The SEC's Elimination of 20-F Reconciliation and the Cost of Debt
45 Pages Posted: 11 Jan 2013
Date Written: January 10, 2013
The SEC adopted a rule in December 2007 to eliminate the 20-F reconciliation requirement for foreign private issuers preparing financial statements under IFRS as issued by the IASB. We examine whether the SEC’s elimination of the 20-F reconciliation affects the cost of debt for such foreign issuers during the 2005-2008 period. On one hand, the reconciliation can provide debt holders useful information to assess firm default risk, and hence eliminating the reconciliation leads to information loss, which is associated with increased cost of debt. On the other hand, significant cost savings from not reconciling earnings and book value can enhance firm value, which decreases cost of debt. We find evidence that the interest expense ratio decreases after such firms discontinue the 20-F reconciliation. Moreover, the cost of debt reduction is driven by firms with higher pre-rule reconciliation magnitude or larger pre-rule number of reconciling items, which is consistent with cost savings dominating the information loss. Lastly, we find evidence of the information loss for firms with higher market uncertainty and limited evidence of information loss for firms with lower bank monitoring incentive. Taken together, our paper provides insight into the SEC’s decision to eliminate the 20-F reconciliation and the SEC’s consideration to adopt IFRS for U.S. domestic firms.
Keywords: eliminating the reconciliation, IFRS, cost of debt
JEL Classification: M41
Suggested Citation: Suggested Citation