Familiarity, home bias and investors’ reactions to 20-F reconciliation gains and losses and perceptions of the quality of accounting principles

This paper examines whether financial statements based on home GAAP (Generally Accepted Accounting Principles) (Irish GAAP), versus non-home GAAP (US GAAP), have differential effects on Irish investors’ financial assessments of a firm. The paper also extends Maroney and Ó hÓgartaigh's (2005) study by investigating whether perceptions of US GAAP and Irish GAAP financial statements and the gains and losses represented in 20-F reconciliations differ between non-US (Irish) and US users of financial statements. The paper adopts an experimental method involving 105 non-US (Irish) participants and 49 US participants. The current study provides evidence that non-US investors react very differently to reconciliation gains and losses than do US investors. In fact, the non-US investors react conversely to US investors in that they perceive the risk of firms filing 20-F reconciliations with reconciliation losses to be lower, and the quality of accounting principles higher, than firms filing 20-F reconciliations with reconciliation gains. Our study also finds that the non-US participants were more confident in making their quality assessment for the home GAAP (Irish GAAP) financial statements than for the non-home GAAP (US GAAP) financial statements. However, despite this difference in confidence level, the financial assessments of the firm preparing home GAAP (Irish GAAP) financial statements versus non-home GAAP (US GAAP) financial statements were not significantly higher. Together, these results help to shed light on the cause of what has been termed a ‘home bias’ phenomenon, whereby domestic investors exhibit a strong preference for domestic versus foreign markets suggesting in particular that ‘home bias’ derives in part from an increased confidence in ‘home GAAP’.