Liability of foreignness: The impact of elimination of the reconciliation requirement on international asset allocation by u.s. investors

Michael Timothy Dugan, Elizabeth H. Turner, Clark M. Wheatley

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

In 2007, the Securities and Exchange Commission (SEC) eliminated the 20-F requirement to reconcile IFRS financial disclosures to U.S. GAAP. We find that this change in SEC regulation is associated with an overall decrease in the international asset allocation of U.S. institutional investors in European Union (E.U.) firms that are cross-listed on U.S. stock exchanges. We also find that U.S. mutual fund investors were more likely to invest in firms in countries with greater levels of investor protection and higher global visibility in the post-elimination period. A learning effect (measured as the length of time a firm is cross-listed on a U.S. stock exchange) is not, however, associated with U.S. institutional ownership. These results are robust to tests involving removal of OTC ADRs, firm-level controls, country controls, and financial controls resulting from the elimination of the 20-F reconciliation. Our results suggest that the increased information processing costs were not offset by information preparation cost savings. Our results indicate that the elimination of the 20-F reconciliation of IFRS to U.S. GAAP resulted in a loss of valuable information for U.S. institutional investors and thereby resulted in a divestment in cross-listed E.U. firms.

Original languageEnglish (US)
Pages (from-to)75-95
Number of pages21
JournalJournal of International Accounting Research
Volume17
Issue number2
DOIs
StatePublished - Jun 1 2018

Fingerprint

Investors
Reconciliation
Asset allocation
Liability of foreignness
Securities and Exchange Commission
International Financial Reporting Standards
Institutional investors
Stock exchange
European Union
Financial control
Cost savings
Visibility
Information processing
Financial disclosure
Costs
Preparation
Investor protection
Learning effect
Institutional ownership
Mutual funds

Keywords

  • IFRS
  • Institutional investment
  • Investor protection
  • Reconciliation

ASJC Scopus subject areas

  • Business and International Management
  • Accounting

Cite this

Liability of foreignness : The impact of elimination of the reconciliation requirement on international asset allocation by u.s. investors. / Dugan, Michael Timothy; Turner, Elizabeth H.; Wheatley, Clark M.

In: Journal of International Accounting Research, Vol. 17, No. 2, 01.06.2018, p. 75-95.

Research output: Contribution to journalArticle

@article{bc0ea1dbcb29461aaf9715d27ae63426,
title = "Liability of foreignness: The impact of elimination of the reconciliation requirement on international asset allocation by u.s. investors",
abstract = "In 2007, the Securities and Exchange Commission (SEC) eliminated the 20-F requirement to reconcile IFRS financial disclosures to U.S. GAAP. We find that this change in SEC regulation is associated with an overall decrease in the international asset allocation of U.S. institutional investors in European Union (E.U.) firms that are cross-listed on U.S. stock exchanges. We also find that U.S. mutual fund investors were more likely to invest in firms in countries with greater levels of investor protection and higher global visibility in the post-elimination period. A learning effect (measured as the length of time a firm is cross-listed on a U.S. stock exchange) is not, however, associated with U.S. institutional ownership. These results are robust to tests involving removal of OTC ADRs, firm-level controls, country controls, and financial controls resulting from the elimination of the 20-F reconciliation. Our results suggest that the increased information processing costs were not offset by information preparation cost savings. Our results indicate that the elimination of the 20-F reconciliation of IFRS to U.S. GAAP resulted in a loss of valuable information for U.S. institutional investors and thereby resulted in a divestment in cross-listed E.U. firms.",
keywords = "IFRS, Institutional investment, Investor protection, Reconciliation",
author = "Dugan, {Michael Timothy} and Turner, {Elizabeth H.} and Wheatley, {Clark M.}",
year = "2018",
month = "6",
day = "1",
doi = "10.2308/jiar-51951",
language = "English (US)",
volume = "17",
pages = "75--95",
journal = "Journal of International Accounting Research",
issn = "1542-6297",
publisher = "American Accounting Association",
number = "2",

}

TY - JOUR

T1 - Liability of foreignness

T2 - The impact of elimination of the reconciliation requirement on international asset allocation by u.s. investors

AU - Dugan, Michael Timothy

AU - Turner, Elizabeth H.

AU - Wheatley, Clark M.

PY - 2018/6/1

Y1 - 2018/6/1

N2 - In 2007, the Securities and Exchange Commission (SEC) eliminated the 20-F requirement to reconcile IFRS financial disclosures to U.S. GAAP. We find that this change in SEC regulation is associated with an overall decrease in the international asset allocation of U.S. institutional investors in European Union (E.U.) firms that are cross-listed on U.S. stock exchanges. We also find that U.S. mutual fund investors were more likely to invest in firms in countries with greater levels of investor protection and higher global visibility in the post-elimination period. A learning effect (measured as the length of time a firm is cross-listed on a U.S. stock exchange) is not, however, associated with U.S. institutional ownership. These results are robust to tests involving removal of OTC ADRs, firm-level controls, country controls, and financial controls resulting from the elimination of the 20-F reconciliation. Our results suggest that the increased information processing costs were not offset by information preparation cost savings. Our results indicate that the elimination of the 20-F reconciliation of IFRS to U.S. GAAP resulted in a loss of valuable information for U.S. institutional investors and thereby resulted in a divestment in cross-listed E.U. firms.

AB - In 2007, the Securities and Exchange Commission (SEC) eliminated the 20-F requirement to reconcile IFRS financial disclosures to U.S. GAAP. We find that this change in SEC regulation is associated with an overall decrease in the international asset allocation of U.S. institutional investors in European Union (E.U.) firms that are cross-listed on U.S. stock exchanges. We also find that U.S. mutual fund investors were more likely to invest in firms in countries with greater levels of investor protection and higher global visibility in the post-elimination period. A learning effect (measured as the length of time a firm is cross-listed on a U.S. stock exchange) is not, however, associated with U.S. institutional ownership. These results are robust to tests involving removal of OTC ADRs, firm-level controls, country controls, and financial controls resulting from the elimination of the 20-F reconciliation. Our results suggest that the increased information processing costs were not offset by information preparation cost savings. Our results indicate that the elimination of the 20-F reconciliation of IFRS to U.S. GAAP resulted in a loss of valuable information for U.S. institutional investors and thereby resulted in a divestment in cross-listed E.U. firms.

KW - IFRS

KW - Institutional investment

KW - Investor protection

KW - Reconciliation

UR - http://www.scopus.com/inward/record.url?scp=85063437695&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85063437695&partnerID=8YFLogxK

U2 - 10.2308/jiar-51951

DO - 10.2308/jiar-51951

M3 - Article

AN - SCOPUS:85063437695

VL - 17

SP - 75

EP - 95

JO - Journal of International Accounting Research

JF - Journal of International Accounting Research

SN - 1542-6297

IS - 2

ER -