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Cost of Capital for Exempt Foreign Private Issuers: Information Risk Effect or Earnings Quality Effect? It Depends

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  • Gotti, Giorgio
  • Mastrolia, Stacy

Abstract

We examine whether the information risk accompanying Foreign Private Issuers' (FPIs) exemptions from the U.S. Securities and Exchange Commission (SEC) reporting requirements is associated with capital market penalties (measured by a higher cost of equity capital) and, further, the extent to which this information risk is mitigated by earnings quality. Our overall results indicate that exempt FPIs exhibit a higher cost of equity capital than reporting FPIs, and this relation still persists after controlling for earnings quality. Furthermore, we partition our sample into firms from strong and weak investor protection environments. Interestingly, similar to the results in Francis et al. (2008), for FPIs from strong investor protection regimes we find no difference in the cost of capital between exempt and filing FPIs, even after controlling for earnings quality. To the contrary, for FPIs from weak investor protection regimes, we find that the exemption is associated with a higher cost of equity capital, and that earnings quality does not significantly reduce the premium paid by these issuers.

Suggested Citation

  • Gotti, Giorgio & Mastrolia, Stacy, 2014. "Cost of Capital for Exempt Foreign Private Issuers: Information Risk Effect or Earnings Quality Effect? It Depends," The International Journal of Accounting, Elsevier, vol. 49(2), pages 190-220.
    • Handle: RePEc:eee:accoun:v:49:y:2014:i:2:p:190-220
    DOI: 10.1016/j.intacc.2014.04.007
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    More about this item

    Keywords

    Cost of capital; Information risk; Financial disclosure quality; Earnings quality; Bonding; Cross listing; SEC 1934 Exchange Act; Rule 12g3-2(b) exemption; Foreign private issuers;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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