Liability of Foreignness: The Impact of Elimination of the Reconciliation Requirement on International Asset Allocation by U.S. Investors

• In Event: International & Pay Incentives

Abstract

On Dec. 21, 2007, the Securities and Exchange Commission (SEC) eliminated the 20-F requirement to reconcile IFRS financial disclosures to US GAAP for fiscal years ending after November 15, 2007. In this study, we find that this change in SEC regulation is associated with a decrease in the international asset allocation of US institutional investors in EU firms that are cross-listed on US stock exchanges. This result is robust to tests involving EU investors, investor protection, firm-level controls, country controls, financial controls, alternative proxies for cross-border investment, and cost-savings resulting from the elimination of the 20-F reconciliation. Our results indicate that the elimination of the 20-F reconciliation of IFRS to US GAAP resulted in a loss of valuable information for US institutional investors.

Authors

• Michael T Dugan, Georgia Regents University

• Elizabeth Hendrix Turner, University of Texas Rio Grande Valley-Brownsville

• Clark M Wheatley, Florida International University