Narrow Results

Synopsis

The research problem

We investigate whether cross-listing in the United States is associated with a reduction in disclosure deficiencies about related party transactions (RPTs) related to the legal traditions of firms’ countries of origin.

Motivation

The extant literature shows that there is a disclosure disparity associated to the firms’ legal origin (civil or common law) and the countries’ institutions (regulation, enforcement, and market scrutiny). The literature has not examined whether cross-listing in the United States mitigates (or eliminates) the disclosure gap for firms from civil law countries and countries with worse institutions. We focus on RPTs because the US Securities and Exchange Commission has put particular emphasis on regulation of this type of disclosure.

Hypotheses

H₁: Among domestically listed firms, those from countries with common law tradition present superior level of RPT disclosure than firms from countries with a civil law tradition.

H₂: Cross-listed firms have a superior level of RPT disclosure compared to domestically listed firms from the same country.

H₃: Among cross-listed firms, those from countries with common law tradition present a superior level of RPT disclosure than firms from countries with a civil law tradition.

Target population

Firms from countries that have adopted international financial reporting standards (IFRS). We sample firms from the G20 countries that have adopted IFRS because of their representativeness in the world economy.

Adopted methodology

Ordinary least squares (OLS) regressions with firm and industry-year fixed effects. Two-stage least squares (instrumental variables) regressions to tackle endogeneity issues.

Analyses

We manually collected data from the financial reports of 531 firms from the G20 countries that have adopted IFRS to compute indices of compliance with disclosures required by IAS 24. We performed double-difference regressions, comparing firms across their legal origin (common law versus civil law), and cross-listing status (cross-listed in the United States versus domestically listed only). In addition, we studied the institutional channels that drive the disclosure gap between common and civil law firms.

Findings

For domestically listed firms, we found that firms from the common law tradition have RPT disclosure levels superior to those of firms from the civil law tradition. We found that the level of RPT disclosure is associated with countries’ regulatory quality, rule of law, and control of corruption. However, we did not find any differences in the level of RPT disclosure among firms cross-listed in the United States that can be associated with firms’ legal origin or with other home-country institutional features. Our results suggest that the regulatory enforcement and scrutiny of capital markets imposed by the US market compensate for home-country institutional deficiencies and eliminate differences in firms’ RPT disclosures across legal origins.

This paper investigates the dynamics of cross-listing in the US and accounting quality. Using an unbalanced panel of 11,780 observations for the period 2000–2019, we show that cross-listing improves accounting quality (in terms of conservatism, earnings management and informational relevance). This result holds for both types of cross-listing (i.e., exchange and OTC listing). Moreover, taking institutional variables into account leads to the conclusion that companies from countries with a weak legal and informational environment have better accounting quality following compliance with the strict standards of shareholder protection and disclosure of information imposed by US authorities. Finally, a complementary analysis shows us that companies listed in the US benefit from a better accounting quality record and less investment inefficiency. This explains why cross-listing in the US reduces the inefficiency of investments thanks to better accounting quality.