the event day. At the
5% and 1% significance level three DARs are significant (and negative) Day +2, Day
+3 and Day +5, respectively. It appears from further analysis that Day +2 is driven by
the non-SEC listed firms, whereas the Day +3 is in part driven by the smaller firms,
whereas Day +5 is driven in part by the larger firms. The pattern for CARs is
predominately positive, although after Day +1 they are all negative. No CAR is
statistically significant, except Day +5.
Following the findings of the value-relevance study below, in particular that
goodwill amortisation reversal appears to be value relevantsuggesting that the value
relevance may be due in part because it provides the firms an opportunity to signal to
the market that the goodwill has not been impairedwe also investigated the DARs
and CARs for those firms who did disclose an impairment (or not full reversal of their
previous amortization). We found eleven firms disclosing impairments to their
goodwill (none of the eleven were SEC listed). The DARs for the event day (-1.55%)

19

and Day +2 (-1.15%) were found to be economically and statistically significant at the
2% level. Interestingly, unlike the previous results we also found the CARs to be
negative and significant for days Day +1 to Day +5, suggesting the reaction was not
temporary. Although the sample is small it does suggest that reporting an impairment
was new information and gives some weight to the value relevance results reported
below.
Additional analysis of the significant DARs and CARs was also conducted by
segmenting the sample into industries. Although not reported here, it was found that
no one industry had significant DARs on the event day. However, we did find
significant DARs on Day +2, Day +3 and Day+5 driven in part by the Utility industry,
the Industrial Goods & Services industry, the Travel & Leisure industry and the
Banking industry. For the sub-sample of firms with negative earnings adjustments,
both the retail and industrial goods & service industries were found to have a
statistically significant DAR on the event day at the 2% level. For the sub-sample of
firms with positive earnings adjustments no industry had statistically significant DARs
during the event window. Thus the reaction by the market to the announcement does
not appear to be industry specific.

Event Study Results: Volume Analysis

Table 4 reports the results from the volume analysis. Similar to the results reported
above we find no significant trading activity for the sample as a whole (see Panel A),
however when we segment the sample based on the sign of the earnings adjustment
we find a significant and positive trading activity on the event day (10.8%) for those
firms with a negative IFRS adjustment on earnings (see Panel B). Again this
significance increases if the SEC registered firms are removed (13.73%). Thus it

20

seems that market participants trading activity significantly increased when the firms
announced that their IFRS earnings were lower than their previously reported UK
GAAP earnings. In addition, and consistent with the finding above, for the eleven
firms reporting an impairment, we also find the DARTs on the event day to be positive
and significant at the 1% level (56.93%). In addition the CARTs from Day +1 to Day
+5 are also positive and significant at the 5% level.
[Insert Table 4]
For the remaining sample, those firms with a positive IFRS adjustment on
earnings, the trading activity decreased although not significantly on the event day.
However their cumulative abnormal trading activity was significant and negative for
Day 0 and Day +1. Further investigation suggests that these significances are driven
by one firm, a large SEC listed firm (see Table 4, Panel A: results for sub-samples:
largest 20% firms and SEC listed firms). These results are consistent with the return
analysis and provide confidence about the validity of our inferences.

Value-Relevance Results
The results for equation 3 are reported in Table 5. Following Belsley et al. (1980)
DFBETAS were estimated to ascertain whether there were outliers driving the results
a number of outliers were identified and deleted from the sample, however the
results of the variables of interest post-deletion were qualitatively unchanged. The
overall adjusted R2 for equation 3 was 90%. For comparison, value relevance studies
have reported high adjusted R2 of 84% (Graham et al. 2003), 96% (Kallapur & Kwan
2004, UK data), 81% (Harris and Kemsley 1999) and 62% (Francis and Schipper
1999).
[Insert Table 5]

21

The results indicate that the earnings reconciliation adjustment appears to be value
relevant and have incremental price relevance over and above the UK GAAP
numbers. The coefficient of ERN itIFRS UK is positive (as predicted) and significant at
the 0.1% level for the un-deflated model and significant at the 2% level for the
deflated model.
This is not the case for the balance sheet reconciliation, the BVitIFRS UK coefficient
is negative (not as predicted) although it is not statistically significant under any
model specifications (deflated and un-deflated). Thus it appears that BVitIFRS UK is not
value relevant, nor does it appear to have incremental price relevance over and above
the UK GAAP numbers.
These initial results may reflect the earlier observation that the IFRS and UK
GAAP earnings are very different (certainly in terms of magnitude) and are highly
variable, whereas the IFRS and UK GAAP shareholders equity appear to be very
similar, suggesting that one would not be surprised that the balance sheet
reconciliation is negligible and therefore irrelevant, as opposed to the earnings
adjustment.
It may be noted that coefficients on BVitUK are positive for both the basic (preinclusion of the reconciliation amounts) and full model (post-inclusion of
reconciliation amounts) and under both specifications (deflated and un-deflated). It is
significant at the 0.1% level for the basic model (deflated and un-deflated) and at the
2% level for the full model (deflated and un-deflated). The coefficients on ERN itUK are
positive and significant at the 0.1% level for all model specifications (deflated and undeflated). For the un-deflated model the coefficient on NOSH is positive and
significant at the 0.1% level.

22

The results cannot reject Hypothesis b1, which predicts that the restatement
disclosures are value-relevant to the market value of the firms equity, since we find,
with respect to earnings, the ERNitIFRS UK coefficient to be significant under all model
specifications. Thus, it appears that the market places a high value on the earnings
reconciliation adjustment between IFRS and UK GAAP. Although the earnings
differences have value-relevance this does not appear to be the case for the
differences in shareholders equity between IFRS and UK GAAP.
These results from equations 4 and 5 are reported in Table 6. Equation 4 captures
the possibility of selection bias by examining whether the information is weighted
differently by the market due to the firms chosen disclosure strategy. We find that
whether the firm is a separate disclosure or a combined disclosure, the
reconciliation adjustments are not weighted differently by the market. Since the
differences in intercept and slope between separate and combined disclosure firms,
represented by 1 and 6 through to 10, are not found to be significant, under any
model specification. It may be noted that for the combined disclosure firms the results
are similar to those reported above for equation 3.
[Insert Table 6]
The coefficient on ERN itIFRS UK , for the combined disclosure firms, is positive and
significant at the 2% level, and this level of significance is maintained under both
specifications (deflated and un-deflated). The coefficient BVIFRS-UK, is positive but not
significant under both specifications. Both the BVUK coefficient and ERNUK
coefficient is positive. BVUK is significant at the 5% level for the undeflated model
and 2% level for the deflated model. ERNUK is significant at the 0.1% level for all
specifications similar to the results reported in Table 5.

23

For equation 5 we do find that some information is weighted differently by the

market depending on whether the firm is SEC listed or not, however it is not related to
the firms reconciliation adjustments. We find the coefficient reflecting the difference
between SEC and non-SEC firms balance sheet reconciliation adjustment (i.e. 8 and
9) are not statistically significant, thus the difference between SEC listed and nonSEC listed firms in relation to these adjustments are not significantly different.
Interestingly though we did find the coefficient SEC*BVUK (6) statistically significant
(both for deflated and un-deflated models) suggesting that the market weights the
value-relevance of an SEC listed shareholders equity under UK GAAP differently
from a non-SEC listed firm. The combined coefficients (1 + 6) would indicate a
multiplier close to 0 for BV of equity for SEC firms. This may reflect the nature and
the underlying time series properties of the abnormal earnings for these firms. In
terms of Ohlsons model (1995) this corresponds to the case where abnormal earnings
follow a random walk and the market ignores other non-accounting information
which enters into the linear information dynamics. In addition the intercept 1 was
also found to be positive and statistically significant at the 5% level. This reflects the
observation that the market value for SEC listed firms tend to be on average higher
than for the non-SEC listed firms, given they represent some of the largest firms.

VI. MAIN DIFFERENCES IN ACCOUNTING PRACTICE

Given the results reported above, in addition to investigating the aggregate
reconciliation, we also investigated the components within the reconciliations, which
allow us to consider whether specific measurement differences are perceived by
investors as value-relevant. We specifically identified six differences which applied to
the majority of the companies within our sample 26 . These six main differences are

24

caused by compliance with IAS 19 Employee Benefits, IAS 17 Leases, IFRS 2 ShareBased Payments, IAS 38 Intangible Assets, IAS 12 Income Taxes and IAS 39
Financial Instruments and are described in more detail below.

