Segment earnings and managerial incentives: evidence from foreign firms cross-listed in the USA

Abstract

Purpose Prior studies find that US firms with managerial incentives may manipulate the earnings gap to obscure higher performing segments to competitors or to hide underperforming segments from external monitors. The purpose of this study is to complement extant research by examining the association between managerial incentives and segment earnings reporting of cross-listed firms in the USA and the impact of country-level characteristics on this association. Design/methodology/approach The dependent variable is the earnings gap between firm-level earnings and sum of segment-level earnings. Managerial incentives are proxied by proprietary cost and agency cost. Proprietary cost is measured by the Herfindahl index. Agency cost is measured by inefficient resource transfer activities across segments. Foreign firms in this study are companies listed on major US Stock Exchanges with headquarters outside the USA. Comparable US firms are selected using the Propensity Score Matching procedure as a control group. Findings The authors find that 1) proprietary cost motive is not the determinant of earnings gap reporting for cross-listed firms; 2) cross-listed firms motivated by agency costs are more likely to manipulate segment earnings reporting than US firms; and 3) among cross-listed firms motivated by agency costs, firms in weak rule of law countries demonstrate more manipulation in segment earnings than firms in strong rule of law countries. Originality/value Extant research with regard to segment reporting exclusively focuses on US firms, and little is known about the practice of segment reporting by cross-listed firms originating from different legal regimes. This study fills the gap in the literature by comparing cross-listed firms to US firms in the reporting of segment earnings. The results of this study have implications for regulators and investors who are interested in evaluating the extent of cross-listed firms’ financial reporting quality.

Internacional evidence on non-GAAP earnings: a cross-country investigation

“…There are few studies that focus the investigation of non-GAAP measures on a U.S. crosslisting scenario or that include a control for cross-listed firms, as these firms are under stricter regulations regarding NGM disclosures under SEC's "Regulation G" (Isidro & Marques, 2013;Isidro & Marques, 2015;Solsma & Wilder, 2015;Malone et al, 2016;Clinch et al, 2022;Sang et al, 2022). Isidro and Marques (2015) found a positive relation between non-GAAP earnings choice to disclosure and cross-listing in U.S. markets.…”

“…Unlike past literature that uses a matched sample to compare results between cross-listed and non-cross-listed firms or U.S. firms (Solsma & Wilder, 2015;Sang et al, 2022), I use one U.S. cross-listed sample and analyze two different annual reports to examine if home-country reporting incentives do play a role in determining firm-level disclosures.…”

“…Their results suggest that US-listed foreign firms applying IFRS are more likely to disclose a pro forma measure than US firms and US-listed foreign firms applying US GAAP. Sang et al (2022) examine non-GAAP earnings and managerial incentives of cross-listed firms in the USA and U.S. firms. They conclude (p. 148) that "cross-listed firms do not behave in the same manner as U.S. firms in reporting segment earnings" because of existing incentives, like weaker investor protection.…”

“…The non-GAAP literature for cross-listing firms is very scarse. As indicated above, only Solsma and Wilder (2015) and Sang et al (2022) examined NGE in this setting. Shi et al (2012) also points that there are few studies that investigate voluntary disclosures for cross-listed firms: "The extant literature focuses either on the cross-listed firms' financial reporting quality or on the mandatory reporting requirements by US exchanges and other regulatory bodies" (p. 145).…”

“…and Sang et al (2022) focus on U.S. cross-listed firms. I follow such previous work to justify my sample of cross-listed firms from G20 countries (see section 5).…”