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2010 Undergrad Research

2010 Undergrad Research

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  • 1. Penn State Behrend Undergraduate Student Academic Year Research Grant Program for 2010-2011Effects 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: David T. Doran Ph.D., CPA Penn State Behrend School of Business October 29, 2010
  • 2. David T. Doran Olivia Rose Derby - ord5003 - 953888751Abstract This study compares average abnormal daily stock trading volume during earnings announcementperiods of firms complying with U.S. generally accepted accounting principles (U.S. GAAP) vs. firmscomplying with International GAAP – International Financial Reporting Standards (IFRS). Abnormalstock trading volume has been established in the literature as a viable measure for monitoring the relativeinformational 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 inabnormal 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 indicatesuperior (inferior) informational value. The observed results will be useful in determining if US firmsshould continue applying US GAAP or should comply with IFRS. Standard setters have committed to a convergence project intended to eliminate or minimizedifferences between U.S. GAAP and IFRS. This project has been underway during the five year sampleperiod (2005-2009). Additional analysis compares abnormal trading volume during 2005 vs. 2009.Successful convergence project efforts should result in lesser trading volume differences observedbetween the groups over time.Affiliated Faculty Member – Student Researcher –
  • 3. David T. Doran Olivia Rose Derby - ord5003 - 953888751Introduction Since 2002 the Financial Accounting Standards Board (FASB) and the International Accounting StandardsBoard (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 standardsappears to be inevitable; over 100 countries including 27 members of the European Union have adopted IFRS. OtherCountries 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 makechanges 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 changesare 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, companiesaffected by the decision will be faced with challenges. These include updating accounting systems, training staff andstructuring 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 beseen that trading volume rises around scheduled earnings announcements (Frazzini 2006). Previous studies haveshown 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 theinformational value of earnings determined under U.S. GAAP or IFRS. This research will compare the averageabnormal stock trading volume of companies filing under each accounting standard. The research will provideuseful 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.Affiliated Faculty Member – Student Researcher –
  • 4. David T. Doran Olivia Rose Derby - ord5003 - 953888751Problem Statement and Research Plan: Previous studies have shown that stock volume provides a good measure for monitoring informationalvalue of financial statements’ content (Beaver 1987). We have chosen abnormal volume as our surrogate forinformational content. Bamber (1987), has found volume to be a reliable measure of relative informational contentaround specific announcement events. Our entire sample will be comprised of 200 companies announcing earnings under U.S. GAAP and 200companies complying with IFRS. The annual earnings announcement will serve as our informational event, aroundwhich, we will obtain our stock volume data. We have chosen to use annual earnings rather than interim earnings inorder to match total yearly announcements more accurately between two different accounting standards. Companiesemploying U.S. GAAP announce earnings four times a year where-as IFRS compliant firms generally announceearnings only twice a year. Additionally, only annual financial statements are audited. The annual announcementfor 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, theday of and the day after the earnings announcement event. This will serve as the event period. Abnormal stockvolume will be calculated as .The average daily trading volume for the comparison period will be determined by averaging the daily tradingvolume over a 25 trading day period before the announcement of earnings event and the daily trading volume over a25 trading day period after the event for each year 2005-2009 for each company. After compiling the eitherparametric or non-parametric statistics will be applied to test for difference in abnormal trading volume between thesample groups (depending upon the normality of the sample distributions). Because the FASB and the IASB havebeen working towards convergence of their respective standards since 2002 we expect the differences to lessen overtime. To visualize the convergence process we will compare data from 2005 and data from 2009 separately andexpect to see a significant change in stock volume. Observed differences in abnormal trading volume should declinefrom 2005 to 2009 if the convergence project has progressed as expected.Affiliated Faculty Member – Student Researcher –
  • 5. David T. Doran Olivia Rose Derby - ord5003 - 953888751Anticipated Outcome: Our research should provide a quantifiable measurement of the value of information conveyed throughearnings 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 announcementsmeasured under U.S. GAAP vs. IFRS will indicate superior/inferior value. We anticipate seeing a decline inobserved difference in abnormal trading volume for the sample groups from 2005 to 2009 resulting from progressbeing made towards convergence of U.S. GAAP and IFRS.Affiliated Faculty Member – Student Researcher –
  • 6. David T. Doran Olivia Rose Derby - ord5003 - 953888751 Works CitedBamber, 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. <>.FRAZZINI, ANDREA, and OWEN LAMONT. The Earnings Announcement Premium and Trading Volume. Illinois University, 6 Aug. 2006. Web. 7 Oct. 2010. <>.“International Convergence of Accounting Standards-Overview”. FASB: Financial Accounting Standards Board. Financial Accounting Standards Board, 2010. Web. 07 Oct. 2010. <>. Affiliated Faculty Member – Student Researcher –
  • 7. David T. Doran Olivia Rose Derby - ord5003 - 953888751 UNDERGRADUATE RESEARCH BUDGET **CATEGORY DETAILS AMOUNTWages (rate and # of Wages paid to student researcher $12.00/hour. The researcher is expected to take about 53 $640 total hours over the period from January 1, 2011 to May 6,2011.hours)Supplies (list majoritems)Travel (relateddirectly to project)Copying/Printing Printing of visual aids (graph of normal stock volume trends for 5 years, graph of abnormal $60.00 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.Payment of HumanSubjectsOtherTotal $700.00**Rental for housing is not permitted by Penn State policyAffiliated Faculty Member – Student Researcher –
  • 8. David T. Doran Olivia Rose Derby - ord5003 - 953888751 Olivia Rose Derby 5620 East Lake Rd. Erie, PA 16511 716.640.8276 ord5003@psu.eduEducation 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 ClubWork Experience2010-Present Victoria’s Secret Erie, PA Sales AssociateSummer 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 Consultant2008-2009 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 Anaheim, CA Volunteer Tutor Dave Poulin’s Art Studio Jamestown, NY Art Director Chautauqua Regional Youth Ballet Jamestown, NY Ballet TeacherAffiliated Faculty Member – Student Researcher –