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)
May 1, 2013
This paper investigates whether institutional investors have significant influence on the convergence of financial reporting practices worldwide. Using the accounting comparability measure developed in De Franco et al. (2011) as a proxy for reporting convergence, we show that an interquartile shift in U.S. mutual fund ownership is associated with a 15.4% increase in emerging market firms’ comparability with their U.S. industry peers. To more directly identify this association, we adopt a changes-in-changes specification and an instrumental variable approach, both of which suggest changes in institutional ownership drive comparability changes. Consistent with this interpretation, we find no evidence that non-U.S. foreign institutional ownership affects firms’ comparability with their U.S. industry peers. Further, the documented comparability increase is particularly strong when U.S. mutual funds’ positions are concentrated in large blocks and have been held for a long term. Finally, we show that the appointment of independent U.S. directors to the board and audit committee and the hiring of a big-four auditing firm appear to be important channels through which U.S. institutions affect the comparability of non-U.S. investees’ financial reporting practices.
Number of Pages in PDF File: 56
Keywords: Institutional Investors, Mutual Funds, Corporate Governance, U.S. GAAP, Financial Statement Comparability
JEL Classification: G32, G34, G38, M41, M48working papers series
Date posted: November 7, 2012 ; Last revised: August 21, 2013
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