Foreign Institutional Ownership and the Global Convergence of Financial Reporting Practices
Vivian W. Fang
University of Minnesota - Twin Cities - Department of Accounting
Mark G. Maffett
University of Chicago - Booth School of Business
University of New South Wales (UNSW) - School of Banking and Finance; Financial Research Network (FIRN)
September 8, 2014
This paper investigates whether foreign institutional investors directly 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 with 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 one specific mechanism – the switch to a big four audit firm – through which U.S. institutional investors affect reporting convergence. Finally, we highlight an economic benefit of global reporting convergence by showing that an increase in emerging market firms’ comparability with their U.S. industry peers is associated with an improvement in the properties of foreign analysts’ forecasts.
Number of Pages in PDF File: 53
Keywords: Institutional Investors; Mutual Funds; Corporate Governance; U.S. GAAP; Financial Statement Comparability; Auditor Selection; Analyst Forecasts
JEL Classification: G32, G34, G38, M41, M47working papers series
Date posted: November 7, 2012 ; Last revised: September 9, 2014
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