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Do countries matter for voluntary disclosure? Evidence from cross-listed firms in the US

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Abstract

This paper explores the likelihood and consequences of voluntary disclosure (proxied by management earnings forecasts) for a sample of 1005 cross-listed firms in the US from 40 countries over the period 1996–2005. Our study is grounded in a three-tiered conceptual framework that relies on insights from and implications of institutional theory, agency theory and bonding theory to explain the costs and benefits associated with voluntary disclosure. Consistent with institutional theory and agency theory, our results indicate that disclosure likelihood increases with the strength of cross-listed firms’ home-country legal institutions, and is also influenced by US listing type, product market internationalization, and ownership structure. Further, our results show that voluntarily committing to US disclosure practice is associated with lower information asymmetry, which supports reputational bonding theory. Overall, our study provides a costs-and-benefits framework to understand voluntary disclosure practices in an international context. Our work also presents evidence that home-country institutions still matter when foreign firms migrate into the US financial market, which highlights the importance of country-level institution development.

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Notes

  1. In 2009, more than 2200 foreign firms from 80 countries were cross-listed on US markets (data from Citigroup Corporate and Investment Banking, www.citigroup.com/adr, and the Bank of New York Global Equity Investing Depositary Receipt Services, www.adrbny.com).

  2. Our research purpose is not to evaluate which (country-level or firm-level) factors matter more in defining firms’ voluntary disclosure practices. However, to gain further insights, we calculate the R 2 values for two models: one with country-level factors only, and one with firm-level factors only. Our preliminary results show that both country- and firm-level variables provide significant incremental explanatory powers, but firm-level variables explain more of the model variations.

  3. For more details, please refer to http://www.adrbny.com.

  4. Sources of information on direct-listing Canadian and Israeli firms include http://www.nyse.com/international/nonuslisted/int_listed.html, http://www.nasdaq.com/asp/NonUsOutput.asp, http://www.amex.com, http://www.pinksheets.com/companysearch/ps_list.jsp, and http://www.otcbb.com.

  5. Our database does not allow us to identify whether a financial analyst is local (i.e., from the home country) or foreign (i.e., from the US or another country). Bae, Stulz, and Tan (2008) find that local analysts have an information advantage compared with foreign analysts. Therefore future research may try to investigate how management earnings forecasts released by cross-listed firms influence local and foreign financial analysts differently.

  6. In the regressions testing the effect of management earnings forecasts on AFD, 2569 observations are employed, because we need observations that have at least two analysts following to calculate the analyst forecast dispersion. To check the robustness of our results, we also look at firms with three or more analysts following, and our results are not sensitive to this correction.

  7. As a robustness check, in all models, we also use three dummies (English common law, French civil law, and German civil law) as proxies for legal origins. However, our results for Hypothesis 1 are not sensitive to this modification.

  8. Data on OWNCON and INST are collected from Worldscope and Compact Disclosure, respectively.

  9. As a sensitivity check, in all models, we also use two dummies (major US exchanges and OTC) as proxies for listing types. However, the results are not sensitive to this correction.

  10. In our primary tests, we include FORSALES as a proxy for cross-border product market integration. We also consider another proxy for a cross-listed firm's interaction with foreign product markets, that is, FOROP, which equals 1 if a cross-listed firm has foreign operations, and 0 otherwise. The use of this alternative proxy does not alter the results of our primary tests.

  11. As sensitivity checks, we also use: (1) analyst forecast standard deviations scaled by beginning-of-period stock prices; (2) analyst forecast standard deviations scaled by the absolute value of mean/median analyst forecast estimates; and (3) changes in analyst forecast standard deviations as our dependent variables. Our major conclusion on Hypothesis 5 (i.e., the negative association between the issuance of management forecasts and analyst forecast dispersion) is not sensitive to these robustness checks.

  12. Similarly, Bamber and Cheon (1998) employ the number of days between the management forecast release and the end of the accounting period to estimate the variables of the non-forecasters in their matched sample design.

