Restoring the Tower of Babel: How Foreign Firms Communicate with US Investors

50 Pages Posted: 2 Feb 2014  

Russell J. Lundholm

University of British Columbia - Sauder School of Business

Rafael Rogo

University of British Columbia - Sauder School of Business

Jenny Li Zhang

University of British Columbia - Sauder School of Business

Date Written: November 30, 2013

Abstract

We examine the readability of text and the use of numbers in the annual filings and earnings press releases of foreign firms listed on US stock exchanges. We find that foreign firms generally write clearer text and present relatively more numerical data than their US firm counterparts. More importantly, we find that the readability of the text and use of numbers increases as the foreign firms get geographically further from the US. It also increases as the foreign firm’s home country has greater differences in accounting standards or investor protection laws relative to the US. Further corroborating our results, we also find that these communication efforts are partially successful. Within a country, firms that produce relatively more readable disclosures attract relatively more US institutional ownership. Collectively our results suggest that foreign firms are responding to a perceived reluctance on the part of US investors to own them and attempt to lower the investors’ information disadvantage or psychological distance by providing clearer and more concrete disclosures.

Keywords: home bias, readability, communication, foreign firms

JEL Classification: F30, G15, M41

Suggested Citation

Lundholm, Russell J. and Rogo, Rafael and Zhang, Jenny Li, Restoring the Tower of Babel: How Foreign Firms Communicate with US Investors (November 30, 2013). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2388979

Russell J. Lundholm (Contact Author)

University of British Columbia - Sauder School of Business ( email )

2053 Main Hall
Vancouver, British Columbia V6T 1Z2
Canada

Rafael Rogo

University of British Columbia - Sauder School of Business ( email )

2053 Main Hall
Vancouver, British Columbia V6T 1Z2
Canada

Jenny Li Zhang

University of British Columbia - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

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