The following post comes to us from Russell Lundholm, Rafael Rogo, and Jenny Li Zhang, all of the Accounting Division at the University of British Columbia.
Foreign companies that trade their equity in the US face serious obstacles. They must navigate a complex set of SEC disclosure requirements, while at the same time satisfying US investor expectations about the frequency and content of voluntary disclosures. Their home country may be far from the US, speak a different language, use different accounting rules, and offer different types of investor protection than the US, and each of these differences presents a friction that must be mitigated in order to attract US investors. Given these cultural, procedural, and linguistic differences, one might expect that the disclosures of foreign firms would be of lower quality than their US firm counter-parts. Nonetheless, in our paper, Restoring the Tower of Babel: How Foreign Firms Communicate with US Investors, forthcoming in The Accounting Review, we find that foreign firms traded in the US present more numerical data and write more readable text in the Management Discussion and Analysis (MD&A) section of their 10-K, and write more readable text in their earnings press releases, than comparable US firms. More importantly, we find that the readability of text and amount of numerical data in both the MD&A and earnings press releases increase with the foreign firm’s distance from the US. Finally, we find that within a country, firms with relatively more readable disclosures attract relatively more US institutional investment.