Employee Benefits
IAS 19 Employee Benefits is similar in many respects to the US and UK equivalents
SFAS 87 Employers Accounting for Pensions and FRS 17 Retirement Benefits
respectively. However FRS 17 contains some important differences both in terms of
its scope and its accounting requirements.
Prior to IAS 19, the majority of the UK companies had taken advantage of FRS
17s transitional regime which entitled companies to continue to report under the old
SSAP 24 within their main accounts, whilst providing detailed disclosures for the
alternative measurement principles of FRS 17. SSAP 24s approach to the recognition
of pension costs was sometimes described as an income approach 27 . Surplus and
deficits were accounted for by smoothing the pension costs over the remaining service
lives of the employees. FRS 17 and IAS 19 adopt a balance sheet approach whereby
any surplus or deficit in a pension plan should be shown on the employers balance
sheet.
Both FRS 17 and IAS 19 require the recognition of any surplus or deficit in a
defined benefit scheme to be recognised in the balance sheet as an asset or liability.
However they diverge with regard to the treatment of actuarial gains and losses.
Under IAS 19 (as amended in December 2004), companies can choose how to report
actuarial gains and losses (AGL). They could recognise all AGL immediately in the
statement of other recognized income and expenses (SORIE) this is effectively
equivalent to FRS 17. Alternatively, they could recognise in the income statement,

25

immediately or over a period either all AGL or only AGL falling outside a 10%
corridor. FRS 17 required such gains and losses to be recognised in the Statement of
Recognised Gains and Losses (STRGL) i.e. taken directly to reserves.
Thus the main transitional effect on UK companies balance sheets is to recognise
the deficit/surplus disclosed in the notes under FRS 17 within the balance sheet. For
our sample this generally resulted in reporting a lower shareholders equity under
IFRS than UK GAAP, and for those companies who had previously only complied
with SSAP 24 this difference tended to be significant, given they now had to report
the deficits. Table 7 contains the summary statistics in relation to the main
components of the shareholders equity adjustment. Panel C indicates that
approximately 78% of our sample adjusted for IAS 19, with the average adjustment
necessary to the shareholders equity being -129,800 (with a standard deviation of
452,300) see Panel A. The effect on earnings however tended to be less significant
and very much depended upon which standard the company had previously reported
under i.e. FRS 17 or SSAP 24, and whether they took advantage of the corridor
approach. The average adjustment to earnings being -10 (with a standard deviation
of 16,820) see Panel B.
[Insert Table 7 here]
Leases
IAS 17 has much in common with its UK counterpart SSAP 21. Both apply
substance rather than legal form whereas the US standard has extensive form-driven
requirements. However, there are certain important differences that could have a
pronounced impact for some UK companies. Firstly it appears that some leases which
have historically been classified as operating leases under UK GAAP will now be
classified as finance leases under IAS 17. Secondly there are differences in relation to

26

revenue recognition by lessors, SSAP 21 requiring the use of the net cash investment
method whilst IAS 17 requires the net investment method to be used. In general this
leads to a deferral of finance income compared with the pattern of recognition under
UK GAAP.
For our sample this generally resulted in reporting a lower shareholders equity
under IFRS than UK GAAP 28 . Approximately 27% of our sample adjusted for IAS
17 (see Table 7, Panel C), with the average adjustment necessary to the shareholders
equity being -7,470 (with a standard deviation of 42,340) see Panel A, which
represents very little of the reported shareholders equity under UK GAAP. The effect
on earnings tended to be even less significant and very much depended upon which
standard the company had previously reported under. Given the income is now
deferred relative to UK GAAP, the adjustment tended to reduce, on average, the
earnings. The average adjustment being -1,000 (with a standard deviation of 6,690)
see Panel B.

Share-Based Payments
In February 2004 ASB issued FRS 20, the requirements of which are identical to
those of IFRS 2. When FRS 20 is applied, the accounting for share-based payments
under UK GAAP and IFRS will become the same.
However, the accounting for employee share schemes under IFRS2/FRS20 will
differ significantly from the current treatment in the UK, which is governed by UITF
Abstract 17 and deals only with employee share schemes. Abstract 17 requires a
charge against profits based on intrinsic value at grant date, which is often nil in the
case of UK share option schemes. Some UK listed companies did adopt FRS 20 early

27

and for these companies there should be no change in this area when the firms moved
to reporting under IFRS 2 for 2005.
But for most companies there will be a significant impact of moving from UITF
Abstract 17 to IFRS 2, especially on their reported earnings 29 . For our sample this
generally resulted in reporting a higher shareholders equity under IFRS than UK
GAAP 30 . Table 7 contains the summary statistics in relation to the shareholders
equity adjustment: approximately 51% of our sample adjusted for IFRS 2 (see Panel
C) and the average adjustment necessary to the shareholders equity was 1,000 (with
a standard deviation of 34,900) see Panel A. The adjustment due to IFRS 2 tended
to reduce, on average, the UK GAAP earnings, the average adjustment being
-4,990 (with a standard deviation of 23,500) see Panel B.

Taxation
IAS 12 deals with both current and deferred taxes. The rules in respect of current
taxes are similar to those of FRS 16, although there are some presentational
differences. In respect of deferred tax IAS 12 is conceptually different from FRS 19.
Instead of accounting for timing differences, (the basis used in FRS 19), it uses a
balance sheet concept of temporary differences. Temporary differences include not
only timing differences but other differences between the accounting and tax bases of
assets, liabilities, income and expenditures, for example revaluation of assets for
which no equivalent adjustment is made for tax purposes. Thus the increase in the
number of fair value items on the balance sheet will impact on the deferred taxation
charge and the effective tax rate under IFRS. In general the deferred tax is more
likely to be recognised under IAS 12 than it was under UK GAAP. In addition IAS 12
prohibits the discounting of deferred tax, whereas FRS 19 did permit, but not require,

28

such discounting. For our sample this generally resulted in reporting a lower
shareholders equity under IFRS compared to UK GAAP. Almost 72% of our sample
adjusted for IAS 12 (see Panel C), and the average adjustment necessary to the
shareholders equity was -67,330 (with a standard deviation of 300,760) see Panel
A. The adjustment due to IAS 12 tended to reduce, on average, the UK GAAP
earnings. The average adjustment being -3,920 (with a standard deviation of
31,760) see Panel B.

Goodwill and Intangibles

The UK standard corresponding to IAS 38 is FRS 10 Goodwill and Intangible assets
and SSAP 13 Accounting for Research and Development. IAS 38 is broadly similar to
those standards, but there are some important differences. The most significant are: a)
whereas SSAP 13 gives a choice over whether to capitalize development costs when
certain criteria are satisfied such costs must be capitalized under IAS 38; b) IAS 38
criteria for recognizing internally-generated assets are stringent but not as onerous as
those of FRS 10 - accordingly UK companies may find that assets which could not
have been capitalized under UK GAAP may be capitalized under IAS 38; and c)
under IAS 38 intangible assets with indefinite lives are not permitted to be amortized
but are instead tested for impairment at least annually in accordance with IAS 36 31 .
IFRS 3 Business Combinations prohibits the amortization of goodwill and requires to
be carried at cost less any accumulated impairment losses. Under FRS 10, there is a
rebuttable presumption that the useful life of goodwill does not exceed 20 years
(requiring amortisation over that life), although it permits an indefinite useful life
(with annual impairment reviews). Thus the major adjustment for the majority of
firms within our sample was to reverse the previous period amortisation charge, thus

29

taking advantage of the IFRS 1 First Time Adoption of International Accounting

Standards 32 , or impair the goodwill currently reported.
For our sample this generally resulted in reporting a higher shareholders equity
under IFRS. Table 7 contains the summary statistics in relation to the shareholders
equity adjustment: approximately 73% of our sample adjusted for IAS 38 (see Panel
C), and the average adjustment necessary to the shareholders equity was 46,970
(with a standard deviation of 230,360) see Panel A. These adjustments tended, on
average, to increase the reported UK GAAP earnings, since the major adjustment for
most firms was the reversal of the previous years goodwill amortisation expense. The
average adjustment being 44,580 (with a standard deviation of 180,380) see Panel
B.

Financial Instruments
IAS 39 provides a comprehensive standard for the measurement of all financial assets
and liabilities. By contrast prior to 2004 there was no specific standard for such
financial instruments in UK GAAP. Disclosure requirements are covered by FRS 13
Derivatives and Other Financial Instruments: Disclosures and recognition,
measurement and presentation issues are covered by FRS 4 Capital Instruments.
However, neither of these standards addressed comprehensively the accounting for
financial instruments. However, in December 2004, the Accounting Standards Board
issued FRS 26 Financial Instruments: Measurement which mainly follows IAS 39
and FRS 25 Financial Instruments: Disclosure and Presentation, which mainly
follows IAS 32. FRS 26 and FRS 25 apply to all listed firms not using IFRS for 2005
and to other companies for 2006.

30

The impact of IAS 39 and IAS 32 on UK firms will be very different to what they
have been used to in the past, and will vary with each individual firm. However,
generally it will often lead to substantial changes being recognised to the carrying
values of assets and liabilities in the balance sheet since certain assets and liabilities
must be measured at mark-to market, which may result in increased volatility of
results. This volatility will be particularly acute where an entity holds a substantive
amount of derivative contracts and is unable, or chooses not, to hedge account.
There are many additional requirements included in the detailed standards, the effect
of which can be significant in comparison with the previous UK GAAP and will not
be apparent without a more detailed review, which is outside the scope of this paper.
The effect of IAS 39 generally resulted in reporting a higher shareholders equity
under IFRS. Approximately 30% of our sample adjusted for IAS 39 (see Panel C),
and the average adjustment necessary to the shareholders equity was - 10,080 (with a
standard deviation of 188,830) see Panel A. These IAS 39 adjustments on earnings,
on average, resulted in firms reporting higher IFRS earnings relative to the UK GAAP
earnings. The average adjustment being 1,980 (with a standard deviation of 28,890)
see Panel B.

