The Price of Being Foreign: Stock Market Penalties Associated with Accounting Irregularities for U.S.-listed Foreign Firms

53 Pages Posted: 29 Aug 2016 Last revised: 21 Dec 2018

See all articles by Weili Ge

Weili Ge

University of Washington - Michael G. Foster School of Business

Dawn A. Matsumoto

University of Washington - Department of Accounting

Emily Jing Wang

Hong Kong University of Science & Technology (HKUST) - Department of Accounting

Jenny Li Zhang

University of British Columbia - Sauder School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 15, 2018

Abstract

We examine the stock market consequences of disclosing accounting irregularities for U.S.-listed foreign firms. After controlling for the severity of the irregularity and other firm characteristics, we find that foreign firms experience significantly more negative short-window stock market reactions following irregularity announcements than do U.S. firms. Moreover, for a subsample of 64 irregularities of foreign firms that are listed on both a U.S. and home country stock exchange, we find evidence that restating firms’ U.S. investors react more negatively to the same irregularity than their home-country investors. This differential market reaction appears related to firm-specific information risks that are greater for foreign firms than U.S. firms. We also find a geographic contagion effect as non-restating firms from the same country experience significant stock price declines following irregularity announcements. Within a country-year, this contagion effect is concentrated among firms with lower accruals quality, suggesting that foreign firms’ irregularities cause U.S. investors to alter their assessment of the earnings quality of non-restating firms from the same country. Collectively, consistent with the reputational bonding hypothesis in prior literature, our results suggest that accounting irregularities cause U.S. investors to reassess the information risk associated with foreign firms.

Keywords: Restatement, Irregularity, Bonding, Information Risk, Reputational Loss

JEL Classification: M41

Suggested Citation

Ge, Weili and Matsumoto, Dawn and Wang, Emily and Zhang, Jenny Li, The Price of Being Foreign: Stock Market Penalties Associated with Accounting Irregularities for U.S.-listed Foreign Firms (December 15, 2018). Available at SSRN: https://ssrn.com/abstract=2831292 or http://dx.doi.org/10.2139/ssrn.2831292

Weili Ge (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Dawn Matsumoto

University of Washington - Department of Accounting ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States
206-543-4454 (Phone)
206-685-9392 (Fax)

Emily Wang

Hong Kong University of Science & Technology (HKUST) - Department of Accounting ( email )

Clear Water Bay
Kowloon
Hong Kong

Jenny Li Zhang

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

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

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