Lubberink, Martien and Huijgen, C (2000) Liability exposure effects on earnings conservatism: the case of cross-listed firms. Working Paper. The Department of Accounting and Finance, Lancaster University.
In this study we investigate earnings conservatism of cross-listed and domestically listed companies. We expect that conservatism will be more pronounced for cross-listed companies because they face the threat of litigation from a wider audience of shareholders than companies with a domestic listing only. Specifically, we compare conservatism of Dutch firms with a listing in the US to conservatism of Dutch firms without a US listing. The motivation to investigate this specific setting is that the liability exposure of managers and auditors in the US market is considered as far more burdensome than in the Dutch market. Another interesting issue is that firms with a cross-listing in the US have to comply with different reporting standards; in our case Dutch GAAP and US GAAP. Therefore we not only compare conservatism of Dutch GAAP earnings of cross-listed companies versus that of domestically listed companies, but also conservatism of US GAAP earnings versus their Dutch GAAP counterparts. It is difficult to predict the outcomes of the latter question. One the one hand, if company managers view US GAAP earnings as especially important for US shareholders and Dutch GAAP earnings as especially relevant for Dutch shareholders they may try to apply conservatism accordingly. On the other hand, it can be argued that cross-listed companies cater to their US investors by presenting more conservative Dutch GAAP earnings numbers, so that it is not necessary to make US GAAP earnings incrementally conservative. Empirical findings for the period from 1993 to 2000 show that Dutch GAAP earnings of cross-listed firms are significantly more conservative than earnings reported by firms with a domestic listing only. Maybe surprizing is the outcome that US GAAP earnings numbers reported by cross-listed companies are slightly less conservative than their Dutch GAAP counterparts, although the difference is not significant. This may imply that company managers view the Dutch GAAP earnings information as especially relevant in communica
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