abstract[1]

Penn State Behrend Undergraduate Student Academic Year Research Grant

Program for 2010-2011

Effects of U.S. GAAP Vs. IFRS on Stock Volume at

Announcement Events

Olivia Rose Derby

5620 East Lake Rd.

Erie Pa, 16511

Phone: 716.640.8276

e-mail: [email protected]

David T. Doran Ph.D., CPA

Penn State Behrend School of Business

October 29, 2010

David T. Doran Olivia Rose Derby - ord5003 - 953888751

Affiliated Faculty Member – [email protected] Student Researcher – [email protected]

Abstract This study compares average abnormal daily stock trading volume during earnings announcement

periods of firms complying with U.S. generally accepted accounting principles (U.S. GAAP) vs. firms

complying with International GAAP – International Financial Reporting Standards (IFRS). Abnormal

stock trading volume has been established in the literature as a viable measure for monitoring the relative

informational value of earnings announcement events.

This study is important because the SEC is currently considering allowing (or requiring) U.S.

firms to comply with IFRS when reporting future EPS amounts. By comparing average differences in

abnormal trading volume between sample groups, the study will determine the relative value of U.S.

GAAP vs. IFRS based on earnings information. Higher (lower) abnormal trading volume will indicate

superior (inferior) informational value. The observed results will be useful in determining if US firms

should continue applying US GAAP or should comply with IFRS.

Standard setters have committed to a convergence project intended to eliminate or minimize

differences between U.S. GAAP and IFRS. This project has been underway during the five year sample

period (2005-2009). Additional analysis compares abnormal trading volume during 2005 vs. 2009.

Successful convergence project efforts should result in lesser trading volume differences observed

between the groups over time.



Introduction

Since 2002 the Financial Accounting Standards Board (FASB) and the International Accounting Standards

Board (IASB) have been working together with the ultimate goal of converging U.S.GAAP and IFRS.

The SEC is expected to make a decision in 2011 as to whether or not U.S. companies may elect to file under IFRS.

The SEC and FASB have recognized the growing pressure from international markets to update the United States’

financial standards to converge with those of IFRS. The convergence with international accounting standards

appears to be inevitable; over 100 countries including 27 members of the European Union have adopted IFRS. Other

Countries including Canada, Mexico, China and Russia are actively working towards adoption of IFRS as well

(Epstein, Barry Jay, Susan Cheng). The convergence process encourages both the FASB and the IASB to make

changes to their respective reporting standards so as to decrease the overall number of differences between the two.

Ideally, differences between IFRS and U.S. GAAP will become fewer and less recognizable over time. The changes

are expected to open U.S. capital markets more effectively to foreign investors, and lower transaction costs

(International Convergence of Accounting Standards 2010). However, as with any major change, companies

affected by the decision will be faced with challenges. These include updating accounting systems, training staff and

structuring the terms of business transactions under new regulation (Epstein, Jay, and Cheng 2010).

The changes to come will affect several areas of the financial statements prepared under U.S. GAAP,

including the calculation and presentation of retained earnings and earnings per share (EPS). On average it can be

seen that trading volume rises around scheduled earnings announcements (Frazzini 2006). Previous studies have

shown that volume is a reliable measure of information contained within the financial statements (Bamber 1987,

Beaver 1968). Abnormal stock trading volume is used here to monitor relative superiority/inferiority of the

informational value of earnings determined under U.S. GAAP or IFRS. This research will compare the average

abnormal stock trading volume of companies filing under each accounting standard. The research will provide

useful information for 1) supporting, rejecting or indicating indifference regarding the adoption of IFRS by U.S.

firms, and 2) gauging the success (if any) of the joint convergence project.



Problem Statement and Research Plan:

Previous studies have shown that stock volume provides a good measure for monitoring informational

value of financial statements’ content (Beaver 1987). We have chosen abnormal volume as our surrogate for

informational content. Bamber (1987), has found volume to be a reliable measure of relative informational content

around specific announcement events.

Our entire sample will be comprised of 200 companies announcing earnings under U.S. GAAP and 200

companies complying with IFRS. The annual earnings announcement will serve as our informational event, around

which, we will obtain our stock volume data. We have chosen to use annual earnings rather than interim earnings in

order to match total yearly announcements more accurately between two different accounting standards. Companies

employing U.S. GAAP announce earnings four times a year where-as IFRS compliant firms generally announce

earnings only twice a year. Additionally, only annual financial statements are audited. The annual announcement

for both accounting principles (U.S. GAAP and IFRS) includes the company’s earnings over the entire fiscal year.

Abnormal stock volume will be calculated by averaging the total volume traded during the day before, the

day of and the day after the earnings announcement event. This will serve as the event period. Abnormal stock

volume will be calculated as .

