Earnings Conservatism, Litigation and Contracting: The Case of Cross‐Listed Firms

Abstract

We compare earnings conservatism of UK companies cross-listed in the US to that of UK companies without a US-listing. We expect that conservatism will be more pronounced for cross-listed firms than for firms with a UK listing only, because the cross-listed firms face a stricter enforcement regime. Furthermore, cross-listed firms may use a listing on a US exchange to signal high-quality reporting to investors. Using a matched-pairs research design, we find that earnings of UK cross-listed firms are significantly more conservative than earnings of UK firms without a US listing. Moreover, cross listed firms display particularly high levels of conservatism during the early years of their cross-listing. This indicates that firms use earnings conservatism to commit to highly demanding reporting requirements and in doing so communicate a perception of investor care. Copyright Blackwell Publishers Ltd, 2005.

Managerial legal liability coverage and earnings conservatism

“…Huijgen and Lubberink (2005) find that earnings of U.K. firms cross-listed in the U.S. are significantly more conservative than earnings reported by U.K. firms with local listing only, suggesting strict enforcement rules and a greater probability of class action lawsuits in the U.S. as an explanation for their findings. Within a legal regime, Ball and Shivakumar (2005) show that public U.K. firms report more conservatively than private U.K. firms, which they attribute to increased litigation exposure for public firms.…”

Conservatism, SEC investigation, and fraud

“…Using a sample of 20 countries, Brown et al (2006) find that, for firms with higher levels of accrual intensity, higher levels of conditional conservatism are more value relevant based on a portfolio-returns approach. Huijgen and Lubberink (2005) compare UK firms with UK cross-listed firms on US exchanges and find UK cross-listed firms have higher levels of accounting conservatism. In this respect, conservatism serves as a bonding mechanism that provides cross-listed firms with a lower cost of capital.…”

The timeliness of accounting disclosures in international security markets

“…We also exclude those observations in which our dependent variable, the reporting lag, is in the extreme two percentiles in each country. Additionally, we exclude foreign firms with listings on U.S. exchanges as these firms will face different disclosure incentives than non-U.S. listed firms, as documented by Huijgen and Lubberink (2005). 5 Because of the unbalanced nature of our sample, we examine statistical relations on a country-by-country basis, report medians of coefficients for common and code law countries, and conduct second stage tests with these country medians.…”