The Price of Being Foreign: Stock Market Penalties Associated with Accounting Irregularities for U.S.‐Listed Foreign Firms

Abstract

We examine the stock market consequences of disclosing accounting irregularities for U.S.‐listed foreign firms. After controlling for the severity of the irregularity and other firm characteristics, we find that foreign firms experience significantly more negative short‐window stock market reactions following irregularity announcements than do U.S. firms. Moreover, for a subsample of 64 irregularities of foreign firms that are listed on both a U.S. and home country stock exchange, we find evidence that restating firms' U.S. investors react more negatively to the same irregularity than their home country investors. This differential market reaction appears related to firm‐specific information risks that are greater for foreign firms than U.S. firms. Collectively, consistent with the reputational bonding hypothesis in prior literature, our results suggest that accounting irregularities cause U.S. investors to reassess the information risk associated with foreign firms.

Equal opportunity market

“…Notes 1. www.fasb.org/summary/stsum154.shtml 2. Concurrent research by Ge et al (2018) also examines market reactions to restatement announcements for US firms and foreign cross-listed firms; however, our paper differs in several important ways. First, our primary contribution is to provide evidence in support of the CMLOF antecedents identified by Bell et al (2012).…”

“…Our primary focus is on establishing why the market reacts differently and how this can be mitigated, rather than simply establishing that the market does indeed react differently. Our paper and Ge et al (2018) use a similar setting to examine two different theories. Rather than examining CMLOF, Ge et al (2018) focus on the use of cross-listing as a bonding mechanism.…”

Does the Form 20‐F reconciliation help ensure the financial reporting quality of cross‐listed IFRS firms? A comparison with cross‐listed non‐IFRS firms

“…7 We balance the sample period from 1997 to 2017, 10 years before and after the elimination of the reconciliation requirement (i.e., the year 2007). We exclude 1484 observations from tax‐avoidance countries: Bermuda, Cayman Islands, Jersey, Netherlands Antilles and Virgin Islands (Chan et al, 2013; Doidge et al, 2009; Ge et al, 2019; Sarkissian & Schill, 2009). 8 Following the prior literature, we also exclude 3922 observations in financial industries (Chen et al, 2016; Chen et al, 2020; Dou et al, 2018).…”

“…7 We balance the sample period from 1997 to 2017, 10 years before and after the elimination of the reconciliation requirement (i.e., the year 2007). We exclude 1484 observations from taxavoidance countries: Bermuda, Cayman Islands, Jersey, Netherlands Antilles and Virgin Islands (Chan et al, 2013;Doidge et al, 2009;Ge et al, 2019;Sarkissian & Schill, 2009 In line with prior studies (Carson, 2009;Chen & Khurana, 2015;Riccardi et al, 2018), we capture auditor global industry specialization based on clients' total assets. We obtain necessary data from the Worldscope database and create an indicator of global industryspecialist auditors (GNSPEC), which equals 1 when an audit firm audits 30% or more market shares in the client industry in the client home country and at the same time audits 20% or more market shares in the client industry globally and 0 otherwise.…”

“…8 8 We follow prior literature to exclude firms from tax‐avoidance countries because these countries provide no role other than corporate tax havens (Sarkissian & Schill, 2009). Furthermore, these firms are normally US firms but have adopted a foreign status only for tax purposes (Chan et al, 2013; Doidge et al, 2009; Ge et al, 2019). Lastly, firms from tax‐avoidance countries do not have the required data from World Bank GovData 360 .…”