Foreign Issuers Research Articles

The Impact of Culture on Internal Control Weaknesses: Evidence from Firms That Cross-List in the U.S.

ABSTRACTThis study addresses the impact of culture on the likelihood of U.S. foreign issuers reporting material weaknesses in internal control over financial reporting (MWICs). Specifically, we explore whether Hofstede's (1980, 2001) country-level dimensions of power distance, individualism, uncertainty avoidance, masculinity, and long-term orientation explain the likelihood of U.S. foreign issuers reporting internal control deficiencies under Section 302 of the Sarbanes-Oxley Act (SOX). To assess whether home country guidance on internal control reporting influences U.S. foreign issuers detecting and reporting MWICs, we identify and control for the adoption of internal control guidance in foreign jurisdictions. Our results show that firms from countries with a high power distance and long-term orientation are more likely to report MWICs. In addition, we find that firms from countries that implement internal control guidance are less likely to report MWICs, suggesting that the effectiveness of U.S. foreign issuers' internal control over financial reporting is influenced by their home countries' regulation and oversight. These results are generally robust to a number of additional sensitivity tests.JEL Classifications: M14; M16; M48.Data Availability: Data are from publicly available sources.

The Supreme Court, the SEC, and International Issuers: Public Enforcement after Morrison v. National Australia Bank

This Article examines SEC enforcement policies and seeks to find the optimum approach to enforcement against foreign private issuers. My previous empirical study of securities class actions against foreign firms identified a number of crucial developments that mainly occurred after Morrison v. National Australia Bank. In Morrison, the Supreme Court sought to limit the extraterritorial reach of the anti-fraud provisions of the U.S. securities law. The Court has scaled down the exposure of foreign issuers to securities liability risk, particularly in class-action litigation. If the Supreme Court in Morrison has created a risky enforcement lacuna on the side of private class actions against foreign corporations, how should the SEC adjust its enforcement strategy? To answer this question, this Article presents an empirical survey of SEC enforcement actions against foreign issuers between 2005 and 2016. The results suggest that the SEC consistently pursues a lenient enforcement approach in this area. This low-key policy is the Commission’s dominant strategy. The Article also discusses post-Morrison doctrinal developments, market trends, and red flags potentially indicative of an increased risk of fraud. Although the traditional low-key enforcement policy may attract some foreign “lemons” in the post-Morrison environment, the SEC should not depart from its dominant strategy and engage in more enforcement actions. Instead, the warning signs identified in this paper call for better preventive monitoring. The Article suggests a number of low-cost fraud prevention policies, including promoting cooperation with foreign firms, using new data analysis programs, and galvanizing market “gatekeepers.” Through implementing the mechanisms suggested in this Article, the SEC may reach a more efficient level of deterrence without ramping up enforcement and increasing the costs of foreign firms seeking to access American capital markets.

Eliminating the Form 20-F Reconciliation and Audit Pricing

ABSTRACTThis study examines the impact of the Securities and Exchange Commission's (SEC) policy in 2007 to eliminate the Form 20-F reconciliation requirements for foreign cross-listed firms following the International Financial Reporting Standards (IFRS) on audit pricing. We find that the elimination of this requirement decreases audit fees, and this fee decrease is less prominent when foreign cross-listed firms engage industry-specialist auditors. Our findings reinforce prior studies that found that managers of foreign cross-listed firms have a greater tendency to manage earnings when there is a need to reconcile earnings (Bradshaw, Bushee, and Miller 2004; Lang, Raedy, and Wilson 2006; Kang, Krishnan, Wolfe, and Yi 2012), and thus eliminating the Form 20-F reconciliation impedes managerial manipulation of earnings, decrease financial reporting risk, and audit fees. The results also provide direct evidence to support the SEC's (2007) claim that eliminating the Form 20-F reconciliation would reduce the preparation costs and regulatory burdens for foreign issuers.