The average daily trading volume for the comparison period will be determined by averaging the daily trading

volume over a 25 trading day period before the announcement of earnings event and the daily trading volume over a

25 trading day period after the event for each year 2005-2009 for each company. After compiling the either

parametric or non-parametric statistics will be applied to test for difference in abnormal trading volume between the

sample groups (depending upon the normality of the sample distributions). Because the FASB and the IASB have

been working towards convergence of their respective standards since 2002 we expect the differences to lessen over

time. To visualize the convergence process we will compare data from 2005 and data from 2009 separately and

expect to see a significant change in stock volume. Observed differences in abnormal trading volume should decline

from 2005 to 2009 if the convergence project has progressed as expected.



Anticipated Outcome:

Our research should provide a quantifiable measurement of the value of information conveyed through

earnings announcements under IFRS and U.S. GAAP. This research will either support the decision to allow U.S.

firms to adopt IFRS, oppose it or indicate indifference. The relative information content of earnings announcements

measured under U.S. GAAP vs. IFRS will indicate superior/inferior value. We anticipate seeing a decline in

observed difference in abnormal trading volume for the sample groups from 2005 to 2009 resulting from progress

being made towards convergence of U.S. GAAP and IFRS.



Works Cited

Bamber, Linda Smith. "Unexpected Earnings, Firm Size and Trading Volume around Quarterly Earnings Announcements."

The Accounting Review 62.3 (1987): 510-32. Print.

Beaver, William H. "The Information Content of Annual Earnings Announcements." Journal of Accounting Research 6

(1968): 67-92. Print.

Epstein, Barry Jay, Susan Cheng, and Russel Novak & Company. "The Coming Transition from U.S. GAAP to IFRS:

Implications for Attorneys." International Accounting Expert, IFRS GAAP, CPA, Accountant, Author, Expert.

RN&Co. Web. 07 Oct. 2010. <http://www.ifrsaccountant.com/nysba-gaap-ifrs.html>.

FRAZZINI, ANDREA, and OWEN LAMONT. The Earnings Announcement Premium and Trading Volume. Illinois

University, 6 Aug. 2006. Web. 7 Oct. 2010. <http://www.business.illinois.edu/finance/papers/2006/frazzini.pdf>.

“International Convergence of Accounting Standards-Overview”. FASB: Financial Accounting Standards Board. Financial

Accounting Standards Board, 2010. Web. 07 Oct. 2010.

<http://fasb.org/jsp/FASB/Page/SectionPage&cid=1176156245663>.



UNDERGRADUATE RESEARCH BUDGET

**CATEGORY DETAILS AMOUNT

Wages (rate and # of

hours)

Wages paid to student researcher $12.00/hour. The researcher is expected to take about 53

total hours over the period from January 1, 2011 to May 6,2011.

$640

Supplies (list major

items)

Travel (related

directly to project)

Copying/Printing Printing of visual aids (graph of normal stock volume trends for 5 years, graph of abnormal

stock volume trends for 5 years and the comparison graph of 2005 and 2009 volume trends) for the Undergraduate Research Conference in April. Printing of visual materials to be done

through the Penn State Behrend Copy and Multimedia Center.

$60.00

Payment of Human

Subjects

Other

Total $700.00

**Rental for housing is not permitted by Penn State policy



Olivia Rose Derby 5620 East Lake Rd. Erie, PA 16511 716.640.8276

[email protected]

Education

Penn State Behrend Erie, PA Accounting & Marketing December 2012

SGA board member, Founder of Behrend Ballet Club

Southwestern Central High School Jamestown, NY Early Graduation 2007

President of Envirothon, Excellence in Technology Award, Secretary of Key Club

Work Experience

2010-Present Victoria’s Secret Erie, PA

Sales Associate

Summer 2010 avVenta New York, NY

Marketing Intern

Collaborated on projects for Google, Yahoo and Citi Group.

Worked with both strategic marketing and direct marketing teams to complete client

research.

2009-Present Penn State Computer Center Erie,

PA Student Consultant

2008-2009 Sterling Technologies Inc. Lake City, PA

Marketing Intern

Developed and lead the advertising presentation that encouraged Tractor Supply Co. to

distribute Sterling Tech’s products in their stores.

Designed the Good Ideas Inc. logo appearing on products and website.

Modernized the employee tracking and data entry systems to create a more efficient and

manageable database.

2006-Present OpenBoxCo. Jamestown, NY

Business Owner and Operator

Managed business’s finances and sales.

Created the designs appearing on a line of the T-shirts as the featured artist for the

designer clothing company Sass&Tini based in orlando FL.

Constructed and updated databases, websites and advertising campaigns for clients.

Volunteer Work

LearnToBe.org Anaheim, CA Volunteer Tutor

Dave Poulin’s Art Studio Jamestown, NY

Art Director

Chautauqua Regional Youth Ballet Jamestown,

NY Ballet Teacher

abstract[1]

Career