Contracts valuation assessment noise and cross-border listing of equities on U.S. and U.K. stock markets

This study develops and tests the hypothesis that firms in the home country have capital market incentives to cross-border list on foreign stock exchanges that have similar financial reporting with local generally accepted accounting principles (GAAP). Non-U.S. firms' contracts and the underlying GAAP are based on the home-country culture and institutional climates. This connection with culture and institution makes the local GAAP's assessment of the contracts less spurious relative to foreign GAAP. Ball et al. [J. Account. Econ. 29 (2000) 1] note that contracting with stakeholders in the home markets is based on local GAAP's numbers, while cross-border listing provides settings in which the value relevance of local GAAP-based contracts is assessed based on foreign GAAP. Therefore, foreign investors' assessment of the contracts using foreign stock exchange GAAP or mindset of foreign GAAP is likely to result in an assessment noise, which is value irrelevant. The level of assessment noise depends on the differences between foreign and local GAAP. Because of the valuation implications of the assessment noise, we expect cross-border listing to diminish as the likelihood of assessment noise increases.As predicted, we find that assessment noise undermines cross-border listing on U.S. stock exchanges. Because U.S. and local GAAPs are based on different cultural and institutional environments, assessment noise arises if U.S. investors use the mindset of U.S. GAAP financial reports to assess local GAAP-based contracts of cross-border firms. The results are robust in the London Stock Exchange in which assessment noise is induced by interpreting local GAAP contracts as if they were based on U.K. GAAP. As expected, the influences of assessment noise on cross-border listings are more robust in the United States than in the United Kingdom. Our results suggest that harmonization of financial reporting is critical in attenuating the influences of assessment noise on global capital market developments.     

Effect of foreign GAAP earnings and Form 20-F reconciliations on revisions of analysts' forecasts

A controversial area of U.S. securities regulations involves the Securities and Exchange Commission's (SEC) financial reporting requirements for foreign firms, specifically, the necessity of providing a quantitative reconciliation to U.S. GAAP (Form 20-F). The results of earnings-returns research to date indicate that the release of foreign GAAP earnings provides important information. However, the results of earnings-returns studies using reconciled information are mixed. Instead of using an earnings-returns methodology adopted in prior research, this study utilizes analysts' revisions as a market indicator of the effect of information released in foreign GAAP earnings and the reconciled information in Form 20-F. Additionally, the study investigates the influence of four firm-specific variables in the firm's information environment—similarities of accounting systems, analyst following, difference between reconciled earnings and foreign GAAP earnings, and dispersion of analysts' expectations—on positive abnormal revision activities of financial analysts at the time of filing Form 20-F.The results indicate that the release of foreign GAAP earnings (at earnings announcement dates) and reconciled information (at the time of filing Form 20-F) contains relevant information as measured by analysts' revisions. Further, variables representing analyst following, change in reconciled earnings, and dispersion of analysts' expectations are significant in explaining the variation observed in positive abnormal revisions.     

Does trading volume detect information content in earnings reconciliations of foreign firms?

Currently, foreign firms trading securities on U.S. markets provide periodically a quantitative reconciliation of selected financial data consistent with U.S. GAAP (hereafter referred to as reconciled information) in Form 20-F. The SEC is examining whether users believe that this reconciliation process provides additional information above that provided by the foreign GAAP earning announcement and whether this incremental information enhances usefulness for market participants. We examine whether the reconciliation affects a primary indicator of information usefulness: the trading volume of capital markets participants.We use a regression model to examine the relation between a measure of abnormal trading volume and four firm-specific variables in the firm's information environment: similarities of accounting systems, analyst following, difference between reconciled earnings and foreign GAAP earnings, and dispersion of analysts’ expectations. We find a significant relation between abnormal volume and the reconciled earnings number and between abnormal volume and the dispersion of analysts forecasts. Our findings suggest that market participants may use the 20-F reconciliation in trading decisions.     

