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Foreign Institutional Ownership and the Global Convergence of Financial Reporting Practices
Authors:VIVIAN W. FANG  MARK MAFFETT  BOHUI ZHANG
Affiliation:1. University of Minnesota;2. University of Chicago Booth School of Business;3. UNSW, Australia
Abstract:This paper investigates whether foreign institutional investors affect the global convergence of financial reporting practices. Using several measures of reporting convergence, we show that U.S. institutional ownership is positively associated with subsequent changes in emerging market firms’ accounting comparability to their U.S. industry peers. We identify this association using an instrumental variable approach that exploits exogenous variation in U.S. institutional investment generated by the JGTRRA Act of 2003. Further, we provide evidence of a specific mechanism—the switch to a Big Four audit firm—through which U.S. institutional investors affect reporting convergence. Finally, we show that, for emerging market firms, an increase in comparability to U.S. firms is associated with an improvement in the properties of foreign analysts’ forecasts.
Keywords:G32  G34  G38  M41  M42  M48  institutional investors  mutual funds  corporate governance  U.S. GAAP  financial statement comparability  auditor selection  analyst forecasts
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