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

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.