The Model and Results

To further investigate the significance of ERNitIFRS UK , and indeed the lack of
significance for BVitIFRS UK , a model similar to Alciatore (1993) was constructed.
Alciatore investigated the information content of the change in the standardized
measure (CSM) disclosure reported by oil and gas producers as assessed by market
participants. Alciatore concluded that knowing how and why the reserve value

31

changed (i.e. the component composition of the CSM) provides additional

information over just the net change.
Thus the new model replaces ERNitIFRS UK and BVitIFRS UK in equation (3) above
with their respective constituents in relation to the six major classifications together
with an additional residual classification which simply captures the remaining
differences. Thus equation 7 is the following 33 :
MVit +5 = 0 + 1 BVitUK + 2 ERNitUK + 3 BV ( LEASE) itIFRSUK + 4 BV (EMPLBEN) itIFRSUK +

(7)

5 BV (SHSPAY) itIFRSUK + 6 BV (GW) itIFRSUK + 7 BV (FINIST) itIFRSUK + 8 BV (TAX ) itIFRSUK +

9 BV (MISC)

IFRSUK
it

+ 13 ERN(GW)

+ 10 ERN(LEASE)

IFRSUK
it

IFRSUK
it

+ 14 ERN( FINIST)

+ 11 ERN(EMPLBEN)

IFRSUK
it

+ 15 ERN(TAX )

IFRSUK
it

IFRSUK
it

+ 12 ERN(SHSPAY)

IFRSUK
it

+ 16 ERN(MISC) itIFRSUK + it

Where:
BV/ERN(LEASE)IFRS-UK

= difference in shareholders equity/earnings between UK GAAP and

IFRS due to IAS17

BV/ERN(EMPLBEN)IFRS-UK = difference in shareholders equity/earnings between UK GAAP

and IFRS due to IAS19

BV/ERN(SHSPAY)IFRS-UK = difference in shareholders equity/earnings between UK GAAP and

IFRS due to IFRS2

BV/ERN(GW)IFRS-UK

= difference in shareholders equity/earnings between UK GAAP and

IFRS due to IAS 38

BV/ERN(FINIST)IFRS-UK

= difference in shareholders equity/earnings between UK GAAP and

IFRS due to IAS39

BV/ERN(TAX)IFRS-UK

= difference in shareholders equity/earnings between UK GAAP and

IFRS due to IAS12

BV/ERN(MISC)IFRS-UK

= difference in shareholders equity/earnings between UK GAAP and

IFRS due to all other IAS/IFRS applied

All other variables are as previously reported. Given that the likely effect of the IFRS
compliance in many cases is firm or industry specific the prediction of the sign of the

32

coefficients is difficult. However, we would expect the coefficients relating to IAS 38,
IAS 39, and IAS 19 to be positive.
Table 8 reports the results of the first stage and Table 9 reports the results of the
second stage regression - equation 7 above. Because of simultaneous causality
problem between price and the reconciliation adjustment for share based payments,
we estimate a two stage-least-squares regression where we use as instruments the
exercise price of the options and the number of outstanding or granted options. Both
of them are inputs in the option valuation formula and therefore expected to covary
with the reconciliation adjustment. We hand collected the inputs of the option
valuation model from the next years annual reports where for comparability purposes
companies were reporting the previous years inputs. The reconciliation statements
were not detailed enough in order to include the necessary information and the annual
report for the same year did not include such data since UK GAAP were not requiring
the expense of stock options. We were unable to collect the data necessary for the
instruments for 48 firms and therefore our sample now drops to 249 observations.
We initially attempted to include volatility, risk free rate and life of option plans
as additional instruments as Aboody et al. (2004) did but found them to be weak (low
correlation with the instrumented variable) and therefore our inferences may had been
spurious (Staiger and Stock 1997). We concluded that the best approach was to use
the instruments reported here in order for the F statistic for the two instruments, of the
first stage regression to be high enough. The two instruments were found to be valid
since they are both relevant and exogenous (Staiger & Stock 1997). Relevance was
satisfied since the F statistic for the two instruments of the first stage regression
signals that after controlling for all other exogenous regressors, the two instruments
are highly correlated 34 (Table 9). Exogeneity was also satisfied for all model

33

specifications. The Hansen test of the over-identifying restrictions assesses whether

the instrumental variables are associated with stock price beyond their ability to
explain cross-sectional variation in share based payments reconciliation adjustments.
Under the null hypothesis that the instruments are not correlated with the error terms,
the test has a 2 distribution with (J-K) degrees of freedom where J is the number of
instruments and K the numbers of the regressors which are instrumented. The null
hypothesis that the instruments are uncorrelated with the error terms and therefore
exogenous is not rejected in any of the models (Table 8). Therefore we are confident
about the validity of our inferences from the disaggregated models.
[Insert Table 8 here]
The findings strongly support the conclusion that earning adjustments due to
share-based payments, taxation and goodwill are value-relevant (see Table 9).
[Insert Table 9 here]
Share-based coefficient is negative for all model specification and significant at
the 0.1% level (except when the level model includes the individual balance sheet
reconciliation items when it reduces to a significance of 2%). The sign of the
coefficient could possibly suggest that the market believes that the cost of the option
is outweighed by their perceived benefit, contrary to previous research (Aboody et al
2004). These compensation schemes certainly impose costs on shareholders in the
form of diluting their ownership. However, at the same time they align the incentives
of management and shareholders mitigating any agency costs. Therefore the sign of
this coefficient is going to be determined on the trade off between these competing
effects. The sign we obtain from our results is consistent with investors perceiving the
benefits they extract from such incentive contracts as higher compared to the costs. It
should be noted that this result is not necessarily inconsistent with Aboody et al

34

(2004). We believe that investors valuation of this trade off will be sample and time
specific. Our result suggests that UK companies have been using incentive schemes
efficiently for the time period examined (Aboody et al (2004) investigate US
companies during time period 1996-1998).
The taxation coefficient is negative under all specifications and significant at the
0.1% level under the undeflated models, and significant at 10% (when including the
aggregate book value adjustment) and 5% levels (when including the individual book
value adjustments) for the deflated models. The negative coefficient may suggest that
the market appears either to see these additional tax adjustments, in relation to
earnings, as merely temporary and therefore reverses such adjustments, or that in the
case of firms who had previously discounted their deferred tax assets/liabilities that
such discounting is appropriate and therefore the reversal of this discounting in the
earnings is inappropriate.
The goodwill coefficient as predicted was positive and statistically significant for
all specifications at 2% or better (except the deflated model, including the individual
balance sheet reconciliation items when the significance level was 10% primarily due
to the high correlation between the book value and income statement reconciliation
adjustment). Interestingly, the adjustment in relation to goodwill appears to be valuerelevant, despite the fact that its major adjustment is simply the adding back of the
previous years amortisation. However, it is possible that this value relevance may be
due, in part, because it gives the firms the opportunity to signal to the market that the
goodwill has not been impaired, i.e. the adding back of the goodwill proxies for no
impairment. These findings are also consistent with the event study, which found
significant negative abnormal returns for those firms that disclosed an impairment (or
did not fully reverse previous goodwill, see Table 3).

35

Other coefficients are also found to be significant but not consistently under all
model specifications. Both the pension adjustment and the financial instrument
adjustments are found to be significant, but are not very robust. Interestingly the
coefficient for the employees benefit adjustment to earnings is negative (was not as
predicted) and the balance sheet adjustment also does not appear to be strongly
significant (5% level for the per-share model only). As previously noted, the
adjustment necessary to both UK earnings and shareholders equity due to IAS 19
compliance is very much dependent upon which standard the company had previously
reported under i.e. FRS 17 or SSAP 24, and which options they chose when
implementing IAS 19. Thus we investigated whether the firms previously accounting
policy, i.e. SSAP 24 or FRS 17, had a significant impact on the value-relevance of the
IAS 19 adjustment. We re-ran equation 3, isolating the IAS 19 adjustment from all
other adjustments and constructed multiplicative dummy variables to capture the
firms previous accounting policy. The model was as follows:
MVit+5 = 0 + 1BVitUK + 2 ERNitUK + 3BVitIFRSUKBVIAS19 + 4ERNitIFRSUKEIAS19 + 5BVitIAS19 + 6 ERNitIAS19
+ 7 NOSHit + 8FRS17+ 9 FRS17* BVitIFRSUKBVIAS19 + 10FRS17* ERNitIFRSUKEIAS19 +

(8)

11FRS17* BVitIAS19 + 12FRS17* ERNitIAS19 + it

The variables are as described above (for equation 3) with an additional dummy
variable FRS17 included. This takes the value of unity if the firm previously reported
under FRS 17 and zero if the firm previously reported under SSAP 24. It may be
noted that the sample for this particular regression is initially based on a total sample
of 283 firms, since 14 of the original firms did not have an employee benefit plan and
therefore did not make any adjustments due to IAS 19. Table 10 reports the results
and indicates for SSAP 24 firms the earnings adjustment due to IAS 19 is negative
and significant at the 0.1% level. However, this result does not appear to be robust
since this significance is not maintained under the deflated model. The sign of the

36

coefficient is intriguing and not as predicted. However it is consistent with the FRS 17
sample ERNIAS19 coefficient. The balance sheet adjustment for SSAP 24 firms is
negative and was not found to be significant (under either model specifications).
[Insert Table 10]
Interestingly, for FRS 17 firms the balance sheet adjustment is positive and
significant at the 2% and 0.1% level for the un-deflated and deflated models
respectively. This appears to suggest that the balance sheet adjustment due to IAS 19
for these FRS 17 firms is value-relevant. This is consistent with the view that,
although on average the adjustment necessary for these firms should be zero or
certainly close to zero, (given the similarities between FRS 17 and IAS 19), when
there is divergence this difference is in itself relevant. For example, IAS 19 requires
the pension assets to be valued at bid price rather than a mid price which is the
requirement under FRS 17. Our results are consistent with the view that investors use
bid prices in the market valuation of pension assets.

