Earnings Conservatism, Litigation and Contracting: The Case of Cross-Listed Firms


  • Carel Huijgen,

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  • Martien Lubberink

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    • The authors are respectively from the Faculty of Economics, University of Groningen and the Department of Accounting and Finance, Lancaster University. This paper has benefited from comments from Abed Abdallah, John Coffee, Peter Easton, Michael Mumford, Ken Peasnell and an anonymous referee. The authors want to thank them for their invaluable support. The research presented in this paper has further benefited from comments received at the ESRC Workshop held at Lancaster, September 2001; the Financial Accounting Workshop, Nijenrode University (Netherlands), October 2001; the EIASM Workshop on Capital Markets Accounting Research, Valencia, December 2001; the BAA Conference, Jersey, April 2002; the EAA Conference, Copenhagen, 2002; the EFMA Conference, London 2002; the annual AAA meeting in San Antonio, August 2002, the Tilburg University Accounting Workshop, October 2003, the Glasgow University Accounting Workshop, November 2003, and at the EIASM Workshop on research and capital markets, Frankfurt, December 2003.

†Carel Huijgen, University of Groningen, Faculty of Economics, Po Box 800, 9700 AV Groningen, The Netherlands.
e-mail: c.a.huijgen@eco.rug.nl


Abstract:  We compare earnings conservatism of UK companies cross-listed in the US to that of UK companies without a US-listing. We expect that conservatism will be more pronounced for cross-listed firms than for firms with a UK listing only, because the cross-listed firms face a stricter enforcement regime. Furthermore, cross-listed firms may use a listing on a US exchange to signal high-quality reporting to investors. Using a matched-pairs research design, we find that earnings of UK cross-listed firms are significantly more conservative than earnings of UK firms without a US listing. Moreover, cross listed firms display particularly high levels of conservatism during the early years of their cross-listing. This indicates that firms use earnings conservatism to commit to highly demanding reporting requirements and in doing so communicate a perception of investor care.