Accepted by Jeffrey Pittman. We thank Jeffrey Pittman (Editor), two anonymous reviewers, Zhihong Chen, Jere Francis, John McInnis, Bill Kinney, Steve Kachelmeier, Jay Lee, Andrew Leone, Thomas Lys, Sarah McVay, Karl Muller, Suresh Radhakrishnan, Zhifeng Yang, and May Zhang for their helpful suggestions. We also acknowledge helpful feedback from workshop participants at Binghamton University, Boston College, University of Texas at Austin, University of Missouri-Columbia, National Taiwan University, Northwestern University, Penn State University, Singapore Management University, Seoul National University, the 2008 International Symposium on Auditing Research, and the 18th Annual Conference on Financial Economics and Accounting. We thank Michael Crawley and Walid Al-Issa for research assistance.
Home Country Investor Protection, Ownership Structure and Cross-Listed Firms' Compliance with SOX-Mandated Internal Control Deficiency Disclosures†
Article first published online: 29 APR 2013
Contemporary Accounting Research
Volume 30, Issue 4, pages 1490–1523, Winter 2013
How to Cite
Gong, G., Ke, B. and Yu, Y. (2013), Home Country Investor Protection, Ownership Structure and Cross-Listed Firms' Compliance with SOX-Mandated Internal Control Deficiency Disclosures. Contemporary Accounting Research, 30: 1490–1523. doi: 10.1111/1911-3846.12000
- Issue published online: 19 DEC 2013
- Article first published online: 29 APR 2013
- Accepted manuscript online: 13 SEP 2012 10:58AM EST
We examine whether home country investor protection and ownership structure affect cross-listed firms' compliance with SOX-mandated internal control deficiency (ICD) disclosures. We develop a proxy for the likelihood of cross-listed firms' ICD misreporting during the Section 302 reporting regime. For cross-listed firms domiciled in weak investor protection countries, we have three main findings. First, firms whose managers control their firms and have voting rights in excess of cash flow rights are more likely to misreport ICD than other firms during the Section 302 reporting regime. Second, there is a positive association between the likelihood of ICD misreporting and voluntary deregistration from the SEC prior to the Section 404 effective date. Third, for firms that chose not to deregister, there is a positive association between the likelihood of ICD misreporting and the reporting of previously undisclosed ICDs during the Section 404 reporting regime. We do not find similar evidence for cross-listed firms domiciled in strong investor protection countries. Our findings are consistent with the hypothesis that, for cross-listed firms domiciled in weak investor protection countries, managers who have the ability and incentive to expropriate outside minority shareholders are reluctant to disclose ICDs in order to protect their private control benefits. The results of our study should be of interest to regulators who wish to identify noncompliant firms for closer supervision, investors who wish to identify ex ante red flags for poor financial disclosure quality, and researchers who wish to understand the economic forces governing cross-listed firms' financial disclosure behavior.