VII. CONCLUSION
We use the IFRS reconciliation/transitional disclosure provided by firms to
evaluate the value relevance of this different accounting regime relative to UK
GAAP. Our results suggest that the market responded to IFRS reconciliation
adjustments. This response was mainly towards firms reporting lower earnings under
IFRS compared to UK GAAP. The conservative nature of investors may be giving
rise to this phenomenon. Positive earnings adjustment may signal opportunistic
behaviour and therefore investors are reluctant to trade upon it. However, a negative
adjustment is enough to trigger a negative sentiment among investors.

37

In analysing some of the systematic components which cause the major

differences between IFRS and UK GAAP earnings we find that investors view sharebased payments, goodwill amortization and impairment and deferred taxes as value
relevant. These results should not be taken as bearing directly on the usefulness of
IFRS requirements. It seems plausible that a sophisticated investor may have been
able to reconstruct the value relevant data in respect of some adjustments from the
previous UK GAAP reports where relevant information was disclosed in the notes.
However, they provide us with enough confidence to claim that accounting
information about the previous financial period change investors beliefs about stock
prices and as a result generate trading activity. Overall, the results support claims that
IFRS reveal timely value relevant information.
Companies have been very confident in claiming that this accounting change
has no cash flow effects and therefore it shouldnt affect investors perceptions about
stock prices. However, according to our findings, the market seemed to have a
different opinion. Maybe an important avenue for future research would be to
investigate these different perspectives, examining how rationally any information,
transmitted by IFRS, was impounded in the stock prices.

38

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Instruments. Econometrica 65: 557 586.

41

TABLE 1
Distribution of firms by industry classification and distribution of sub-samples by industry classification
The Full Sample consists of all UK firms, from the FTSE 350, who disclosed a detailed IFRS reconciliation document. The combined disclosure sample consists of all firms
within the full sample who disclosed their reconciliation document with other price-sensitive information. The separate disclosure sample consists of firms within the full
sample who disclosed their reconciliation documents separately from other price-sensitive information; this sample is further segmented into whether the number of firms
within the industry classification disclosed a negative IFRS adjustment on earnings or a positive IFRS adjustment on earnings

Industry
Automobiles & Parts
Banks
Basic Resources
Chemicals
Construction & Material
Financial Services
Food & Beverage
Healthcare
Industrial Goods & Services
Insurance
Media
Oil & Gas
Personal & Household Goods
Retail
Technology
Telecommunications
Travel & Leisure
Utilities

IAS UK

ERN
amounts.

Event Sample - Separate Disclosure

Negative ERNIAS-UK
Positive ERNIAS-UK
0
1
3
5
0
6
0
1
0
4
3
20
0
5
3
1
8
33
2
9
1
8
3
3
7
7
8
8
2
4
2
1
4
11
4
5

Code
AUTMB
BANKS
BRESR
CHMCL
CNSTM
FINSV
FDBEV
HLTHC
INDGS
INSUR
MEDIA
OILGS
PERHH
RTAIL
TECNO
TELCM
TRLES
UTILS

Full Sample
1 (0.34%)
9 (3.03%)
7 (2.36%)
4 (1.35%)
6 (2.02%)
46 (15.49%)
10 (3.37%)
7 (2.36%)
63 (21.21%)
14 (4.71%)
16 (5.39%)
13 (4.38%)
22 (7.41%)
27 (9.09%)
10 (3.37%)
4 (1.35%)
26 (8.75%)
12 (4.04%)

Combined
0
1
1
3
2
23
5
3
22
3
7
7
8
11
4
1
11
3

Separate
1
8
6
1
4
23
5
4
41
11
9
6
14
16
6
3
15
9

TOTAL

297 (100%)

115 (38.72%)

182 (61.28%)

50

132

= the earnings reconciliation adjustment necessary to UK GAAP to comply with IFRS, a positive reconciliation amount reflects additions to UK GAAP amounts to arrive at IFRS

42

TABLE 2
Descriptive Statistics of Market Value, Earnings and Book Values under both UK GAAP and IFRS for two samples: full sample and
separate disclosure sample (event sample)
Panel A: For the sample of UK Firms who disclosed their reconciliation documents (from UK GAAP to IFRS).

Full Sample (n=297)

Mean
Std Dev.
Median
Maximum
Minimum

MVt +5

BV

000
4429.53
12510.48
1171.76
122081.88
210.69

000
2398.67
9734.31
448.80
111924.00
-795.40

UK

BV

IAS

000
2329.54
9683.78
421.00
111551.00
-1123.00

BV IAS UK
BV UK
-0.04
0.65
-0.01
4.67
-6.50

ERN

UK

000
288.35
1378.23
54.74
15731.00
-9015.00

ERN

IAS

000
395.26
1419.63
68.50
17075.00
-193.40

ERN IAS UK
ERN UK
1.62
18.91
0.06
258.79
-32.32

Panel B: For the sample of firms who disclosed their reconciliation documents (from UK GAAP to IFRS) separately from other information.
Event Sample
(n=182)
Mean
Std Dev.
Median
Maximum
Minimum

MVt +5

BV

000
5663.10
15162.64
1641.57
122081.88
253.73

000
3302.92
12117.95
517.05
111924.00
-795.40

UK

BV

IAS

000
3223.06
12078.89
508.13
111551.00
-1123.00

BV IAS UK
BV UK
-0.03
0.73
-0.01
4.67
-6.50

ERN

UK

000
383.28
1713.24
63.45
15731.00
-9015.00

ERN

IAS

000
534.02
1742.90
89.75
17075.00
-173.20

ERN IAS UK
ERN UK
2.46
24.12
0.06
258.79
-32.32

MVt+5 is the market value of shareholders equity for firm i five days after the restatement at time t, BVUK (ERNUK) is shareholders equity (earnings) reported by firms
calculated under UK GAAP, BVIAS (ERNIAS) is shareholders equity (earnings) reported by firms calculated under IFRS, BVIAS-UK is the shareholders equity reconciliation
adjustment, a positive reconciliation amounts reflects additions to UK GAAP amounts to arrive at IFRS amounts, ERNIAS-UK is the earnings reconciliation adjustment, a positive
reconciliation amount reflects additions to UK GAAP amounts to arrive at IFRS amounts.

43

TABLE 3
Panel A: Market-Adjusted Returns, daily and cumulative, for the Event Window Day -5 to Day +5, for the event sample as a whole and alternative segmental samples as
follows: segmented into the largest 20% of firms and the smallest 20% of firms, segmented between SEC firms and non-SEC firms and sub-sample based on those firms who
reported an impairment under IAS 38 (or did not fully reverse previous goodwill amortisation).

Event
-5
-4
-3
-2
-1
0
1
2
3
4
5

Full Sample (n=182)

DAR
CAR

Largest 20% of sample

(n=36)
DAR
CAR

Smallest 20% of sample

(n=36)
DAR
CAR

-0.0010
0.0020
0.0014
-0.0008
-0.0005
-0.0006
0.0007
-0.0021*
-0.0026**
0.0003
-0.0023*

0.0026
-0.0009
0.0017
-0.0003
0.0003
-0.0004
0.0008
-0.0005
-0.0007
0.0012
-0.0054***

0.0008
0.0018
0.0041
0.0002
0.0014
-0.0013
-0.0018
-0.0043
-0.0057*
-0.0001
-0.0035

-0.0010
0.0010
0.0023
0.0015
0.0010
0.0004
0.0011
-0.0010
-0.0036
-0.0033
-0.0056**

0.0026
0.0016
0.0033
0.0030
0.0033
0.0029
0.0037
0.0032
0.0025
0.0037
-0.0017

0.0008
0.0026
0.0066
0.0069
0.0083
0.0069
0.0051
0.0008
-0.0049
-0.0050
-0.0085

Non-SEC Firms
(n=148)
DAR
CAR
-0.0012
0.0019
0.0015
-0.0011
-0.0009
-0.0008
0.0012
-0.0028**
-0.0024*
0.0006
-0.0025*

-0.0012
0.0007
0.0022
0.0011
0.0002
-0.0005
0.0007
-0.0022
-0.0046
-0.0040
-0.0065**

SEC Firms (n=34)

DAR
CAR
-0.0003
0.0024
0.0006
0.0004
0.0011
0.0003
-0.0015
0.0013
-0.0033
-0.0009
-0.0016

-0.0003
0.0021
0.0027
0.0032
0.0042
0.0045
0.0030
0.0042
0.0010
0.0000
-0.0016

Impairment (n=11)
DAR
CAR
-0.0013
0.0037
0.0053
-0.0011
0.0031
-0.0155**
-0.0099
-0.0115*
-0.0008
0.0057
0.0010

-0.0013
0.0025
0.0078
0.0067
0.0099
-0.0057
-0.0156*
-0.0271**
-0.0279**
-0.0222**
-0.0212*

Panel B: Daily and Cumulative Market-Adjusted Returns for the Event Window Day -5 to Day + 5, based on the samples with negative or positive IFRS adjustment on
earnings. These two samples were also segmented into non-SEC firms and SEC firms.

