Earnings Management by Cross-Listed Growth and Value Firms

• In Event: Accounting and Disclosure

Abstract

The purpose of this study is to investigate the earnings management (both AEM (accrual-based) and REM (real-based)) between foreign growth firms and foreign value firms traded on the three U.S. main exchanges. Prior studies (Madhogarhia et al. 2009; Houmes and Skantz 2010; Nabar and Song 2017) have examined U.S. domestic firms and generally agreed that growth firms engage in more AEM than value firms. In addition, Nabar and Song (2017) found domestic growth firms use less REM than domestic value firms. However, the conclusions might not hold for foreign cross-listed growth firms versus foreign cross-listed value firms due to different reporting incentives.
Based on a sample of 6,429 firm-year observations traded on the three U.S. main exchanges from 54 countries between 1990 and 2017, we find that foreign growth firms, compared with foreign value firms, are more likely to have a larger magnitude of AEM and REM. The results are robust to a fixed effect model, an alternative definition of “growth”, and various samples. While our findings are consistent with research on domestic firms’ AEM, they are the opposite of Nabar and Song’s (2017) claim that domestic growth firms employ less real REM than domestic value firms. Our results, combined with prior studies, suggest that REM behaviors differ between domestic growth firms and foreign cross-listed growth firms. Therefore, investors should analyze cross-listed growth firms differently than cross-listed value firms.

Authors

• Shrikant Jategaonkar, Southern Illinois University - Edwardsville

• Linda Lovata, Southern Illinois University Edwardsville

• Xiaoxiao Song, Southern Illinois University - Edwardsville