The Role of Accounting Standards in Firms’ Cross-Listing Decisions

• In Event: Research in Accounting Standards

Abstract

This paper examines the role of accounting standards in shaping firm’s decisions about whether, where, when and how they cross-list their equity shares on foreign stock exchanges. Our initial examination focusses on how differences in accounting standards across countries that existed prior to large scale IFRS adoption in 2005 affected cross-listing decisions. Because the regulatory requirements and enforcement intensity may differ between direct cross-listing versus listing through depositary receipts, we examine the effects of accounting standard differences and accounting standard harmonization separately for these two different forms of cross-listing. Across a variety of tests we find that depositary receipt listings increase and direct listings decrease as the accounting standards between countries become less similar. We also find that exchanges that allow foreign firms to provide financial statements prepared using IFRS gain direct cross-listings in the periods prior to widespread IFRS adoption, and find that this effect is moderated when the cross-listings come from countries with local accounting standards that differ more from IFRS. In addition, we examine the effect of wide-spread adoption of IFRS on both direct listing and depositary receipts. We find that direct cross-listings increase when two countries adopt IFRS and that cross-listings through depositary receipts generally are unchanged by IFRS adoption. We supplement this analysis by examining how hosting countries acceptance of IFRS for foreign issuers affects cross-listing behavior before and after widespread IFRS adoption for local entities. We find that countries that permit IFRS use for foreign issuers and subsequently adopt IFRS for local entities gain cross-listings from other IFRS adopting jurisdictions post adoption, while countries that permitted IFRS use for foreign issuers but do not subsequently adopt IFRS for local issuers do not gain cross-listings. These combined results suggest that compliance costs and comparability effects influence cross-listing decisions.

Authors

• Shiheng Wang, The Hong Kong University of Science and Technology

• Michael Welker, Queen's University, Kingston

• Shuo Wu, Queen's University, Kingston