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

Author

Listed:
  • Weili Ge
  • Dawn Matsumoto
  • Emily Jing Wang
  • Jenny Li Zhang
  • Wayne Thomas

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. 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. Le prix à payer pour les sociétés étrangères : Pénalités sur le marché boursier associées aux irrégularités comptables de firmes étrangères cotées aux États‐Unis On examine ici les conséquences sur le marché boursier que peut entraîner la divulgation d'irrégularités comptables pour les sociétés étrangères cotées aux É.‐U. Après avoir pris en compte la gravité des irrégularités et d'autres caractéristiques liées aux sociétés, nous avons constaté qu’à la suite de la divulgation d'irrégularités, les sociétés étrangères font l'objet de réactions beaucoup plus négatives sur le marché boursier à court terme que les sociétés américaines. En outre, dans un sous‐échantillon de 64 irrégularités de sociétés étrangères cotées à la fois aux États‐Unis et dans leur pays d'origine, nous observons que face à la même irrégularité, les investisseurs américains des sociétés qui retraitent leurs résultats réagissent de façon plus négative que les investisseurs dans le pays d'origine. Cet écart sur le plan de la réaction du marché semble être lié à des risques d'information erronée spécifiques plus grands pour les sociétés étrangères que pour les sociétés américaines. Globalement, conformément à l'hypothèse de la caution de réputation (reputational bonding) dans la littérature antérieure, nos résultats suggèrent que les irrégularités comptables incitent les investisseurs américains à réévaluer le risque d'information erronée associé aux sociétés étrangères.

Suggested Citation

  • Weili Ge & Dawn Matsumoto & Emily Jing Wang & Jenny Li Zhang & Wayne Thomas, 2020. "The Price of Being Foreign: Stock Market Penalties Associated with Accounting Irregularities for U.S.‐Listed Foreign Firms," Contemporary Accounting Research, John Wiley & Sons, vol. 37(2), pages 1073-1106, June.
    • Handle: RePEc:wly:coacre:v:37:y:2020:i:2:p:1073-1106
    DOI: 10.1111/1911-3846.12530
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    References listed on IDEAS

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    1. Lamoreaux, Phillip T., 2016. "Does PCAOB inspection access improve audit quality? An examination of foreign firms listed in the United States," Journal of Accounting and Economics, Elsevier, vol. 61(2), pages 313-337.
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