Melbourne Accounting Research Seminar - Associate Professor Scott Liao-
Associate Professor Scott Liao from the University of Toronto presented a MARS seminar.
Topic: The Effectiveness of SEC monitoring of Foreign Firm Disclosures
Abstract: This study examines the effectiveness of SEC monitoring of foreign firm disclosures via comment letters relative to that of U.S. firms. We find that compared to U.S. firms with similar severity of comment letters, foreign firms experience a lower increase in earnings quality, i.e., a lower increase in earnings response coefficients and a lower decrease in discretionary accruals after comment letter resolutions. In addition, we find that foreign firms experience a lower decrease in illiquidity and a lower increase in share turnover around 10-K filings relative to U.S. firms. In the cross-sectional analyses, we further document that most of these findings are stronger when the foreign firms’ countries are more distant from the U.S. with respect to the accounting rules, languages, and disclosure quality. These findings suggest that while the SEC monitors foreign firms’ disclosures, the process is not as effective as that for U.S. firms, potentially due to resource constraints and lack of enforcement. This evidence is important to understanding how foreign firms cross-listed in the U.S. are regulated and contributes to the debate on the bonding hypothesis.