Liability Exposure Effects on Earnings Conservatism: The Case of Cross-Listed Firms

Abstract

In this study we investigate earnings conservatism of cross-listed and domestically listed companies. We expect that conservatism will be more pronounced for cross-listed companies because they face the threat of litigation from a wider audience of shareholders than companies with a domestic listing only. Specifically, we compare conservatism of Dutch firms with a listing in the US to conservatism of Dutch firms without a US listing. The motivation to investigate this specific setting is that the liability exposure of managers and auditors in the US market is considered as far more burdensome than in the Dutch market.

Empirical findings for the period from 1993 to 2000 show that Dutch GAAP earnings of cross-listed firms are significantly more conservative than earnings reported by firms with a domestic listing only. This may imply that company managers view their domestic earnings information as the primary mode of communication with their shareholders irrespective of their origin. Further, the results seem to suggest that managers more or less mechanistically apply financial reporting requirements of foreign regulators.

JEL Classification: G14, G38, M41, M44