Foreign Ownership and Financial Reporting Quality in Private Subsidiaries

Abstract

In a sample of large private Spanish subsidiaries, we find that both the magnitude of discretionary accruals and the probability of receiving a qualified audit report are significantly higher when the parent company is foreign. Additionally, the observed negative relation between foreign shareholding and our financial reporting quality proxies is stronger (weaker) when the parent company is located in the US (other continental European countries). This is consistent with a multinational corporations’ strategy of manipulating the accounts of their subsidiaries from countries with low quality institutions, especially when the parent is located in a strong institutional quality setting.