We examine whether the level of trust in a country affects investors' perception and utilization of information transmitted by firms through financial disclosure. Specifically, we investigate the effect of societal trust on investor reactions to corporate earnings announcements. We test two competing hypotheses: on the one hand, corporate earnings announcements are perceived as more credible by investors in more trusting societies and therefore elicit stronger investor reactions; on the other hand, societal trust mitigates outside investors' concern of moral hazard and reduces the value of corporate earnings announcements to them, thereby weakening their reactions to these events. We analyze the abnormal trading volume and abnormal stock return variance during the earnings announcement period in a large sample of firm-year observations across 25 countries, and find that both measures of investor reactions to earnings announcements are significantly higher in more trusting countries. We also find that the positive effect of societal trust on investor reactions to earnings news is more pronounced (1) when a country's investor protection and disclosure requirements are weaker, suggesting that trust acts as a substitute for formal institutions, (2) when a country's average education level is lower, consistent with less educated people relying more on trust in making economic decisions, and (3) when firm level information asymmetry is higher, supporting the notion that trust plays a more important role in poorer information environments.

No abstract

We examine the impact of foreign institutional investors on firms' voluntary disclosure practices measured by management forecasts. In a sample of 32 non-U.S. countries, we find that, on average, foreign institutional investments lead to improved voluntary disclosure, and their impact is larger than that of domestic institutional investors. These results are more pronounced when foreign institutional investors (1) are unfamiliar with the firm's home country, (2) have longer investment horizons, and (3) are from countries with stronger investor protection and disclosure requirements than the firm's home country. However, we also find some evidence of voluntary disclosure deterioration in firms with foreign institutional investors from countries with inferior disclosure requirements and securities regulations and with concentrated foreign institutional ownership. Overall, our results suggest that the relation between foreign institutional investors and voluntary disclosure is much richer and more complex than what has been documented for domestic institutional investors in the literature.

We investigate how the demand for higher quality audits outside of the United States is affected by the type of institutional investors, foreign versus domestic. Consistent with the notion that foreign institutional investors (compared to domestic institutional investors) are more informationally disadvantaged, in a large sample of firm-year observations from 41 non-U.S. countries, we find that foreign institutional investors play a more important role in influencing firms' auditor choices. This effect is stronger when the firms they invest in have more severe information asymmetries, either at the country level or at the firm level. We further find that the effect of foreign institutional investors on auditor choice concentrates on institutional investors originating from countries with stronger governance institutions. Overall, our findings suggest that cross-border institutional investment serves as an important channel in influencing firms' auditor choices and improving the information environment of firms around the world.

No abstract