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Essays on foreign firms listed in the United States Zhang, Lei (Ray)

Abstract

This thesis is a collection of two essays on US listed foreign firms, which represent a significant proportion of firms trading in US markets. These firms, like listed US firms, are subject to the litigation system in the US and are subject to monitoring by the US regulators, such as the Securities Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB). Because of US regulators’ tripartite mission to protect investors, maintain efficient markets, and facilitate capital formation, it is not obvious how the US regulators monitoring of foreign firms compares with US firms. In addition, it is not trivial how the foreign auditors react to the legal environment in the US compared with the US auditors. The first chapter of this thesis explores whether SEC’s monitoring activities differ for US versus foreign firms and whether monitoring varies based on attributes of the home country’s institutions. We find that, on average, SEC monitors foreign firms with less frequency and SEC provides increased monitoring for those foreign firms where SEC monitoring is most valuable to US. In addition, SEC reduces monitoring when it can rely on public and private enforcement in the foreign firm’s home country. Our study highlights the heterogeneity in SEC monitoring of foreign firms. The second chapter examines the effects of cross-listings in the United States on the pricing and quality of foreign auditors. The Bonding hypothesis suggests that foreign auditors can leapfrog their home countries’ weak legal institutions and provide quality similar to US auditors for their cross-listed clients because they abide by U.S. legal requirements. However, recent evidence, such as the first chapter of these essays, suggests that the U.S. legal enforcement is weaker for foreign entities because U.S. regulators focus their resources on domestic firms. This study finds that despite the nuances of the functional convergence hypothesis, foreign auditors are found to provide quality at least as good as the U.S. non-Big4 auditors. The findings of this paper can mitigate some recent concerns about the quality of foreign auditors practicing in the U.S. cross-listing market.

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