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Abstract:
International Financial Reporting Standards (IFRS) have recently been adopted in a number of jurisdictions, including the European Union. Despite the importance of IFRS in the context of global accounting standards harmonization, little is known regarding what institutional factors influence countries' decisions to voluntarily adopt IFRS. This issue is relevant to standard setters because a better understanding of the motivations for adoption will enable them to promote IFRS more effectively to countries that currently do not employ IFRS. Consistent with bonding theory, we find that countries with weaker investor protection mechanisms are more likely to adopt IFRS. Our evidence also shows that jurisdictions that are perceived to provide better access to their domestic capital markets are more likely to adopt IFRS. Taken together, our results are consistent with the view that IFRS represent a vehicle through which countries can improve investor protection and make their capital markets more accessible to foreign investors.

International Financial Reporting Standards, Bonding, Capital Market Access

Abstract:
International Financial Reporting Standards (IFRS) have recently been adopted in a number of jurisdictions, including the European Union. Despite the importance of IFRS in the context of global accounting standards harmonization, little is known regarding what institutional factors influence countries' decisions to voluntarily adopt IFRS. This issue is relevant to standard setters because a better understanding of the motivations for adoption will enable them to promote IFRS more effectively to countries that currently do not employ IFRS. Consistent with bonding theory, we find that countries with weaker investor protection mechanisms are more likely to adopt IFRS. Our evidence also shows that jurisdictions that are perceived to provide better access to their domestic capital markets are more likely to adopt IFRS. Taken together, our results are consistent with the view that IFRS represent a vehicle through which countries can improve investor protection and make their capital markets more accessible to foreign investors.

International Financial Reporting Standards, Bonding, Capital Market Access

Abstract:
Under the assumption that audit quality relates positively to unobservable financial reporting reliability, we investigate whether audit quality is associated with the predictability of accounting earnings by focusing on analyst earnings forecast properties. The evidence shows that analysts' earnings forecast accuracy is higher and the forecast dispersion is smaller for firms audited by a Big Five auditor. We further find that auditor industry specialization is associated with higher forecast accuracy and less forecast dispersion in the non-Big Five auditor sample but not in the Big Five auditor sample. Overall, our results suggest that high quality audit provided by Big Five auditors and industry specialist non-Big Five auditors is associated with better forecasting performance by analysts.

Audit Quality, Analyst Earnings Forecast, Forecast Accuracy and Dispersion

Abstract:
Under the assumption that audit quality relates positively to unobservable financial reporting reliability, we investigate whether audit quality is associated with the predictability of accounting earnings by focusing on analyst earnings forecast properties. The evidence shows that analysts' earnings forecast accuracy is higher and the forecast dispersion is smaller for firms audited by a Big Five auditor. We further find that auditor industry specialization is associated with higher forecast accuracy and less forecast dispersion in the non-Big Five auditor sample but not in the Big Five auditor sample. Overall, our results suggest that high quality audit provided by Big Five auditors and industry specialist non-Big Five auditors is associated with better forecasting performance by analysts.

Audit Quality, Analyst Earnings Forecast, Forecast Accuracy and Dispersion

Abstract:
Foreign operations are becoming increasingly important for U.S. companies. We investigate whether the market's valuation of foreign earnings is a function of the firm's geographic segment disclosures. Specifically, we examine the effects of an increase in the number of geographic segments disclosed and the inclusion of earnings measures in geographic segment disclosures following the adoption of SFAS 131. We find strong evidence that our proxies for increased disclosure are positively associated with the valuation of foreign earnings. Our results are robust to a number of sensitivity analyses. Taken together, our results suggest that the pricing of foreign earnings is associated with important aspects of the firm's information environment.

Geographic segment disclosures, valuation, foreign earnings, SFAS 131, international

Abstract:
Foreign operations are becoming increasingly important for U.S. companies. We investigate whether the market's valuation of foreign earnings is a function of the firm's geographic segment disclosures. Specifically, we examine the effects of an increase in the number of geographic segments disclosed and the inclusion of earnings measures in geographic segment disclosures following the adoption of SFAS 131. We find strong evidence that our proxies for increased disclosure are positively associated with the valuation of foreign earnings. Our results are robust to a number of sensitivity analyses. Taken together, our results suggest that the pricing of foreign earnings is associated with important aspects of the firm's information environment.

Foreign earnings, geographic disclosures, valuation, SFAS 131

Abstract:
This study examines the relation between excess auditor remuneration and the implied required rate of return (IRR hereafter) on equity capital in global markets. We conjecture that when auditor remuneration is excessively large, investors may perceive the auditor to be economically bonded to the client, leading to a lack of independence. This perceived lack of independence increases the information risk associated with the credibility of financial statements, thereby increasing IRR. Consistent with this notion, we find that IRR is increasing in excess auditor remuneration, but only in countries with stronger investor protection. Finding evidence of a relation only in stronger investor protection countries is consistent with the more prominent role of audited financial statements for investors' decisions in these countries. In settings where investors are less likely to rely on audited financial statements and instead rely on alternative sources of information (i.e., in countries with weaker investor protection), the impact of client/auditor bonding should have less of an effect on investors' decisions.