Event
-5
-4
-3
-2
-1
0
1
2
3
4
5

Firms with negative IFRS adjustment to their earnings (n=50)

Total Sample
Non-SEC (n=41)
SEC (n=9)
DAR
CAR
DAR
CAR
DAR
CAR
-0.0012
0.0012
0.0013
0.0012
0.0007
-0.0037*
0.0013
-0.0027
-0.0023
0.0003
-0.0004

-0.0012
0.0000
0.0012
0.0025
0.0031
-0.0006
0.0008
-0.0019
-0.0042
-0.0040
-0.0044

-0.0004
0.0005
0.0031
0.0012
0.0006
-0.0040**
0.0016
-0.0043**
-0.0034
0.0015
-0.0005

-0.0004
0.0001
0.0032
0.0043
0.0049
0.0009
0.0025
-0.0018
-0.0052
-0.0036
-0.0042

-0.0048
0.0044
-0.0071
0.0015
0.0010
-0.0022
0.0002
0.0048
0.0024
-0.0055
0.0000

-0.0048
-0.0005
-0.0075
-0.0060
-0.0050
-0.0072
-0.0071
-0.0023
0.0001
-0.0054
-0.0055

Firms with positive IFRS adjustments on their earnings (n=132)

Total Sample
Non-SEC (n=107)
SEC (n= 25)
DAR
CAR
DAR
CAR
DAR
CAR
-0.0009
0.0023
0.0014
-0.0016
-0.0010
0.0006
0.0004
-0.0019
-0.0027*
0.0003
-0.0030**

-0.0009
0.0013
0.0027
0.0012
0.0002
0.0008
0.0012
-0.0006
-0.0033
-0.0030
-0.0061

-0.0014
0.0024
0.0009
-0.0020
-0.0015
0.0005
0.0010
-0.0023
-0.0021
0.0002
-0.0032**

-0.0014
0.0010
0.0019
-0.0001
-0.0015
-0.0011
0.0000
-0.0023
-0.0044
-0.0042
-0.0074

0.0013
0.0017
0.0034
0.0000
0.0011
0.0011
-0.0021
0.0000
-0.0053*
0.0007
-0.0022

0.0013
0.0030
0.0064
0.0065
0.0075
0.0087
0.0066
0.0066
0.0013
0.0020
-0.0002

Significance Levels are: *= 5%; **= 2%;***= 1%, DARs = Daily Abnormal Returns; CARs= Cumulative Abnormal Returns

44

TABLE 4
Panel A: Market Model Trading Activity, daily and cumulative, for the Event Window Day -5 to Day +5, for the full sample and alternative segmental samples as follows:
segmented into the largest 20% of firms and the smallest 20% of firms, segmented between SEC firms and non-SEC firms and sub-sample based on those firms who
reported an impairment (or did not fully reverse previous goodwill amortisation).

Event
-5
-4
-3
-2
-1
0
1
2
3
4
5

Full Sample
(n=182)
DART CART
-0.0075
-0.0271
0.0022
-0.0168
-0.0284
-0.0043
-0.0012
0.0190
0.0151
0.0052
0.0167

-0.0075
-0.0346
-0.0324
-0.0492
-0.0776
-0.0819
-0.0831
-0.0641
-0.0490
-0.0438
-0.0271

Largest 20% of
sample (n=36)
DART
CART
-0.0361
-0.0061
-0.0393
0.0203
-0.0042
-0.1907***
-0.0289
0.0011
-0.0396
0.0080
-0.0239

-0.0361
-0.0422
-0.0816
-0.0613
-0.0655
-0.2561
-0.2851
-0.2840
-0.3236
-0.3156
-0.3394

Smallest 20% of sample

(n=36)
DART
CART
0.0191
-0.0606
0.1524
0.0973
-0.0125
0.0828
-0.0293
0.0592
0.1375
0.0747
0.0062

0.0191
-0.0415
0.1109
0.2082
0.1957
0.2785
0.2492
0.3084
0.4459
0.5206
0.5268

Non-SEC Firms
(n=148)
DART
CART
-0.0127
-0.0359
-0.0011
-0.0182
-0.0328
0.0441
0.0036
0.0199
0.0282
0.0040
0.0197

-0.0127
-0.0486
-0.0497
-0.0679
-0.1007
-0.0566
-0.0531
-0.0332
-0.0050
-0.0010
0.0187

SEC Firms (n=34)

DART
CART
0.0148
0.0112
0.0170
-0.0104
-0.0093
-0.2151***
-0.0220
0.0152
-0.0422
0.0107
0.0038

0.0148
0.0260
0.0430
0.0326
0.0233
-0.1918
-0.2138
-0.1987
-0.2409
-0.2302
-0.2264

Impairment (n=11)
DART
CART
-0.0333
-0.1678
-0.0345
0.0804
0.1583
0.5693***
0.1254
0.3496*
0.0383
-0.0158
-0.1011

-0.0333
-0.2011
-0.2356
-0.1551
0.0032
0.5725
0.6979
1.0475*
1.0857*
1.0699*
0.9688*

Panel B: Daily and Cumulative Market Model Trading Activity for the Event Window Day -5 to Day + 5, based on the samples with negative or positive IFRS adjustment on
earnings. These two samples were also segmented into non-SEC firms and SEC firms.

Event
-5
-4
-3
-2
-1
0
1
2
3
4
5

Firms with negative IFRS adjustment to their earnings (n=50)

Total Sample
Non-SEC (n=41)
SEC (n=9)
DART
CART
DART
CART
DART
CART

Firms with positive IFRS adjustments on their earnings (n=132)

Total Sample
Non-SEC (n=107)
SEC (n= 25)
DART
CART
DART
CART
DART
CART

0.0231
0.0231
0.0159
0.0159
0.0490
0.0490
-0.0192
-0.0192
-0.0242
-0.0530
-0.0298
-0.0561
-0.0401
-0.0139
0.0351
-0.0173
-0.0365
-0.0261
0.0173
-0.0125
0.0155
-0.0247
0.0187
0.0538
-0.0035
-0.0399
-0.0081
-0.0002
-0.0127
-0.0087
-0.0334
0.0423
0.0961
-0.0230
-0.0630
-0.0216
0.0236
0.0108
0.0365
0.0032
-0.0516
0.0445
-0.0481
-0.1111
-0.0607
0.1189
0.1405
-0.0865
-0.0420
-0.0469
0.0033
0.1080*
0.1373**
-0.1579*
-0.0244
0.0944
-0.0211
0.1194
-0.0305
-0.0726
0.0076
0.0138
-0.1503*
0.0054
0.0999
0.0081
0.1275
-0.0102
-0.0828
0.0241
-0.1262
0.0241
-0.0066
0.0933
0.0029
0.1304
-0.0512
-0.1339
0.0233
-0.1029
0.0378
0.0160
0.1093
0.0184
0.1488
-0.0029
-0.1368
0.0011
-0.1018
-0.0022
-0.0384
0.0709
-0.0366
0.1122
-0.0307
-0.1674
0.0376
-0.0642
0.0426
Significance Levels are: *= 5%; **= 2%;***= 1%. DART = Daily Abnormal Trading Activity, CART= Cumulative Abnormal Trading Activity.

-0.0242
-0.0503
-0.0584
-0.0800
-0.1407
-0.1374
-0.1236
-0.0996
-0.0617
-0.0639
-0.0214

0.0025
0.0202
0.0164
-0.0294
0.0059
-0.2613***
-0.0190
0.0243
-0.0390
0.0155
0.0163

0.0025
0.0227
0.0391
0.0097
0.0156
-0.2457
-0.2647
-0.2404
-0.2794
-0.2639
-0.2476

45

TABLE 5
Test of Value Relevance of Reconciliation adjustments from UK GAAP to IFRS
Coefficients Values and t-statistics for the regression
(Whites Heteroscedasticity consistent t-statistics in parentheses)
MV it + 5 = 0 + 1 BV itUK + 2 ERN
Dependent Variable
Predicted Sign
Sample n
Intercept

UK
it

+ 3 BV itIFRS UK + 4 ERN
Market Value
Basic
Full
(n=292)a
(n=292)a

IFRS UK
it

+ 5 NOSH

it

+ it

(3)

Price-per-share
Basic
Full
(n=292)a
(n=292)a

+/-

264.39
(2.43)**

238.96
(2.55)**

0.002
(11.16)***

0.002
(11.68)***

BVUK

0.68
(3.75)***

0.49
(2.81)**

0.501
(4.82)***

0.36
(2.31)**

ERNUK

5.66
(4.24)***

6.23
(4.74)***

5.05
(7.98)***

5.50
(7.86)***

BVIFRS-UK

-0.27
(-0.57)

-0.06
(-0.16)

ERNIFRS-UK

4.47
(4.10)***

2.23
(2.32)**

NOSH

0.001
(4.59)***

0.001
(4.00)***

R2 Adj

88.68%

90.00%

64.59%

65.32%

F-statistic

761.26***

525.05***

266.46***

138.01***

= The initial sample was 297 firms; excluded outlier(s) following the calculation of DFBETAS.
*, **, *** indicate significance at 5, 2 and 0.1 percent levels respectively.
MV = market value of equity five days after the announcement of the IFRS reconciliation document;
BVUK = the accounting book value of shareholders equity calculated under UK GAAP;
ERNUK = the earnings calculated under UK GAAP;
BVIFRS-UK = the difference between UK GAAP and IFRS book value of shareholders equity;
ERNIFRS-UK = the difference between UK GAAP and IFRS earnings;
NOSH = number of shares outstanding.

