Restoring the tower of Babel: How foreign firms communicate with US investors

• In Event: Determinants and Consequences of Management Communication

Abstract

We examine the readability of text and the use of numbers in the annual filings of foreign firms listed on US stock exchanges. We find the surprising result that foreign firms write clearer text and present relatively more numerical data than their US firm counterparts. We also find that the readability of the text and use of numbers increases as the foreign firms get geographically further from the US. It also increases as the foreign firm’s home country has greater differences in accounting standards or investor protection laws relative to the US. Our results suggest that foreign firms are responding to a perceived bias against them and attempt to lower the information disadvantage or psychological distance that US investors feel by providing clearer and more concrete disclosures.

Authors

• Russell J Lundholm, The University of British Columbia

• Rafael L. Rogo, The University of British Columbia

• Li Zhang, The University of British Columbia