Foreign firms seek greater clarity to overcome US investor bias toward domestic companies
Non-US companies communicate more clearly with US investors than their US counterparts, according to a study to be published in The Accounting Review.
The study of voluntary earnings press releases and the management discussion and analysis (MD&A) sections of 10K financial forms, conducted at the University of British Columbia’s Sauder School of Business, also shows that communications grow clearer the further away the company’s base is from the US.
‘Foreign firms generally write clearer text and present relatively more numerical data than their US counterparts,’ notes the study, written by Russell Lundholm, Jenny Li Zhang and Rafael Rogo. ‘More importantly, we find the readability of the text and use of numbers increases as the foreign firms get geographically further from the US.’
The authors studied the communications of about 3,500 foreign firms from between 2000 and 2012 and compared them with the communications of their competitors based in the US, looking for clarity of text and the detail of numbers released. They attribute the difference to the effort of non-US companies to overcome the ‘home equity bias’ of US investors.
The study also finds that companies generally try harder to achieve clarity of communications when they come from vastly different business environments than their US counterparts.
‘These conclusions remain generally true when the notion of distance is changed to English or non-English, or when distance is measured as differences between the foreign country’s accounting rules and the US rules, or when distance is measured as differences between the foreign countries’ investor protection laws and the US laws,’ the study adds.
The authors also find that non-US companies that achieve greater clarity of communications in press releases and MD&A sections generally have a greater proportion of US stock owners among their shareholder bases than other companies from the same country.
