Dissertations, Theses, and Capstone Projects

Date of Degree

6-2016

Document Type

Dissertation

Degree Name

Ph.D.

Program

Business

Advisor

Joseph Weintrop

Advisor

Jay Dahya

Committee Members

Jay Dahya

Jon Kerr

Karl Lang

Hagit Levy

Subject Categories

Accounting

Keywords

deregistration, cross-listing, International Financial Reporting Standards, accounting quality, audit fees

Abstract

In 2007 the SEC introduced Rule 12h-6, which significantly reduced the requirements for cross-listed firms to leave U.S. markets. While the benefits and costs of cross-listing in the U.S. have been widely analyzed in prior literature, questions as to the impact of deregistration on firms, investors, and other parties have been raised given the increase in foreign firms leaving the U.S. over the past decade. In addition, the growing global adoption of International Financial Reporting Standards (IFRS) and worldwide regulatory developments over this time period have brought changes to the home markets to which deregistering firms return potentially influencing the impact of deregistration. This dissertation consists of two chapters that analyze samples of foreign cross-listed firms that voluntarily deregister from U.S. equity markets. In Chapter 1, I examine whether a benefit of cross-listing, improved accounting quality, is impacted when foreign firms deregister. In Chapter 2, I examine whether a cost of cross-listing, a fee premium paid to auditors, is impacted when foreign firms deregister. Additionally, in both chapters I analyze the characteristics of the home market that influence these associations.

Chapter 1: For a sample of 122 voluntary foreign firm deregistrations from 2004 through 2012, I find that deregistration from the U.S. is associated with greater abnormal accruals, a lower likelihood of reporting a loss, and less timely recognition of economic losses compared to both before the firm deregistered and to a matched control firm that still maintains a U.S. cross-listing. Upon further examination, I find the decrease in accounting quality is not significant for firms returning to home markets that require IFRS, but rather the significant decrease is attributable only to foreign firms returning to non-IFRS environments. Additional tests show that the level of regulatory quality in the home market, relative to the U.S., is not a significant mitigating factor in the negative association between deregistration and accounting quality. These findings imply that, after controlling for country and regulatory effects, accounting standards play a significant role in explaining the relationship between deregistration from U.S. exchanges and financial reporting quality.

Chapter 2: For a sample of 105 voluntary foreign firm deregistrations from 2004 through 2013, I find that deregistration is associated with a decrease in audit fees compared to both before the firm deregistered and to a matched control firm that still maintains a U.S. cross-listing. This significant decrease is attributable only to foreign firms returning to non-IFRS environments, which is consistent with the high complexity and effort associated with auditing IFRS financial statements. Additional tests show the level of legal liability auditors are exposed to in the home market is not a significant mitigating factor in the negative association between deregistration and audit fees. These findings imply that, after controlling for country and legal effects, the difference in the complexity of accounting standards is a significant factor explaining the impact of deregistration on audit fees.

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