Review of securities class action filings in 2015

Purpose To provide an analysis of securities class action filings in 2015 along with related trends over time and a comprehensive current view of the securities class action landscape. Design/methodology/approach Details 2015 securities class actions and related trends in terms of the number and size of filings; market capitalization losses; the litigation exposure of IPOs; the classification of complaints; litigation likelihood for US exchange-listed companies; resolutions (settlements, dismissals or trial verdict outcomes); timing of dismissals and settlements; filing lags; filings against foreign issuers; number of mega filings; recent rulings related to class certification; and concentration of class action activity by industry sector, stock exchange and court circuit. Findings The number of filings in 2015 was the largest since 2008. The Disclosure Dollar Loss Index® (DDL Index®), the Maximum Dollar Loss Index® (MDL Index®) and the number of mega filings rose sharply in 2015 after declines in 2014. The Consumer Non-Cyclical sector had the most filings in 2015 while filings against companies in the Financial sector were below historical averages. Dismissal rates appear to be trending down. The median filing lag has never been shorter than in 2015. Filings against foreign issuers remain at high levels. Filings against S&P 500 companies remained below the historical average. Originality/value Detailed analysis by legal and industry experts.

Corporate failures and the denomination of corporate bonds: Evidence from emerging Asian economies over two financial crises

Using a novel financial data-set which covers an extensive time period between 1995 to 2012, we test for the impact of currency denomination of bonds on Asian firms’ survival probabilities. Our data span two financial crises: the 1997–98 Asian crisis and the 2007–09 global financial crisis. We find that during the former crisis firms with foreign currency denominated bonds face a higher probability of failure compared to firms with domestic bonds. On the other extreme, we find no notable differences between the 2007–09 financial crisis and tranquil times for both domestic and foreign issuers.

Diversification of pre-IPO ownership and foreign IPO performance

We examine the diversification of pre-IPO ownership of foreign-listed firms and how the presence of pre-IPO shareholders from the host country affects foreign issuer’s subsequent IPO and post-IPO activities. Using a sample of foreign-listed Chinese firms, we find that the presence of pre-IPO shareholders from the host country is associated with a significant reduction in direct and indirect IPO costs, especially for issuers without international sales and for firms operating at a loss. Benefits of such pre-IPO affiliation persist into the post-IPO period as manifested in greater analyst coverage and better acquisition performance in the host country. Our paper provides new insight on the value of pre-IPO ownership diversification and identifies one strategy that firms can use to overcome the liability of foreignness.

Does Mandatory Risk Information Disclosure Affect Bank Debt Design? Cross-Country Evidence from Yankee Bond Covenants

This paper investigates the impact of mandatory risk disclosure on the design of foreign bank debt. The Basel II and III Accords require the public disclosure of bank regulatory information under the Pillar 3 or market discipline framework. The new information details bank risk exposures and management strategies, capital adequacy and remuneration practices to enhance market discipline through transparency. We target foreign issuers of US (“Yankee”) to test whether banks domiciled in Pillar 3 regimes increase debt raising in an overseas market and face reduced demand from investors for covenants. Pillar 3 reporting reduces the propensity of banks to raise debt capital abroad, a finding that is attenuated when the banks are domiciled in countries with superior creditor rights protections. Pillar 3 reporting increases the imposition of covenants in Yankee bonds, particularly for banks domiciled in countries with weaker debt law enforcement standards and stronger shareholder rights.

Securities Regulation Week 13: International (Lecture Slides)

Securities markets are global. U.S. companies raise money from foreign investors. Foreign companies raise money on U.S. markets. U.S. investors seek diversification and higher yields in foreign markets. Foreign broker-dealers desire to sell securities to U.S. investors. International securities regulation involves three parts or “tranches.” Tranche One is the Corp. Fin. Tranche. There are two parts to the Corp. Fin. Tranche: (1) Regulation S, which provides a registration exemption for securities sold outside the U.S., and (2) American Depositary Receipts (“ADRs”) and other U.S. accommodations for foreign issuers that wish to sell securities inside the U.S. Tranche Two is the Trading and Markets Tranche. This tranche addresses issues such as whether a foreign exchange must register as a U.S. exchange if it places an electronic trading screen on U.S. soil. This tranche also addresses issues concerning whether, and under what conditions, a foreign “bank” (i.e., broker-dealer) that sells securities to U.S. investors must register as a U.S. broker-dealer. SEC Rule 15-6, which provides a limited exemption from U.S. broker-dealer registration for foreign banks, is an important part of this tranche. The Third Tranche is the Enforcement Tranche. This tranche addresses issues concerning when the SEC can enforce U.S. laws abroad or against non-U.S. citizens. Cooperation agreements with foreign regulators (e.g., Memoranda of Understanding or MOUs) come into play in this tranche.

