Home Country Investor Protection, Ownership Structure and Cross-listed Firms’ Compliance with SOX-mandated Internal Control Deficiency Disclosures

59 Pages Posted: 12 Jun 2010 Last revised: 21 Feb 2013

See all articles by Guojin Gong

Guojin Gong

Penn State University - Smeal College of Business

Bin Ke

National University of Singapore

Yong Yu

University of Texas at Austin

Date Written: August 18, 2012

Abstract

We examine whether home country investor protection and ownership structure affect cross-listed firms’ compliance with SOX-mandated internal control deficiency (ICD) disclosures. We develop a proxy for the likelihood of cross-listed firms’ ICD misreporting during the Section 302 reporting regime. For cross-listed firms domiciled in weak investor protection countries, we have three main findings. First, firms whose managers control their firms and have voting rights in excess of cash flow rights are more likely to misreport ICD than other firms during the Section 302 reporting regime. Second, there is a positive association between the likelihood of ICD misreporting and voluntary deregistration from the SEC prior to the Section 404 effective date. Third, for firms that chose not to deregister, there is a positive association between the likelihood of ICD misreporting and the reporting of previously undisclosed ICDs during the Section 404 reporting regime. We do not find similar evidence for cross-listed firms domiciled in strong investor protection countries. Our findings are consistent with the hypothesis that for cross-listed firms domiciled in weak investor protection countries, managers who have the ability and incentive to expropriate outside minority shareholders are reluctant to disclose ICDs in order to protect their private control benefits. The results of our study should be of interest to regulators who wish to identify non-compliant firms for closer supervision, investors who wish to identify ex ante red flags for poor financial disclosure quality, and researchers who wish to understand the economic forces governing cross-listed firms’ financial disclosure behavior.

Keywords: Cross-Listed Firms, Sarbanes-Oxley Act, Internal Control Deficiency Disclosure, Earnings Response Coefficient, SEC Deregistration

JEL Classification: G18, M41

Suggested Citation

Gong, Guojin and Ke, Bin and Yu, Yong, Home Country Investor Protection, Ownership Structure and Cross-listed Firms’ Compliance with SOX-mandated Internal Control Deficiency Disclosures (August 18, 2012). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1624186 or http://dx.doi.org/10.2139/ssrn.1624186

Guojin Gong

Penn State University - Smeal College of Business ( email )

University Park, PA 16802
United States
814-863-7055 (Phone)

Bin Ke (Contact Author)

National University of Singapore ( email )

Mochtar Riady Building, BIZ 1, #07-54
15 Kent Ridge Drive
Singapore, 119245
Singapore
+6566013133 (Phone)

Yong Yu

University of Texas at Austin ( email )

1 University Station B6400
Austin, TX 78712
United States
(512)471-6714 (Phone)
(512)471-3904 (Fax)

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