The Influence of U.S. GAAP on the Harmony of Accounting Measurement Policies of Large Companies in the U.K. and Australia

U.S. GAAP has increasingly become an influence on accounting practices in other countries, even aside from those traditionally considered under direct U.S. influence. The change arises from the large number of U.S. accounting standards, non-U.S. companies listing on U.S. stock exchanges, and the amount of U.S. direct investment abroad. As the impact of U.S. GAAP varies across countries, it may affect international accounting harmony. This idea is tested by examining the level of international harmony for eleven accounting measurement policies in matched pairs of large companies from Australia and the U.K., two countries with historically strong cultural and economic links. It is argued that, in recent decades, accounting practice in Australia, more so than in the U.K., has become increasingly U.S.-oriented. The concepts of harmony of Tay and Parker (1990) and Archer et al . (1996) are employed. International harmony is measured by the between-country C index and chi-square test; national harmony by van der Tas's (1988) H index. While considerable national harmony is found in the U.K. for seven and in Australia for five accounting policies, there is considerable or complete international harmony for only three policies. Evidence is presented of the influence of U.S. GAAP as one factor explaining the poor degree of U.K./Australia international harmony. Australian companies appear to follow U.S. GAAP to a greater extent than do U.K. companies. The state of partial harmony thus existing restricts international comparability of accounting reports and may cause problems for regulators.     

Cross-listing as a Global Depository Receipt: The influence of emerging markets,regulation, and accounting regime

This paper examines factors influencing international firms’ decisions to cross-list as Global Depository Receipts (GDRs). We focus on differences in regulatory and accounting requirements between exchanges and the economic clustering that has arisen with increasing globalization. An important economic influence on this decision is the home country, reflecting trade ties. Higher US regulation and governance requirements influence firms from emerging markets to issue GDRs rather than ADRs on a US exchange. Using local GAAP or IFRS also tends to deter firms from listing as an ADR, suggesting that the cost of US GAAP reconciliation is an important consideration in the decision to list as a GDR or an ADR.     

Can a stock exchange improve corporate behavior? Evidence from firms' migration to premium listings in Brazil

Because Brazil's legal system lacked protection for minority shareholders and trading of Brazilian shares flowed to U.S. exchanges, in 2001 the São Paulo Stock Exchange, Bovespa, created three premium exchange listings that require more stringent shareholder protections. This paper examines the effects of a commitment to improved corporate disclosure and governance by firms' voluntary migration to these premium listings. Our analysis finds that a firm's migration brings positive abnormal returns to its shareholders, particularly when its shares did not have a prior cross-listing on a U.S. exchange and also when the firm chooses a premium listing with the highest standards. Migration to a premium listing also leads to a significant increase in the trading volume of non-voting shares. Firms that choose a premium listing tend to have growth opportunities that they finance with subsequent seasoned equity offerings. These results suggest that a premium listing is a mechanism for bonding to improved corporate behavior that can be less costly than cross-listing on a U.S. exchange.     

How Representative Are Firms That Are Cross‐Listed in the United States? An Analysis of Accounting Quality

We provide evidence on the characteristics of local generally accepted accounting principles (GAAP) earnings for firms cross‐listing on U.S. exchanges relative to a matched sample of foreign firms currently not cross‐listing in the United States to investigate whether U.S. listing is associated with differences in accounting data reported in local markets. We find that cross‐listed firms differ in terms of the time‐series properties of earnings and accruals, and the degree of association between accounting data and share prices. Cross‐listed firms appear to be less aggressive in terms of earnings management and report accounting data that are more conservative, take account of bad news in a more timely manner, and are more strongly associated with share price. Furthermore, the differences appear to result partially from changes around cross‐listing and partially from differences in accounting quality before listing. We do not observe a similar pattern for firms cross‐listed on other non‐U.S. exchanges or on the U.S. over‐the‐counter market, suggesting a unique quality to cross‐listing on U.S. exchanges.     

THE IMPACT OF U.S. REQUIREMENTS FOR AUDIT COMMITTEES ON THE STRUCTURE AND MEMBERSHIP OF NON-U.S. AUDIT COMMITTEES

Many non-U.S. national stock exchanges have amended their listing standards to require audit committees during the last two decades, while U.S. national stock exchanges have recently amended their listing standards in response to recommendations made by the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (BRC). These new listing requirements for U.S. registrants (SEC Form 10-K filers) provide an opportunity to contrast and examine requirements for audit committee structure and membership of non-U.S. registrants (SEC Form 20-F filers). Recognizing that the International Accounting Standards Board has identified a “core” set of basic accounting standards in international filings accentuates the need to have uniform requirements for audit committees. This paper argues that requirements for audit committees should be consistent to improve financial reporting in a global securities marketplace. Results suggest that boards of directors and their audit committees of non-U.S. sample firms before the enactment of the U.S. requirements will need to exhibit greater alignment of their audit committee’s structure and composition with the recent U.S. requirements for audit committees.     