The Impact of IFRS Adoption on Earnings Quality: A Study Conducted on Foreign Issuers in the United States

<p>The worldwide adoption of International Financial Reporting Standards (IFRS) is affecting many countries around the globe as it has become widely spread. Since 2007 the United States (US) allows foreign issuers to voluntarily adopt IFRS. This paper investigates the effect of IFRS adoption on earnings quality after voluntary IFRS adoption was allowed to foreign issuers in the US. More precisely, the discretionary accruals and the small positive earnings are tested for a sample of foreign issuers in the US that are registered and reporting with the SEC, comparing a pre-period from 2002 to 2006 with a post-period from 2008 to 2011. The results from the difference-in-differences regression analysis suggest that in terms of discretionary accruals there is no statistical difference between the pre-IFRS and the post-IFRS period, therefore the earnings quality remains the same. For small positive earnings it is found that, when foreign issuers incorporate IFRS, these are lower, indicating higher earnings quality.</p>

Are different stock market transparency requirements associated with different accounting quality levels? An analysis of bonding effects on the German stock market

Most international stock exchanges distinguish solely between domestic and foreign issuers, whereas in Germany, issuers can choose between two market segments with diverse transparency levels: the Prime Standard and Non-Prime Standard segment. Transparency requirements for the Non-Prime Standard segment coincide with the minimum legal requirements of the EU-regulated market/regulated unofficial market. Companies that opt for a listing in the Prime Standard segment must comply with the higher transparency standards stipulated by the Frankfurt Stock Exchange. In our study, we find evidence indicating that companies that voluntarily bond themselves to these additional (private) regulations and tighter transparency requirements show higher accounting quality. Our results relate to papers that emphasize the importance of regulatory and legal environments as well as to papers discussing bonding effects on both the national and international levels. In summary, the unique German listing regime offers companies a setting in which to flexibly choose an appropriate level of transparency while considering the trade-off between the costs and benefits of specific listing requirements. For investors, the market segment is relevant for assessing the expected accounting quality level and the reliability of financial statements, respectively.

A Free Pass for Foreign Firms? An Assessment of SEC and Private Enforcement Against Foreign Issuers

While proponents of the bonding hypothesis have posited that foreign firms crosslist in the United States to signal compliance with the strict U.S. corporate governance regime, these scholars have taken the enforcement of U.S. securities laws largely for granted. This Note presents an empirical examination of previously unexplored data on the enforcement of U.S. securities laws against foreign issuers. The results suggest that relative to domestic issuers, foreign issuers in the United States have benefited not only from a more lax set of rules, but also from a more forgiving public enforcement agency. At the same time, U.S. courts have limited private enforcement against foreign issuers, thus restricting an alternative to public enforcement and further widening the gap between the corporate governance regime for U.S. issuers and the one for foreign issuers.

The SEC's elimination of 20-F reconciliation and information asymmetry

The U.S. SEC adopted a rule in December 2007 to eliminate the 20-F reconciliation requirement for foreign private issuers preparing financial statements under IFRS as issued by the IASB. In this paper we examine whether eliminating the reconciliation is associated with information asymmetry for such foreign issuers during the 2005–2008 sample period. We find that information asymmetry decreases after such firms discontinue the 20-F reconciliation. Moreover, information asymmetry reduction is more pronounced for firms with higher reconciliation constraint proxied by higher pre-rule disclosure incentive and for firms with higher cost savings proxied by more reductions in audit fees in the post-rule period. We also document that foreign IFRS firms change accounting policies more frequently than foreign non-IFRS firms after the relaxation of the reconciliation constraint. Together, these findings provide empirical evidence supporting the SEC's decision to eliminate the 20-F reconciliation.