Auditing, auditor independence, economic bonding, cost of equity capital, international, investor protection

Abstract:
This study examines the relation between excess auditor remuneration and the implied required rate of return (IRR hereafter) on equity capital in global markets. We conjecture that when auditor remuneration is excessively large, investors may perceive the auditor to be economically bonded to the client, leading to a lack of independence. This perceived lack of independence increases the information risk associated with the credibility of financial statements, thereby increasing IRR. Consistent with this notion, we find that IRR is increasing in excess auditor remuneration, but only in countries with stronger investor protection. Finding evidence of a relation only in stronger investor protection countries is consistent with the more prominent role of audited financial statements for investors' decisions in these countries. In settings where investors are less likely to rely on audited financial statements and instead rely on alternative sources of information (i.e., in countries with weaker investor protection), the impact of client/auditor bonding should have less of an effect on investors' decisions.

Auditing, auditor independence, economic bonding, cost of equity capital, international, investor protection

Abstract:
This paper examines whether the current reporting and disclosure requirements for foreign registrants in the United States affect foreign firms' decisions to list on a U.S. exchange. We find that while firms from a weak disclosure environment are more likely to cross-list and either trade over-the-counter or be placed privately among institutional investors, they are less likely to list on an exchange in which firms are required to comply with U.S. GAAP. This is consistent with the idea that the decrease in the potential private control benefits accruing to managers discourages them from listing on an organized exchange. We further conduct pricing tests to investigate whether the choice relating to the mode of listing has capital market consequences. These tests indicate that: (1) exchange-listing firms receive a higher valuation (i.e., Tobin's q) than non-exchange-listing firms; and (2) exchange-listing firms domiciled in a higher disclosure regime, who incur lower costs of U.S. GAAP compliance, generally receive a higher valuation than exchange-listing firms from a lower-disclosure regime. Overall, the lower tendency of firms domiciled in a lower disclosure regime to list on an organized exchange appears to be consistent with the smaller valuation benefit they receive from the listing.

Bonding, Cross-Listing, Disclosure

Abstract:
In this paper, we examine investors' valuation of the domestic and foreign components of total earnings after controlling for information beyond current earnings. Our sample consists of U.S. multinationals during the 1985-2002 period. In a prior study, Bodnar and Weintrop (1997) find that investors place a higher weight on foreign earnings than on domestic earnings in valuing securities, and that this finding can be explained in part by the higher growth opportunities in foreign markets. While this explanation is intuitively appealing, other possible explanations include the varying importance of information other than current accounting earnings in pricing securities and the possible mis-specification of their model. One potentially important source of other information is information contained in revisions of analysts' forecasts of future (abnormal) earnings and terminal values. Excluding this information from the regression specification potentially leads to a correlated omitted variables problem. In this paper, we use the Liu and Thomas (2000) proxy for other information, which is derived from analysts' revisions of near-term and long-term earnings forecasts and discount rate changes. Including the other information variable greatly improves the explanatory power of the returns-earnings regression. Consistent with our predictions, we find that the bias resulting from excluding other value-relevant information has a greater effect on foreign earnings than on domestic earnings. Foreign earnings are no longer incrementally value relevant when we control for other information.

Accounting, foreign earnings, valuation, omitted variables, multinationals, analyst forecasts

Abstract:
In this paper, we examine investors' valuation of the domestic and foreign components of total earnings after controlling for information beyond current earnings. Our sample consists of U.S. multinationals during the 1985-2002 period. In a prior study, Bodnar and Weintrop (1997) find that investors place a higher weight on foreign earnings than on domestic earnings in valuing securities, and that this finding can be explained in part by the higher growth opportunities in foreign markets. While this explanation is intuitively appealing, other possible explanations include the varying importance of information other than current accounting earnings in pricing securities and the possible mis-specification of their model. One potentially important source of other information is information contained in revisions of analysts' forecasts of future (abnormal) earnings and terminal values. Excluding this information from the regression specification potentially leads to a correlated omitted variables problem. In this paper, we use the Liu and Thomas (2000) proxy for "other information," which is derived from analysts' revisions of near-term and long-term earnings forecasts and discount rate changes. Including the "other information" variable greatly improves the explanatory power of the returns-earnings regression. Consistent with our predictions, we find that the bias resulting from excluding other value-relevant information has a greater effect on foreign earnings than on domestic earnings. Foreign earnings are no longer incrementally value relevant when we control for "other information."