  13. Canadian firms constitute about 31% of all firms in our sample. To check whether our results reported in Table 3 are driven by their presence, we exclude them from our sample and re-estimate Eqs. (1) and (2) using this reduced sample. Our primary findings generally hold, except that the coefficients of ANTI-DIRECTOR (Hypothesis 1) and OWNERSHIP (Hypothesis 2) become statistically insignificant at the conventional levels (p>0.1). In an additional test using the reduced sample excluding Canadian observations, we replace the country-level ownership variable with the country-level index for risk of expropriation as our proxy for agency costs. This country-level index is an evaluation of the risk of minority shareholder expropriation, and is scaled from 0 to 10, with lower scores for higher risks. Our additional results suggest that: (1) our primary findings hold, whether or not Canadian firms are included in our sample; and (2) firms from countries with higher agency cost are less likely to make earnings forecasts, which is consistent with Hypothesis 2.

  14. In a sensitivity check, we also correct for country-level standard error clustering, and the results are generally consistent with our primary findings, except that the coefficient of OWNERSHIP (Hypothesis 2) has its expected sign but is insignificant.

  15. As a sensitivity check, we partition our sample firms into good news and bad news groups and re-run Eq. (1). Our results are robust to this correction. Following Skinner (1994), we also classify good/bad news according to the difference between management earnings forecast and mean analyst forecast consensus, and the results from the robustness checks are generally consistent with our primary results.

  16. Since management earnings forecasts are voluntary, our regression results reported in Table 4 may suffer from a self-selection bias. Hence we re-estimate Eq. (2) using the Heckman (1979) two-stage procedure. In the first stage, we estimate a probit model of a firm's probability to release management earnings forecasts (i.e., Eq. (1)), and thus obtain inverse Mills ratios. In the second stage, we estimate Eq. (2), with the inverse Mills ratio as a control variable. Results using the Heckman two-stage regressions are qualitatively similar to those reported in Table 4. In all models, the coefficients of MF are negative and significant (p<0.01). It is worth noting that it is difficult to identify true instrumental variables, so the results are not tabulated or presented in our main text.

  17. Ideally, we would like to use the percentage of shares held by US institutional owners. However, the database on US institutional ownership (i.e., Form 13(f)) covers only a small portion of our sample firms and thus may cause selection bias. We therefore use the percentage of shares held by both US and non-US institutions.

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Acknowledgements

We thank Paul Beamish, Denis Cormier, Steve Foerster, George Kanaan, Joung Kim, Michael Welker, three anonymous referees, Lemma Senbet, the editor, and participants of research workshops at Concordia University, Chinese University of Hong Kong, McGill University, University of Toronto, University of Western Ontario, the AAA International Section Mid-Year Meeting (San Diego), the American Accounting Association Meeting (Anaheim), the Academy of International Business Annual Conference (Milan), and the Canadian Academic Accounting Association Meeting (Winnipeg) for their comments and suggestions on an earlier version of this manuscript. Yaqi Shi acknowledges financial support from Richard Ivey School of Business, University of Western Ontario. Michel Magnan acknowledges financial support from the Social Sciences and Humanities Research Council of Canada (SSHRC), FQRSC (Quebec) and the Lawrence Bloomberg Chair at Concordia University. A major part of this research was completed while Jeong-Bon Kim worked as Canada Research Chair (Tier 1) in Corporate Governance and Capital Market at Concordia University. All errors remain our own responsibilities.

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Authors and Affiliations

  1. Richard Ivey School of Business, University of Western Ontario, London, Canada

    Yaqi Shi

  2. John Molson School of Business, Concordia University, West Montreal, Canada

    Michel Magnan

  3. Department of Accountancy, City University of Hong Kong, Hong Kong

    Jeong-Bon Kim

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  1. Yaqi Shi
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Correspondence to Yaqi Shi.

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Accepted by Lemma Senbet, Area Editor, 19 July 2011. This paper has been with the authors for three revisions.

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Table A1

Table A1 Variables definitions and data sources
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Shi, Y., Magnan, M. & Kim, JB. Do countries matter for voluntary disclosure? Evidence from cross-listed firms in the US. J Int Bus Stud 43, 143–165 (2012). https://doi.org/10.1057/jibs.2011.38

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