IAS Versus U.S. GAAP: Information Asymmetry–Based Evidence from Germany's New Market

Motivated by the debate about globally uniform accounting standards, this study investigates whether firms using U.S. generally accepted accounting principles (GAAP) vis‐à‐vis international accounting standards (IAS) exhibit differences in several proxies for information asymmetry. It exploits a unique setting in which the two sets of standards are put on a level playing field. Firms trading in Germany's New Market must choose between IAS and U.S. GAAP for financial reporting, but face the same regulatory environment otherwise. Thus, institutional factors such as listing requirements, market microstructure, and standards enforcement are held constant. In this setting, differences in the bid‐ask spread and share turnover between IAS and U.S. GAAP firms are statistically insignificant and economically small. Subsequent analyses of analysts' forecast dispersion, initial public offering underpricing, and firms' standard choices corroborate these findings. Thus, at least for New Market firms, the choice between IAS and U.S. GAAP appears to be of little consequence for information asymmetry and market liquidity. These findings do not support widespread claims that U.S. GAAP produce financial statements of higher informational quality than IAS.     

An examination of the perceptions of auditors and chief financial officers regarding principles versus rules based accounting standards

The debate over the adoption of International Financial Reporting Standards (IFRS) by United States issuers, or its convergence with U.S. Generally Accepted Accounting Principles (U.S. GAAP) has been going on for several years now. However, as of this writing, the Securities and Exchange Commission (SEC) has still not taken a definitive position on the issue. This is in part due to issues involving the cost of adoption, independence concerns relating to the IFRS promulgation body, the International Accounting Standards Board (IASB), and the debate over which type of accounting standards is superior for financial reporting: IFRS, which are said to be “principles-based,” or U.S. GAAP, which are said to be “rules-based.” In this paper we examined the views of two stakeholders in the U.S. financial reporting system, auditors in large public accounting firms and Chief Financial Officers in the Fortune 1000. We elicited their perceptions involving ten situations where specific rules are incorporated in U.S. GAAP. We asked if the elimination of the specific rule would be likely to better achieve the “qualitative characteristics of useful financial information” as defined by the Conceptual Framework for Financial Reporting adopted by the Financial Accounting Standards Board (FASB) in 2010 (FASB 2010) and the similar document adopted by the IASB at the same time (IASB 2010). We found that in eight of the ten situations both groups preferred the rules-based accounting regime (the current U.S. GAAP rules) over a principles-based approach.     

Cross-market information transfers of ADR firms: An investigation of emerging market economies

Level II and III ADRs permit issuers to be listed on the major U.S. exchanges with the stipulation that they comply with extensive SEC disclosure requirements. Foreign private issuers are compelled to file a set of audited financial statements prepared in accordance with U.S. GAAP, or alternatively, IFRS or Home Country Accounting Principles with attendant reconciliation to U.S. GAAP prior to 2008. Although the Form 20-F reconciliation is discontinued in 2008 for IFRS filers, non-U.S. issuers are required to satisfy other Form 20-F stipulations such as expanded Item 17 and Item 18 disclosures. We conjecture that non-U.S. firms choosing to be listed on the major U.S. exchanges will incur the added costs associated with the supplemental disclosure requirements in order to attract sufficient investor attention as to have the disclosures impounded in the home country equity share price in the manner described by Fishman et al. (1989). Because a prominent attribute of ADR firms is that they benefit from multiple-market trading, we investigate whether the Form 20-F disclosure cross-market information transfers are associated with emerging market economy status. We employ models of the cross-market ADR and equity security share returns and trading volume controlling for the emerging economy status and incremental firm-specific SEC Form 20-F accounting principles disclosures. Preliminary results indicate that (1) U.S. listed ADR firms from emerging economies experience greater cross-market information transfers associated with the SEC Form 20-F filing, and (2) that the increased cross-market information transfers associated with the SEC Form 20-F filing are proportional to the difference in quality of accounting principles employed for home country reporting purposes vis-à-vis the accounting principles employed for SEC Form 20-F reporting purposes. Results are consistent with a feedback process through which the new information disclosed by the SEC Form 20-F reporting requirements in the ADR market attenuates the price discovery process in the home country equity market when the difference in information environment quality is large.     

