Institutional monitoring on corporate earnings: Evidence from U.S. Cross-listed Firms

Abstract

Existing research on the effectiveness of institutional monitoring internationally highlights the advantage domestic investors hold due to their geographic proximity to the invested firms. We revisit the topic by examining a unique setting: the U.S. cross-listing market. U.S. institutions as foreign investors may benefit from their market proximity because cross-listed firms are traded in the United States and must adhere to U.S. regulations and listing requirements. Using earnings management as the proxy for monitoring effectiveness, we find that only the ownership of home institutional investors is negatively associated with earnings management, suggesting that the market proximity advantage enjoyed by U.S. institutions is not enough to overcome the disadvantage related to their geographic distance from the invested firms. This finding holds across alternative measures of earnings management and remains robust when addressing endogeneity concerns in the model specification. Thus, our results have important policy implications. © 2023 Elsevier Inc.