46

TABLE 6
Value relevance models examining disclosure strategy
and the impact of being SEC registered
Disclosure Strategy:
MV

it + 5

5 NOSH

it +

9 DS * ERN

+ 1 DS + 1 BV

6 DS * BV
IFRS UK
it

UK
it

UK
it

+ 2 ERN

+ 7 DS * ERN

+ 10 DS * NOSH

it

+ 3 BV

UK
it
IK
it

+ 8 DS

IFRS UK
+ 4
it
IFRS UK
* BV it

ERN

IFRS UK
it

(4)

+ it

SEC Registered:
UK
+ 3 BV itIFRS UK + 4 ERN itIFRS UK
it
ERN itIK + 8 SEC * BV itIFRS UK

MV it + 5 = 0 + 1 SEC + 1 BV itUK + 2 ERN

5 NOSH
+ 9 SEC

UK
it + 6 SEC * BV it
+
* ERN itIFRS UK + 10

7 SEC *

SEC * NOSH

it

SEC registered

Reporting
Model
(n=292)a

Reporting
Model (PS)
(n=292)a

Intercept

BVUK

ERNUK

BVIFRS-UK

ERNIFRS-UK

0.003
(8.74)***
0.468
(3.17)**
5.58
(8.89)***
-0.013
(-0.02)
2.52
(2.88)**

NOSH

205.67
(1.45)
0.53
(1.96)*
7.52
(3.23)***
1.95
(1.02)
5.27
(2.50)**
0.001
(2.81)**
17.52
(0.09)
-0.12
(-0.27)
-1.57
(-0.57)
-1.77
(-0.90)
3.06
(1.26)
-0.0004
(-0.69)

DS

+/-

DS * BVUK

+/-

DS * ERNUK

+/-

DS * BVIFRS-UK

+/-

DS * ERNIFRS-UK

+/-

DS*NOSH

+/-

R2 Adj
F-statistic

90.77%
261.12***

(5)

+ it

Disclosure Strategy
Predicted
Sign
Sample n

-0.0002
(-0.72)
-0.14
(-0.49)
0.047
(0.04)
-0.03
(-0.04)
-1.49
(-0.78)

65.94%
63.59***

Predicted
Sign

SEC
Model
(n=296)a

SEC Model
(PS)
(n=294)a

Intercept

BVUK

ERNUK

BVIFRS-UK

ERNIFRS-UK

0.002
(9.68)***
0.54
(5.34)***
5.53
(11.16)***
0.16
(0.54)
2.02
(2.53)**

NOSH

SEC

SEC*BVUK

SEC*ERNUK

SEC* BVIFRS-UK

SEC* ERNIFRS-UK

SEC*NOSH

191.63
(2.01)*
0.61
(2.81)**
5.51
(4.31)***
0.18
(0.21)
3.56
(2.38)**
0.001
(3.04)**
233.57
(3.17)**
-0.51
(-1.97)*
0.84
(0.52)
-1.08
(-0.79)
3.86
(1.11)
-0.0004
(-0.74)

R2 Adj
F-statistic

96.98%
829.17***

0.001
(1.98)*
-0.73
(-3.41)***
1.57
(1.77)
0.17
(0.86)
-0.34
(-0.10)

65.91%
63.74***

= The initial sample was 297 firms; excluded outlier(s) following the calculation of DFBETAS.
*, **, *** indicate significance at 5, 2 and 0.1 percent levels respectively.
MV = market value of equity five days after the announcement of the IFRS reconciliation document;
BVUK = the accounting book value of shareholders equity calculated under UK GAAP;
ERNUK = the earnings calculated under UK GAAP;
BVIFRS-UK = the difference between UK GAAP and IFRS book value of shareholders equity;
ERNIFRS-UK = the difference between UK GAAP and IFRS earnings;
NOSH = number of shares outstanding;
DS = disclosure strategy, DS = 1 if separate disclosure firm, DS=0 if combined disclosure;
SEC = SEC listed, SEC = 1 if firm is SEC listed, otherwise takes the value of zero.

47

TABLE 7
Panel A: Descriptive Statistics of the Reconciliation Items reported by firms to reconcile from UK GAAP to IFRS for Shareholders Equity

Mean
Std Dev.
Median
Maximum
Minimum
ABS(MAIN)/ABS(TOTAL)

LEASE
(IAS 17)
000
-7.47
42.34
0.00
12.00
-503.00

EMPLBEN
(IAS 19)
000
-129.80
452.30
-12.46
307.80
-4470.00

SHAREPAY
(IFRS 2)
000
1.00
34.90
0.00
353.00
-381.00

Balance Sheet Reconciliation items

GOODW
TAX
FININSTR
(IAS 38) (IAS 12)
(IAS 39)
000
000
000
46.97
-67.33
-10.08
230.36
300.76
188.83
4.45
0.00
0.00
2985.00
423.00
392.60
-636.30
-3986.00 -3144.00

SUM OF MAIN
DIFFERENCES
000
-166.72
474.69
-22.60
435.85
-4643.00
68.37%

OTHER
DIFFERENCES
000
230.74
625.52
53.00
5214.00
-620.70
31.63%

BVIAS- BVUK
000
-69.34
407.23
-6.35
1629.00
-4189.00

Panel B: Descriptive Statistics of the Reconciliation Items reported by firms to reconcile from UK GAAP to IFRS for Earnings

Mean
Std Dev.
Median
Maximum
Minimum
ABS(MAIN)/ABS(TOTAL)

LEASE
(IAS 17)
000
-1.00
6.69
0.00
20.10
-66.00

EMPLBEN
(IAS 19)
000
-0.01
16.82
0.00
161.00
-134.00

Income Statement Reconciliation items

SHAREPAY GOODW
TAX
FININSTR SUM OF MAIN
(IFRS 2)
(IAS 38) (IAS 12)
(IAS 39) DIFFERENCES
000
000
000
000
000
-4.99
44.58
-3.92
1.98
36.64
23.50
180.38
31.76
28.89
173.16
-0.40
5.07
0.00
0.00
3.15
7.50
1773.00
160.00
423.80
1650.00
-314.00
-98.20
-298.00
-49.00
-418.00
46.15%

OTHER
DIFFERENCES
000
70.11
887.98
0.00
15163.00
-397.00
53.85%

ERNIAS-ERNUK
000
106.90
884.32
5.70
14868.00
-394.00

Panel C: Frequency of the main balance sheet reconciliation items

Full sample (n=296a)
Frequency per:

LEASE
80 (26.94%)

Frequency of individual reconciliation items

EMPLBEN
SHAREPAY
GOODW
TAX
231 (77.78%)
235 (79.12%)
219 (73.74%)
214 (72.05%)

FININSTR
89 (29.97%)

a
We were unable to obtain one firms breakdown of their aggregate reconciliation numbers. BVIAS (ERNIAS) = Shareholders equity (earnings) reported by firms calculated under IFRS GAAP;
BVUK(ERNUK) = Shareholders equity (earnings) reported by firms calculated under UK GAAP; LEASE = Reconciliation item due to implementing IAS 17 Leases; EMPLBEN = Reconciliation
item due to implementing IAS 19 Employee Benefits; SHAREPAY= Reconciliation item due to implementing IFRS 2 Share-Based Payments; GOODW = Reconciliation item due to implementing
IAS38 Intangible Assets; TAX = Reconciliation item due to implementing IAS 12 Income Taxes; FININSTR = Reconciliation item due to implementing IAS 39 Financial Instruments.

48

TABLE 8
First stage regression of instrumental variables approach
Coefficients Values (Whites Heteroscedasticity consistent t-statistics in parentheses)
Dependent Variable

ERN(SHSPAY)
Predicted Sign

Intercept

BVUK

ERNUK

ERN(LEASE)

+/-

ERN(EMPLBEN)

+/-

ERN(TAX)

+/-

ERN(GW)

+/-

ERN(FINIST)

+/-

ERN(MISC)

+/-

BV(LEASE)

+/-

BV(EMPLBEN)

+/-

BV(TAX)

+/-

BV(GW)

+/-

BV(FINIST)

+/-

BV(MISC+IFRS2)

+/-

BVIFRS-UK

NOSH

Options outstanding

+/-

Level
Model

Per Share
Model

0.002
(0.75)
0.000002
(1.96)b
-0.00008
(-5.14)***

0.003
(1.01)

(n=241)a
1.711
(1.51)
0.0003
(0.62)
-0.014
(-2.20)*
-0.574
(-2.08)*
0.067
(1.84)b
-0.061
(-1.46)
0.004
(1.19)
0.025
(2.44)**
-0.003
(-0.78)

(n=242)a
0.000003
(2.84)***
0.0004
(0.59)
-0.004
(-1.19)
0.573
(2.15)*
0.044
(0.68)
-0.061
(-1.99)*
-0.003
(-0.42)
0.003
(0.30)
-0.01
(-1.74)b

Level
Model

(n=242)a
1.266
(1.45)
0.0005
(0.82)
-0.017
(-2.22)**
-0.403
(-1.98)*
0.066
(-1.46)
-0.059
(-1.47)b
0.002
(0.33)
0.004
(0.19)
-0.009
(-1.49)
-0.041
(-0.85)
0.001
(0.37)
-0.008
(-1.31)
0.002
(0.24)
0.003
(0.20)
0.009
(1.40)

Per Share
Model
(n=242)a
0.00001
(2.78)***
0.001
(1.26)
-0.005
(-1.64)
0.64
(2.67)***
0.079
(1.17)
-0.058
(-1.80)b
-0.001
(-0.07)
-0.015
(-0.73)
-0.007
(-1.17)
-0.092
(-2.16)*
0.001
(0.41)
0.009
(2.19)*
-0.003
(-1.53)
0.024
(1.07)
-0.003
(-1.20)