Attribute differences between U.S. GAAP and IFRS earnings: An exploratory study

In this study we explore attribute differences between U.S. GAAP and IFRS earnings. Our study is motivated by the ongoing harmonization process in accounting standard setting as well as by recent convergence projects by the FASB and the IASB. We test two market-based earnings attributes, i.e., value relevance and timeliness, as well as two accounting-based earnings attributes, i.e., predictability and accrual quality. These attributes are tested for German New Market firms as they are allowed to choose between IFRS and U.S. GAAP for financial reporting purposes. Overall, we find that U.S. GAAP and IFRS only differ with regard to predictive ability. The fact that U.S. GAAP accounting information outperforms IFRS also holds after controlling for differences in firm characteristics, such as size, leverage and the audit firm. However, our results also seem to suggest that these differences are not fully valued by investors, as we do not observe significant and consistent differences for the value-relevance attribute.     

Pricing of Foreign GAAP Earnings in U.S. Capital Market Prior to the SEC Required Reconciliation Disclosure

The Securities and Exchange Commission (SEC) requires foreign registrants to include in their annual reports on Form 20-F reconciliation to U.S. GAAP of net income, earnings per share, and shareholders' equity, if materially different. Previous research indicates that foreign firms usually file their reports with the SEC near or at the deadline, that is six months after the fiscal year-end and about three months after the earnings announcement. The purpose of this study is to examine U.S. investors' ability to interpret foreign GAAP earnings before the SEC regulated disclosure becomes publicly available. Presented empirical evidence indicates that market participants are able to infer U.S. GAAP earnings from the foreign GAAP earnings at the time of initial earnings announcements.     

Competition and Cooperation among Exchanges: Effects on Corporate Cross‐Listing Decisions and Listing Standards

In recent years, many European companies have listed on the New York Stock Exchange (NYSE), and companies from emerging market countries such as Israel, China, and India have listed not only on the NYSE, but on various other American and European exchanges such as the Nasdaq and the London Stock Exchange (LSE). At the same time, growing competition among exchanges has led to consolidation of the industry through mergers and alliances. In this article, the authors explore the main factors in corporate listing decisions as well as the expected effects on listing standards of both the growing competition and the recent wave of alliances and mergers among exchanges. When choosing an exchange, corporate issuers are likely to consider the listing requirements and reputations of the exchanges, as well as the sophistication of investors who trade on those exchanges and the extent of their knowledge of the firm's industry and business. As a general rule, value‐maximizing companies can be expected to list on the most reputable exchange they can, but may also choose listings (in some cases, dual or multiple listings) on less reputable (typically local) exchanges with more investors who are familiar with the issuer's industry or products. When setting their listing standards, publicly traded exchanges devote considerable attention to finding the optimal listing and disclosure standards, and may consider adjusting them to changes in circumstances. The setting and enforcement of the appropriate listing standards are the main determinant of an exchange's reputation, which in turn determines the kinds of companies that will choose to list on it. Exchanges with the highest listing standards and reputations are likely to work hard to maintain them, while exchanges with lesser reputations will seek to carve out niches by making opportunistic use of lower (though not too low) listing standards while possibly seeking alliances or mergers. But if less reputable exchanges use their lower listing standards (and fees) as a means of competing for listings with other exchanges, this will not necessarily lead to a “race to the bottom” in listing standards. Moreover, a merger between two exchanges is likely to result in a higher listing standard for the combined exchange than for (at least one of) the pre‐merger exchanges.     

Are IFRS and U.S. GAAP converging? : Some evidence from People's Republic of China companies listed on the New York Stock Exchange

This research investigates the comparability and convergence of two sets of accounting standards from 1996 to 2002: United States’ Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS). The investigation involves a sample of companies from the People's Republic of China (PRC) that are listed on the New York Stock Exchange (NYSE). PRC companies traded on the NYSE generally prepare IFRS financial statements and provide a limited reconciliation to U.S. GAAP, creating a unique quasi-experimental opportunity to examine differences between two sets of accounting numbers produced by two different sets of accounting standards while holding the company constant. Comparability is measured by using Gray's index of comparability, and a set of measures are introduced to capture several dimensions of convergence over time in reported net income, net assets, return on net assets, and earnings per share. The evidence shows lack of comparability, caused largely by the revaluations of property, plant and equipment permitted under IFRS, but not permitted under U.S. GAAP. There is, however, substantial evidence of convergence over time.     

