For Better or Worse? Financial Reporting Harmonization and Transnational Information Transfers

We find that global financial reporting harmonization is associated with investors overreacting to peer firms’ earnings announcements. Using a sample of 35,116 firm-pair-years from 51 countries between 2000 and 2010, we show that heightened information transfers due to financial reporting harmonization are followed by predictable price reversals when investors observe own-firm earnings. However, overreactions are not present for international firm-pairs that follow different accounting standards. Further, the same-standards overreactions are significantly stronger for firms with lower reporting incentives and weaker information environments. A difference-in-differences analysis of mandatory adoptions confirms our main results. Collectively, the findings reflect unintended consequences of harmonization.