0.00001
(1.42)*
-0.00007
(-5.05)***

-0.0002
-0.00022
(-3.39)***
(-3.34)***
Exercise price
+/-0.647
-0.000001
-0.586
-0.000001
(-1.51)
(-2.31)**
(-1.55)
(-2.37)**
R2 Adj
56.28%
35.96%
58.59%
42.97%
F-statistic
26.75***
13.307***
21.06***
12.350***
F-st for relevance
13.448***
12.494***
16.887***
13.880***
Hansen for exogeneity
3.840
1.549
2.099
3.097
p-value for Hansen
14%
46%
35%
21%
a
=initial sample was 246 firms, excluded outlier(s) following the calculation of DFBETAS, b, *, **, *** = significance at 10 5,
2 and 0.1 percent levels respectively. BVUK = shareholders equity calculated under UK GAAP; ERNUK = earnings calculated
under UK GAAP; BV/ERN(LEASE)IFRS-UK = difference in shareholders equity/earnings between UK and IFRS due to IAS17;
BV/ERN(EMPLBEN)IFRS-UK= difference in shareholders equity/earnings between UK and IFRS due to IAS19;
BV/ERN(SHSPAY)IFRS-UK= difference in shareholders equity/earnings between UK and IFRS due to IFRS2; BV/ERN(GW)IFRSUK
= difference in shareholders equity/earnings between UK and IFRS due to IAS38; BV/ERN(FINIST)IFRS-UK= difference in
shareholders equity/earnings between UK and IFRS due to IAS39; BV/ERN(TAX)IFRS-UK= difference in shareholders
equity/earnings between UK and IFRS due to IAS12; BV/ERN(MISC)IFRS-UK= difference in shareholders equity/earnings
between UK and IFRS due to all other IAS/IFRS applied. Exercise price is the median exercise price of all option schemes for
a certain company. Options outstanding and granted are the sum of the options for a certain company at the end of the fiscal
period when the transition to IFRS happened, NOSH = number of shares outstanding.
Options granted/NOSH

+/-

49

TABLE 9
Test of Value Relevance of Reconciliation adjustments from UK GAAP to IFRS
Coefficients Values (Whites Heteroscedasticity consistent t-statistics in parentheses)
MV it + 5 = 0 + 1 BV itUK + 2 ERN itUK + 3 BV ( LEASE ) itIFRS UK + 4 BV ( EMPLBEN ) itIFRS UK
+ 6 BV (GW ) itIFRS UK + 7 BV ( FINIST ) itIFRS UK + 8 BV (TAX ) itIFRS UK + 9 BV ( MISC + SHSPAY ) itIFRS UK
+ 10 ERN ( LEASE

) itIFRS UK

+ 11 ERN ( EMPLBEN

) itIFRS UK

+ 12 ERN ( SHSPAY

(7)

) itIFRS UK

+ 13 ERN (GW ) itIFRS UK + 14 ERN ( FINIST ) itIFRS UK + 15 ERN (TAX ) itIFRS UK + 16 ERN ( MISC ) itIFRS UK + it

Dependent
Variable

2 Stage-Least-Squares Disaggregated Model

Market
Price per
Market
Value
share
Value
(n=241)a
(n=242)a
(n=242)a

Predicted
Sign

Intercept

BVUK

ERNUK

ERN(LEASE)

+/-

ERN(EMPLBEN)

+/-

ERN (SHSPAY )

+/-

ERN(TAX)

+/-

ERN(GW)

+/-

ERN(FINIST)

+/-

ERN(MISC)

+/-

BV(LEASE)

+/-

BV(EMPLBEN)

+/-

BV(TAX)

+/-

BV(GW)

+/-

BV(FINIST)

+/-

BV(MISC+IFRS2)

+/-

BVIFRS-UK

NOSH

R2 Adj
F-statistic

Price per
share
(n=242)a

249.44
(2.95)***
0.433
(2.63)***
4.762
(4.23)***
-52.603
(-1.32)
-27.645
(-2.51)**

0.002
(9.90)***
0.403
(2.45)**
3.635
(5.00)***
55.288
(1.20)
0.228
(0.01)

312.692
(3.33)***
0.385
(2.29)*
4.455
(3.90)***
6.358
(0.12)
-35.1
(-3.60)***

0.002
(8.57)***
0.524
(3.26)***
2.963
(4.06)***
79.813
(1.94)b
3.116
(0.18)

-109.099
(-2.66)***
-30.256
(-2.97)***
6.962
(8.65)***
6.67
(1.67)b
1.167
(0.48)

-174.086
(-3.61)***
-14.802
(-1.69)b
4.926
(2.36)**
6.977
(2.18)*
-1.506
(-0.71)

-113.693
(-2.48)**
-35.694
(-5.91)***
6.137
(8.10)***
19.615
(3.07)***
0.337
(0.19)
-1.531
(-0.16)
0.02
(0.04)
3.336
(2.51)**
1.727
(1.51)
-8.895
(-1.80)
3.201
(2.38)**

-177.684
(-4.23)***
-16.605
(-2.01)*
3.837
(1.91)b
5.55
(0.96)
-1.751
(-0.84)
-24.12
(-1.96)b
-0.384
(-0.66)
1.013
(1.15)
0.754
(1.08)
1.437
(0.27)
0.518
(1.191)b

0.969
(1.70)b
0.001
(4.19)***
93.26%
294.46***

0.136
(0.3)
0.001
(3.29)***
93.71%
218.67***

61.04%
29.98***

60.10%
43.00***

= initial sample was 246 firms, outlier(s) were excluded following the calculation of DFBETAS, b, *, **, *** = significance
at 10 5, 2 and 0.1 percent levels respectively. BVUK = shareholders equity calculated under UK GAAP; ERNUK = earnings
calculated under UK GAAP; BV/ERN(LEASE)IFRS-UK = difference in shareholders equity/earnings between UK and IFRS due
to IAS17; BV/ERN(EMPLBEN)IFRS-UK= difference in shareholders equity/earnings between UK and IFRS due to IAS19;
BV/ERN( SHSPAY )IFRS-UK= estimated (following first stage regression) difference in shareholders equity/earnings between
UK and IFRS due to IFRS2; BV/ERN(GW)IFRS-UK= difference in shareholders equity/earnings between UK and IFRS due to
IAS38; BV/ERN(FINIST)IFRS-UK= difference in shareholders equity/earnings between UK and IFRS due to IAS39;
BV/ERN(TAX)IFRS-UK= difference in shareholders equity/earnings between UK and IFRS due to IAS12; BV/ERN(MISC)IFRSUK
= difference in shareholders equity/earnings between UK and IFRS due to all other IAS/IFRS applied; NOSH = number of
shares outstanding.

50

TABLE 10
Value relevance model examining employee benefits previously reported
under FRS17 or SSAP24
MVit +5 = 0 + 1 BVitUK + 2 ERNitUK + 3 BVitIFRSUK BVIAS19 + 4 ERNitIFRSUK EIAS19 + 5 BVitIAS19 + 6 ERNitIAS19
+ 7 NOSHit + 8 FRS17 + 9 FRS17 * BVitIFRSUK BVIAS19 + 10 FRS17 * ERNitIFRSUK EIAS19 +

11 FRS17 * BV

IAS19
it

+ 12 FRS17 * ERN

IAS19
it

+ it

Predicted
Sign

Intercept

BVUK

ERNUK

BVIFRS-UK-IAS19

ERNIFRS-UK-IAS19

ERNIAS19

+/-

BVIAS19

+/-

NOSH

FRS17

+/-

FRS17 * BVIFRS-UK-BVIAS19

+/-

FRS17* ERNIFRS-UK-EIAS19

+/-

FRS17* ERNIAS19

+/-

FRS17*BVIAS19

+/-

R2 Adj
F-statistic

(8)

375.66
(3.93)***
0.40
(2.37)**
5.12
(4.72)***
1.91
(2.04)*
4.86
(5.16)***
-26.06
(-4.05)***
0.03
(0.07)
0.001
(3.44)***

88.22%
295.24***

Level

Per-Share

(n=276)a

(n=277)a

351.42
(3.52)***
0.45
(2.69)**
4.62
(4.40)***
1.20
(1.17)
5.47
(5.07)***
-21.94
(-3.55)***
-0.23
(-0.46)
0.001
(3.53)***
219.75
(1.02)
2.83
(1.29)
-4.70
(-1.30)
-8.16
(-0.09)
4.61
(3.10)**

0.002
(9.57)***
0.41
(2.37)**
5.14
(6.86)***
0.23
(0.47)
2.28
(2.38)**
-8.72
(-0.68)
-0.06
(-0.09)

88.67%
180.29***

65.21%
87.24***

0.002
(8.97)***
0.40
(2.41)**
5.12
(6.78)***
-0.02
(-0.05)
2.32
(2.41)**
-7.43
(-0.58)
-0.35
(-0.53)
0.0001
(0.39)
2.73
(1.62)
1.51
(0.67)
-106.08
(-1.32)
11.63
(3.55)***
65.75%
49.18***

= initial sample was 283 firms, outlier(s) were excluded following the calculation of DFBETAS,
*, **, *** = significance at 5, 2 and 0.1 percent levels respectively,
MV = market value of equity five days after the announcement of the IFRS reconciliation document;
BVUK = the accounting book value of shareholders equity calculated under UK GAAP;
ERNUK = the earnings calculated under UK GAAP;
BVIFRS-UK = the difference between UK GAAP and IFRS book value of shareholders equity;
ERNIFRS-UK = the difference between UK GAAP and IFRS earnings
NOSH = number of shares outstanding.
ERNIAS19 = the earnings adjustment necessary due to IAS 19 Employee Benefits compliance
BVIAS19 = the shareholders equity adjustment necessary due to IAS 19 Employee Benefits compliance
FRS 17 = firm previous chose to comply with the full implementation of FRS 17 Retirement Benefits, FRS 17 = 1 if full
compliance, FRS17 =0 if previous complied with transitional SSAP 24 regime.

