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The Price of Being Foreign: Stock Market Penalties Associated with Accounting Irregularities for U.S.‐Listed Foreign Firms
Author(s) -
Ge Weili,
Matsumoto Dawn,
Wang Emily Jing,
Zhang Jenny Li,
Thomas Wayne
Publication year - 2020
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1111/1911-3846.12530
Subject(s) - business , stock exchange , monetary economics , stock market , stock (firearms) , accounting , differential (mechanical device) , stock price , economics , finance , series (stratigraphy) , engineering , biology , aerospace engineering , paleontology , mechanical engineering , horse
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.