The interaction of voluntary and mandatory disclosures

Abstract

In November 2007, the SEC approved a new rule to eliminate the IFRS-U.S. GAAP reconciliation requirement for foreign private issuers (hereafter, IFRS firms). The relaxation of the SEC’s reconciliation requirement raises concern about a potential information loss associated with the decreased mandatory disclosure. This study examines the interaction of IFRS firms’ voluntary and mandatory disclosures surrounding the implementation of the SEC’s new reconciliation rule. I find that IFRS firms significantly increase their overall voluntary disclosures in annual financial reports and earnings announcement press releases after elimination of the reconciliation. Specifically, they increase voluntary disclosures about the prior reconciling items in their financial reports. My results further show that such increases in IFRS firms’ voluntary disclosure are associated with IFRS firms’ relations with U.S. markets. IFRS firms with more U.S. revenues are more likely to increase voluntary disclosure, while IFRS firms with more U.S. competitors are less likely to increase voluntary disclosure after the SEC eliminated the reconciliation. In addition, I examine whether increases in IFRS firms’ voluntary disclosures mitigate the potential impact of eliminating the IFRS-U.S. GAAP reconciliation on IFRS firms’ capital market conditions. The results are not conclusive regarding the capital market consequences of the SEC’s new reconciliation rule. Overall, my findings are broadly consistent with the hypothesis that firms use voluntary disclosure to optimize total corporate disclosure levels in response to a mandatory disclosure change.