Cultural distance and foreign IPO underpricing variations

This paper examines the impact of cultural distance on the underpricing of initial public offerings issued by foreign firms in the United States (foreign IPOs). Using a sample of 503 foreign IPOs from 27 countries for the 1980–2012 period, we find that greater cultural differences between U.S. investors and foreign domiciled issuers increase the underpricing of foreign IPOs. Our findings are robust after controlling for a country's legal environment, financial development, and corporate tax rates. We also find that the presence of prior public equity issues in the home market moderates the positive impact of cultural distance due to the increased transparency and visibility of foreign firms among U.S. investors. Our results suggest that cultural differences influence IPO underpricing through an information asymmetry channel and visibility reduces information asymmetry between foreign issuers and U.S. investors, which, in turn, mitigates the positive impact of cultural distance on the underpricing cost.

Corporate Inversions and the Unbundling of Regulatory Competition

A sizable number of US public companies have recently executed “tax inversions” – acquisitions that move a corporation’s residency abroad while maintaining its listing in domestic securities markets. When appropriately structured, inversions replace American with foreign tax treatment of extraterritorial earnings, often at far lower effective rates. Regulators and politicians have reacted with alarm to the “inversionitis” pandemic, with many championing radical tax reforms. This paper questions the prudence of such extreme reactions, both on practical and on conceptual grounds. Practically, I argue that inversions are simply not a viable strategy for many firms, and thus the ongoing wave may abate naturally (or with only modest tax reforms). Conceptually, I assess the inversion trend through the lens of regulatory competition theory, in which jurisdictions compete not only in tax policy, but also along other dimensions, such as the quality of their corporate law and governance rules. I argue that just as US companies have a strong aversion to high tax rates, they have an affinity for robust corporate governance rules – a traditional strength of American corporate law. This affinity has historically given the US enough market power to impose tax premiums with dampened fear of chasing off incorporations, because US law specifically bundles tax residency and state corporate law into a conjoined regulatory package. To the extent this market power remains durable, radical tax overhauls would be unhelpful (and even counterproductive). A more blameworthy culprit for inversionitis, I argue, can be found in an unlikely source: Securities Law. Over the last fifteen years, financial regulators have progressively suffused US securities regulations with mandates relating to internal corporate governance matters – traditionally the domain of state law. Those federal mandates, in turn, have displaced and/or preempted state law as a primary source of governance regulation for US-traded issuers. And, because US securities law applies to all listed issuers (regardless of tax residence), this displacement has gradually “unbundled” domestic tax law from corporate governance, eroding the US’s market power in regulatory competition. A potential elixir for this erosion, then, may also lie in securities regulation. I propose two alternative reform paths: (a) domestic exchanges should charge listed foreign issuers for their consumption of federal corporate governance policies; and/or (b) federal law should cede corporate governance back to the states by rolling back many of the governance mandates promulgated over the last fifteen years.

CULTURAL DISTANCE AND BOND PRICING: EVIDENCE IN THE YANKEE AND RULE 144A BOND MARKETS

AbstractIn this article we examine the impact of cultural distance on the pricing of corporate bonds issued in the United States. We find that greater cultural differences between U.S. investors and foreign issuers increase the cost of debt. We also find that the cost of Rule 144a offers is less sensitive to cultural distance and creditor protection effects because of the different market structure and investor bases in the Yankee and Rule144a bond markets. Our results suggest that cultural differences influence bond pricing through an information asymmetry channel.

U.S. Class Action Lawsuits Targeting Foreign Firms: The Spill-Over Effect

We find negative price reactions among non-sued U.S.-listed foreign firms to filings of U.S. shareholder lawsuits targeting foreign issuers. This spillover effect is stronger among non-sued firms from the sued-company’s home country or industry, especially when the home country is poorly governed or the industry is litigation-prone, and for less anticipated lawsuits. We also document a stronger same-country spillover for a recent wave of U.S. lawsuits targeting Chinese issuers than for other standalone litigations. Finally, a non-sued firm’ litigation price reaction predicts its future litigation risk. Our findings are consistent with investors updating litigation risks of peer firms upon litigation events, and highlight the importance of U.S. shareholder lawsuits in disciplining foreign issuers.