How it all began: the rise of listing requirements on the London, Berlin, Paris, and New York stock exchanges

The issue of accounting standards for foreign securities listed on a stock exchange arose gradually over the period 1825-1914 among the leading exchanges in the first global financial market—London, New York, Paris, and Berlin. Comparing their listing requirements on the eve of World War I, we find that the London and New York exchanges were most detailed, reflecting their common-law legal environments and their status as self-regulating organizations. The evolution of listing requirements in London and New York therefore influenced the development of accounting standards in those countries. By contrast, Paris and Berlin relied on validation of a security by political authorities. One result of these differences in legal and political environments was that American railroads issued the only securities to be listed on each of the four exchanges.     

Differential levels of disclosure and the earnings-return association: evidence from foreign registrants in the United States

Foreign companies listing on U.S. exchanges are required to report financial information under U.S. GAAP on form 20-F using either Item 17 or Item 18 disclosure rules. These two disclosure rules differ in that Item 17 allows many exemptions from U.S. GAAP, while Item 18 requires disclosure of all financial information in accordance with U.S. GAAP. This study examines the differential earnings-return association between Item 17 and Item 18 filers.We find significantly higher earnings-return associations for Item 18 filers than for Item 17 filers. While the earnings-return association of Item 18 foreign firms is not different from that of matched U.S. firms (which fundamentally use Item 18 rules), the earnings-return association of Item 17 foreign firms is significantly lower than that of matched U.S. firms. Overall, the results are consistent with the idea that higher levels of disclosure may be related to lower discount rates and higher earnings response coefficients (ERCs).     

Accounting Choice, Home Bias, and U.S. Investment in Non-U.S. Firms

This paper examines the relation between accounting choice and U.S. institutional investor ownership in non‐U.S. firms. We predict that U.S. investors exhibit home bias in their preference for accounting methods conforming to U.S. Generally Accepted Accounting Principles (GAAP) because such methods are more familiar, reduce information processing costs, and are perceived as higher quality. We find that firms exhibiting higher levels (changes) of U.S. GAAP conformity have greater levels (changes) of U.S. institutional ownership. Lead‐lag regressions suggest that increases in U.S. GAAP conformity precede increases in U.S. investment, but changes in U.S. institutional holdings do not precede changes in accounting methods. We also find that the positive relation between U.S. GAAP conformity and U.S. investment holds regardless of a firm's visibility to U.S. investors (e.g., American Depositary Receipt listing, stock index membership, analyst following, firm size). However, we find that U.S. GAAP conformity has a significantly greater impact among firms already visible to U.S. investors.     

Eliminating the 20-F reconciliation from IFRS to U.S. GAAP: Short-term and long-term liquidity effects

This paper examines the effects of the SEC’s 2008 decision to no longer require foreign private issuers using IFRS and trading on U.S. exchanges to reconcile their financial statements to U.S. GAAP. Extant research has found conflicting results using short event windows, while studies using longer event windows have found limited capital market impact from eliminating the reconciliation. Motivated by the SEC’s interest in understanding how disclosure rules impact market liquidity, we examine changes in effective bid-ask spreads, the price impact of trades, and quoted depth around 20-F filing dates for a sample of foreign private issuers. We find that effective spreads increase more around 20-F filing dates for filers using IFRS than for filers using U.S. GAAP, suggesting the 20-F report is more informative for filers using IFRS. We then find, in a subsample of filers using IFRS, that the increase in effective spreads for IFRS firms around 20-F filing dates is directly related to the magnitude of differences in book values between IFRS and U.S. GAAP. In sum, our results suggest a loss of useful information after the SEC’s rule change.     

The valuation effects of overseas listings: The case of the Tokyo Stock Exchange

Shareholders of U.S. firms that listed stock on the Tokyo Stock Exchange from 1973 to 1989 are shown to have experienced no significant wealth gains. The pattern of the market's reaction to a Tokyo listing tracks closely the reactions to a domestic listing, where gains prior to listing are later erased. The findings indicate no advantages to a listing for a firm with a prior business presence in Japan, and they do not support the hypothesis of diminishing returns to foreign listings. The findings are consistent with the integration of international capital markets.