Crossed-Listed Foreign Firms' Earnings Informativeness, Earnings Management and Disclosures of Corporate Governance Information Under SOX

Abstract

The passage of Sarbanes-Oxley Act (SOX) marks the beginning of cross-listed foreign firms' mandatory disclosure of audit committee composition and other corporate governance information. We posit that SOX improves the effectiveness of an independent audit committee and other corporate governance functions in monitoring the earnings quality of cross-listed foreign firms. We measure the earnings quality by the sample firms' earnings informativeness and earnings management. Our findings show significant positive associations between earnings informativeness and audit committee independence as well as board independence in the post-SOX period. In contrast to the post-SOX results, we do not find a significant association between earnings informativeness and audit committee independence in the pre-SOX period. We also find a consistently negative association between earnings management and audit committee independence after SOX, while such association is not found in the pre-SOX period. Similarly, a negative association between earnings informativeness and duality of CEO is only found in the post-SOX period. Furthermore, our results show a positive (negative) association between earnings informativeness (earnings management) and an aggregate corporate governance score, which is a measure of overall corporate governance functions, in both the pre- and post-SOX periods. Our findings on the magnitude change of relations between earnings informativeness (earnings management) and corporate governance functions suggest that SOX improves the effectiveness of cross-listed foreign firms' corporate governance functions in monitoring quality of accounting earnings.

Keywords: Corporate Governance, Earnings Informativeness, Earnings management, SOX.

JEL Classification: M41