Incorporating Field Data into Archival Research

I explore the use of field data in conjunction with archival evidence by examining Iliev, Miller, and Roth’s [2014] analysis of an amendment to the Securities Exchange Act of 1934. This regulatory amendment allowed depositary banks to cross-list firms without the cooperation of foreign issuers. Iliev, Miller, and Roth [2014] argue that the regulation failed to fulfill its intended purpose and imposed significant costs on foreign firms for the benefit of depositary banks. Drawing on evidence from lawyers, issuers, depositary banks, and regulators involved in the design and implementation of the amendment, I describe a more optimistic assessment of the amendment and its effects on capital markets. I conclude by discussing opportunities for field data in financial reporting and disclosure research.

Satyam Fraud: A Case Study of India's Enron

ABSTRACTThis case provides students a unique opportunity to examine and reflect on the challenges of auditing in today's global environment. Students examine a real-world billion dollar plus embezzlement and fraud at Satyam Corporation, an international company based in India and previously trading on the New York Stock Exchange. The case focuses on auditors' responsibilities related to obtaining and evaluating audit evidence, particularly as it relates to confirming cash and receivables. It also explores the quality control responsibilities related to audit procedures performed by foreign affiliates of a large international audit firm. The case illustrates the role of culture in performing an audit in accordance with auditing standards issued by the U.S. Public Company Accounting Oversight Board. Additionally, case details provide opportunities for class discussions and foster students' critical thinking skills on other auditing topics such as audit risk and planning, related party transactions, tone-at-the-top, and internal control deficiencies. By using a foreign issuer to explore these issues, the case highlights both the technical and international challenges of performing auditing procedures.

The Rigour of IFRS Education in the USA: Analysis, Reflection and Innovativeness

International Financial Reporting Standards (IFRS) are accepted throughout the world, particularly in the European Union, Australia, New Zealand and Canada. Emerging economies are also are aligning their practices with IFRS. Historically, the USA has been cautious about accepting IFRS. However, following acceptance of IFRS worldwide, the US Securities and Exchange Commission has recently allowed the filing of IFRS-based financial statements from foreign issuers and is presently considering the same from domestic issuers. Owing to lack of IFRS education and training in the country, concerns have been expressed about such moves of the USA towards IFRS. Following such concerns, the aim of the present study is to review previous literature on IFRS education to reflect on the present status of IFRS education in the USA. The research method includes a review of past literature on IFRS education in the Business Source Complete database from 2001 to 2012. In line with the review, this study reports that active learning approaches that stimulate critical thinking and judgement skills of students are the best methods to teach IFRS. The studies reviewed also report the lack of teaching materials, including software and technologies, to effectively teach IFRS. The only active learning strategies advocated in previous studies were the use of case studies and real life examples. Additionally, this study advocates the use of problem-based learning strategies. This study also reports the lack of research investigating students’ and educators' perceptions of available resources and approaches. Future studies are suggested in this direction, employing surveys and interviews.

Cross-Listings and the New World of International Capital: Another Look at the Efficiency and Extraterritoriality of Securities Law

This Article examines the cumulative welfare effect of the application of the U.S. regulatory regime on foreign private issuers (FPI) and whether the extraterritorial reach of U.S. law creates unnecessary risks deterring crosslistings. To assess the deterrence effect and optimality of regulations, the research designs a simplified model explaining decision-making processes of control persons and applies the model to the FPI regulatory regime and case law analysis. The Article assembles a sample of seventy-five cases, interprets the application of the conduct and effects test and recent Supreme Court decisions, examines deregistration forms filed in 2001-2011, and juxtaposes statistical data with recent law reforms in the United States, the European Union, and a number of other jurisdictions. The research concludes that the U.S. policies are not uniformly value maximizing for all categories of FPI. The current singlemodal policies of indiscriminate incremental deregulation fail to properly address the concerns of issuers from developed economies and may be socially wasteful and unnecessary for FPI from emerging markets. To solve this dilemma, the Article suggests three solutions premised on the policy of regulatory granularity.