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); Centre for International Finance and Regulation (CIFR)
January 29, 2014
We investigate whether institutional investors affect the convergence of financial reporting practices worldwide. Using the De Franco et al. (2011) accounting comparability measure, we document 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. We identify the effect of U.S. ownership on comparability using an instrumental variable approach, which exploits variation in U.S. mutual fund ownership generated by the 2003 JGTRRA act, and by demonstrating that the effect varies predictably with U.S. institutions’ monitoring incentives. Consistent with U.S. ownership increasing comparability, we show that, relative to domestic analysts, foreign analysts’ forecast errors and dispersion decrease following increases in U.S. ownership. Finally, we provide evidence that the appointment of U.S. independent directors to the board and audit committee and the hiring of an international auditor are potential channels through which U.S. institutions affect comparability.
Number of Pages in PDF File: 55
Keywords: Institutional Investors; Mutual Funds; Corporate Governance; U.S. GAAP; Financial Statement Comparability; Analyst Forecasts
JEL Classification: G32, G34, G38, M41, M47working papers series
Date posted: November 7, 2012 ; Last revised: January 30, 2014
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