Accounting, foreign earnings, valuation, omitted variables, multinationals, analyst forecasts

Abstract:
In this study, we examine how institutional ownership affects the quality and riskiness of the financial statement audit. We hypothesize that institutional investors can influence corporate policy to employ governance mechanisms that reduce their monitoring costs. Our evidence shows that firms are more likely to hire a Big 4 auditor (our proxy for audit quality) when long-term institutional ownership is high, suggesting that long-term institutional investors view high quality audits as a viable means of improving corporate governance while reducing their direct monitoring costs. We find no association between auditor choice and short-term institutional ownership. Next, we find that auditors charge higher fees (our proxy for audit risk) when short-term institutional ownership is high, consistent with short-term investors creating greater incentives for managers to act myopically. We find no association between audit fees and long-term institutional ownership. Taken together, our evidence suggests that dedicated long-term institutional investors demand higher quality audits to enhance corporate monitoring, and that short-term institutional ownership is positively associated with higher audit risk.

audit quality, institutional ownership, monitoring, audit risk, corporate governance

Abstract:
Using country-level proxies for corporate governance transparency, this paper investigates how differences in transparency across 21 countries affect the average forecast accuracy of analysts for the country's firms. The association between financial transparency and analyst forecast accuracy has been well documented in previous published literature; however, the association between governance transparency and analyst forecast accuracy remains unexplored. Using the two distinct country-level factors isolated by Bushman et al. (2004), governance transparency and financial transparency, we investigate whether corporate governance information impacts on the accuracy of earnings forecasts over and above financial information. We document that governance transparency is positively associated with analyst forecast accuracy after controlling for financial transparency and other variables. Furthermore, our results suggest that governance-related disclosure plays a bigger role in improving the information environment when financial disclosures are less transparent. Our empirical evidence also suggests that the significance of governance transparency on analyst forecast accuracy is higher when legal enforcement is weak.

Abstract:
The purpose of this study is to investigate why the information content of US earnings announcements of non-US firms cross-listing in the US varies with the degree of capital market segmentation in the cross-listing firms' countries of domicile. My evidence shows that indirect barriers to investing (i.e., accounting rules and liquidity differences) rather than direct investment barriers (i.e., investment restrictions) mainly account for this difference. After controlling for the level of accounting disclosure in a firm's country of domicile, I do not observe a systematic difference in the size of market's reaction to earnings announcements depending on the degree of market segmentation in the firm's country of domicile. This study contributes to the literature by providing evidence that accounting disclosure plays an important role in the integration of global capital markets.

Abstract:
This study hypothesizes and tests whether the degrees to which managers exercise earnings discretion relates to their value system (i.e., culture) as well as the institutional features (i.e., legal environment) of their country. We find that uncertainty avoidance and individualism dimensions of national culture explain managers' earnings discretion across countries and that this association varies with the strength of investor protection. This study extends prior literature by documenting that both national culture and institutional structure are important factors that explain corporate managers' earnings discretion practices around the world and that the influences of these factors on earnings discretion are conditional on each other.

Cross-Cultural Management, Cultural Frameworks, Earnings Management, Investor Protection

Abstract:
We investigate the effects of the introduction of Statement of Financial Accounting Standards No. 131 (SFAS 131) on the market's valuation of foreign earnings. Thomas (1999) documents that investors discount the value of foreign earnings for US multinational companies. He conjectures but does not test the possibility that this finding is due to poor disclosure related to foreign operations. We find strong evidence that the introduction of the standard is positively associated with the pricing of foreign earnings. In addition, we use both the Mishkin (1983) test and a zero-investment hedge portfolio test and find that investors' mispricing of foreign earnings lessens (and in fact disappears) after SFAS 131. This study is one of the first attempts to show that improved disclosure reduces mispricing.

Abstract:
We investigate the effects of the introduction of Statement of Financial Accounting Standards No. 131 (SFAS 131) on the market's valuation of foreign earnings. Thomas (1999) documents that investors discount the value of foreign earnings for U.S. multinational companies. He conjectures but does not test the possibility that this finding is due to poor disclosure related to foreign operations. We find strong evidence that the introduction of the standard is positively associated with the pricing of foreign earnings. In addition, we use both the Mishkin (1983) test and a zero-investment hedge portfolio test and find that investors' mispricing of foreign earnings lessens (and in fact disappears) after SFAS 131. This study is one of the first attempts to show that improved disclosure reduces mispricing.

Segment disclosure, SFAS 131 foreign earnings, valuation, mispricing

Abstract:
The purpose of this study is to investigate whether firms' auditor choice relates to national culture. We construct a novel measure of secretiveness based on Hofstede's (1980) cultural factors. Using a very large sample of firms from 37 countries and controlling for a number of firm- and country-level factors, we find that firms in more secretive countries are less likely to hire a Big 4 auditor. We also document that the relation between secrecy dimension of national culture and auditor choice is mitigated by the firms' degree of internationalization. These results establish a link between national culture and financial reporting quality through the firm's choice of auditor.

Culture, Secrecy, Auditor Quality, International