51

FOOTNOTES
1

For example BP Plc announced on 28th April, 2005 that BP and Kuwait agree to develop China links.

These firms had previously published their annual reports under UK GAAP and approximately three months later they then

produced their reconciliations of these numbers to IFRS.

3

Deloitte & Touche (2004). Indeed it was noted that some firms had underestimated the amount of work which was needed to

prepare for certain aspects of the new accounting standards.

4

According to PwC (2004b) for example, larger companies as well as SEC registrants were further ahead than their

counterparts. Furthermore, financial services companies were just ahead of others in the main project areas.
5

PwC (2005) surveyed 75 fund managers, half of them having funds under management in excess of 50 billion.

It was also noted that fund managers found IFRS numbers more useful than US GAAP. In a later survey (PwC, 2006) 187

fund managers were asked about the influence of IFRS on their investment decisions. This was deemed to be significant as 22
per cent of them were convinced to sell a companys shares and 17% of them were influenced not to invest in a companys
shares after receiving IFRS numbers. Overall, 52 per cent of fund managers admit that IFRS have already influenced a specific
investment decision. Such views are difficult to reconcile with the efficient markets hypothesis if as all the firms claim this is
purely an accounting change with no effect on the economics of the business.
7

The information content approach looks at the entirety of the disclosed information, and because of its aggregative nature, but

without an explicit aggregation function, the tests must necessarily be non-directional.

8

For example, the requirement to consolidate Special Purpose Entities (SPE) for the first time in the accounts will give

information to the market which was not available before. It has been suggested that this could result in the closure or
modification of certain SPEs. PwC (2004) noted that most UK companies were trying to avoid surprising the market because
of the arrival of SPEs on the balance sheet for the first time.
9

Contracts such as borrowing and management compensation are often agreed on accounting numbers. A change of the

underlying accounting number may lead to a renegotiation of debt covenants and employee bonus and stock option plans, etc.
10

IAS 19 (as amended Dec 2004) specifies that companies can choose either to report all actuarial gains and losses in the

statement of other recognised income and expenses (SORIE) or all in the income statement or if the accumulated
unrecognized actuarial gains and losses exceed 10% of the greater of the defined benefit obligation or the fair value of plan
assets, a portion of that net gain or loss can be recognised immediately as income or expense. The portion recognised is the
excess divided by the expected average remaining working lives of the participating employees. Actuarial gains and losses that
do not breach the 10% limits described above (the 'corridor') need not be recognised - although the enterprise may choose to do
so.
11

For a recent study on framing effects see Fiss & Zajac (2006).

12

The combined disclosure firms are considered later when we investigate the value relevance of the IFRS reconciliations.

13

Ball and Torous (1988) proved there is little to gain from a more elaborate estimation framework compared to an informal

procedure of expanding the event window. The event window needs to be wide enough to capture any abnormal returns after
the announcement that could be attributed either to the fact that the announcement is made after the market closes or that the

52

market does not incorporate this information immediately but gradually. Also abnormal returns before the announcement can
potentially come from a number of sources, i.e. some firms announced the date they expected to release the restated accounts
and depending upon the way the release is handled this may in itself convey information. For example, Aviva on 01/06/2005
announced that its restated results were going to be released on 05/06/2005. Or abnormal returns prior to the announcement
day could reflect leakage of the information by those who may have access to it.
14

We employ different models to test the robustness of our results. The results are essentially similar under all generating

methods. The estimation period for our return metrics is 120 days. Using estimation periods of 60 or 240 days leaves our
results unchanged. The event window is not included in the estimation period in order to prevent the event from influencing the
coefficients of the normal return model. The parameters of the regression were estimated by the OLS method. The stability of
the estimated betas under the market model within the estimation periods was tested by employing the Chow test and a nonparametric test of the confidence interval for the slope, and they were found to be stable.
15

Logarithmic returns were also calculated in additional to the discrete returns. Empirically the logarithmic returns are more

likely to be normally distributed and therefore conform to the assumptions of standard statistical techniques such as required
for the t-test. Moreover, logarithmic returns have the valuable property of additivity whereby one is able to link together subperiods returns to form returns over longer periods. However, the results were identical and only the discrete returns are
reported here.
16

Bamber and Cheon (1995) suggest that the relation between volume and return responses to earning announcements is closer

to independence than it is to a "strong positive relation." Therefore volume and return are complementary measures and not
cross-substitutes. If volume and return measures are sufficiently complementary, then tests of market response based on both
metrics should be more precise than tests based on either metric alone.
17

The measure we use is based on the number of trades per day, since Cready and Ramanan (1995) find that tests based on the

number of trades outperform tests based on the percentage of shares traded in detecting both seeded and announcement-period
trading effects.
18

The log-transformation mitigates the skewness in the transaction distribution (Cready and Ramanan 1995) and we add 1 to

avoid taking the log of zero in case a stock has no trades on a particular day.
19

We re-ran the model utilising alternative dates for MV: MV at time t (the event day), and MV at t+3mnths (three months

after the event day). The results were similar and all-coefficients had exactly the same signs and similar significances.
20

Additional deflators were also used market value of equity at the beginning of the event window and one month before the

event window, share price at the beginning of the event window and one month before the event window however the results
are not materially different and hence are not reported.
21

In every model we controlled for industry but it didnt change qualitatively any of our results. Here we report the results

without including dummy variables for industries.

22

The size of earnings adjustments does not appear to be driven by one particular reconciliation adjustment.

53

23

Although not reported in detail in the paper it may be noted that segmenting the full sample into industries it appears, in

relation to the mean earnings adjustments that firms within the telecommunication, utilities, healthcare and construction and
material industries, tend on average to report lower earnings under IFRS than under UK GAAP, whereas for all other industries
the opposite is true. Indeed firms within the Travel and Leisure industry appear to report the highest mean aggregate
adjustments. For the majority of firms the mean balance sheet adjustment tends to be negative, i.e. the owners equity under
IFRS is smaller than under UK GAAP. This is especially true for firms within the chemical and telecommunication industry.
Five industries however have positive adjustments resulting in their IFRS balance sheet equity being larger under IFRS relative
to UK GAAP. The largest positive adjustments were for the Food & Beverage and Personal & Household Goods industries.
24

We also split the sample based on the sign of BVIFRS-UK however we did not find any significant DARs for either sample.

25

The authors believed that there was some probability, especially since the planned convergence between FASB and IASB

following the Norwalk Agreement 2002, that the market may not react to the SEC firms IFRS reconciliation since the market
has already been provided with very similar information in their Form 20F fillings. The results indicate that no SEC firm has
significant DARs or CARs (even when segmented into positive and negative earning adjustments except one significant CAR
on Day +5)) see Table 3 Panels A and B. See also the value relevance results for equation 5 below, which investigates the
possible differences between SEC and non-SEC listed firms in relation to the value relevance of their reconciliation
adjustments.
26

These differences were identified based on frequency and size. Since the differences can be positive or negative we computed

the average absolute value of these specified differences relative to the sum of the absolute value of these and other
differences. They cover about 69% of all recorded differences with respect to the shareholders equity and 46% with respect to
earnings; see Tables 7 Panels A, B and C (see Amir et al, 1993).
27

Its focus was on achieving a relatively stable charge to the profit and loss account.

28

The effect on the balance sheet may be positive or negative and it is very much depended upon how the firms classify the

assets and what had previously been done with them.

29

Indirectly the firms will also have had to incur additional costs and effort to obtain the valuations that are necessary to apply

the standard.
30

One would have expected the effect on shareholders equity to be negative; however a number of companies reported large

deferred tax credits and other items resulting in a net increase in shareholders equity.
31

Or more frequently if events or changes in circumstances indicate they might have been impaired.

32

IFRS 1 sets out requirement for the first time adoption of IFRS. Generally IFRS 1 requires that accounting policies be

adopted that are compliant with IFRS and that these policies be applied retrospectively to all periods presented. However, a
number of exemptions are permitted to be taken in preparing the balance sheet at the date of transition. Most firms tended to
adopt the transitional provision set out in IFRS 1 to apply IFRS 3 prospectively from the Transition Date, whereby goodwill
arising on acquisitions made prior to this is frozen as at the Transition Date and any goodwill amortisation occurring in the
financial year 2004/05 is therefore reversed for comparative IFRS reporting purposes.

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33

We report our results without including an individual reconciliation due to share based payments for the book value of

equity. Instead we aggregate this number with miscellaneous adjustments. The reason is that none of the instruments was
correlated with this number in order to be instrumented. Investigation revealed that this was primarily attributed to the fact that
this adjustment for book value includes other components which are unrelated to options. However, we also run the model
including it as an independent variable and we found our results unchanged and the coefficient on this adjustment insignificant.
34

As a rule of thumb the F statistic has to be greater than ten. The logic behind this is that the mean of the sampling

distribution of the two-stage least-squares (TSLS) estimator is in large samples approximately equal to b1 + (b1OLS b1)/[E(F)1] where b1OLS is the probability limit of the OLS estimator and E(F) is the expectation of the first-stage regression. Then if
E(F)=10, the large-sample bias of TSLS, relative to the large-sample bias of OLS is only 1/9.

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