Management Earnings Guidance by Non-U.S. Firms Cross-Listed in the U.S.

Abstract

We study management earnings guidance practices of non-U.S. firms that are cross-listed in the United States. Our investigation is motivated by the economic importance of voluntary disclosure practices, the limited prior evidence concerning disclosure choices made by foreign issuers, and mixed evidence on foreign firms’ functional convergence behaviors in U.S. We report several important findings. First, consistent with the notion that home country institutions continue to influence foreign firms after cross-listing, the likelihood, frequency, and quality of disclosure by foreign listings are lower than that of comparable U.S. firms. Second, the frequency and quality of guidance for both U.S. and ADR firms increases following Reg FD. However, the increase is significantly greater for U.S. firms. This analysis shows how regulations which differ in their treatment of foreign and domestic firms can limit convergence in disclosure policies. Third, firms from stronger legal environments (i.e., common law countries) are more likely to provide guidance and provide higher frequency and quality of guidance than those from weaker legal environments (i.e., code law countries). Finally, foreign firms that do not list on an organized U.S. exchange (and hence are not required to comply with or reconcile to U.S. GAAP) provide more frequent and higher quality earnings guidance than those that do list on organized exchanges. This finding suggests that certain cross-listing firms choose issuing earnings guidance as a less costly means of improving corporate transparency rather than subjecting themselves to costly U.S. GAAP compliance. Overall, our study shows that cross-listing does not yield complete convergence to the higher disclosure standards exhibited by U.S. firms. Furthermore, we show that functional convergence is affected by factors such as regulations and home-country institutions