Why do Foreign Investors Demand Comparability? Evidence from Unsponsored ADRs
52 Pages Posted: 8 Mar 2020 Last revised: 23 Oct 2020
Date Written: October 20, 2020
Abstract
We study the sources of demand for accounting comparability. We hypothesize that U.S. investors
interested in investing in a foreign firm potentially have two different types of demands for
comparability: (i) comparability to U.S. firms which report under U.S. GAAP (which we label as
U.S. comparability) and (ii) comparability to other foreign firms which the investor is interested
in investing in (which we label as regional comparability). The findings in prior literature
examining U.S. institutional investors are consistent with channel (i). We explore unsponsored
ADRs as a setting where we expect channel (ii) to be particularly important. We find that regional
(but not U.S.) comparability increases the ex-ante likelihood that a depository bank selects a
foreign firm for the creation of unsponsored ADRs, and the ex-post trading in the unsponsored
ADR by U.S. investors. Our results imply an implicit tradeoff in the costs and benefits of increased
comparability and suggest that one has to consider not only if comparability matters in a specific
context, but also to whom it is aimed for.
Keywords: Accounting comparability, Unsponsored cross listing, Institutional investors, Information processing costs
JEL Classification: M41, G15, G11
Suggested Citation: Suggested Citation