Restoring the Tower of Babel: How Foreign Firms Communicate with US Investors
50 Pages Posted: 2 Feb 2014
Date Written: November 30, 2013
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: Suggested Citation