The impact of US GAAP reconciliation requirements on choice of foreign stock exchange for firms from common law and code law countries

Abstract

The aim of this study is to investigate whether the impact of the SEC's Form 20-F reconciliation requirements on non-US firms' choices of foreign stock exchanges was different for firms from common law and code law countries, that is, for firms with different accounting, legal and financial systems. We examined attributes of 253 cross-listed firms from the UK, Australia, France, Germany and Japan in the 1999 financial year. We found the ability to raise further capital in the home market was relevant for firms from both groups. In addition, firms from code law countries listing on the NYSE or NASDAQ were more likely to have greater foreign revenue and lower leverage. We expected differences in accounting requirements to be a greater barrier to listing on the NYSE or NASDAQ for code law firms. However, we found firms from code law countries were more likely to select a Form 20-F exchange than firms from common law countries, providing support for suggestions that a NYSE/NASDAQ cross-listing has a bonding role for code law firms.

Acknowledgements

The authors wish to thank survey participants for the data they provided and Matthew Sargeant and Rajan Aggarwal for assistance in data collection. They also acknowledge the helpful comments of the editor (Kari Lukka), two anonymous referees, Philip Brown, David Woodliff and seminar participants at the EAA 2003 Seville Conference, the University of Technology Sydney and the University of Western Australia.

Notes

¹ The Securities and Exchange Commission, the regulator of the US stock exchanges; US generally accepted accounting principles.

² International Organization of Securities Commissions.

³ International accounting standards and international financial reporting standards promulgated by the International Accounting Standards Board (IASB) and its predecessor organisation, the International Accounting Standards Committee (IASC).

⁴ Financial Accounting Standards Board, the US accounting standard setter.

⁵ Removal of the reconciliation requirement will depend on continuing convergence of IFRS and US GAAP, a strong, independent IASB that issues high quality standards, commitment to quality application of IFRS and development of an effective global financial reporting infrastructure (IASB, 2004).

⁶ New York Stock Exchange; National Association of Securities Dealers Automated Quotations System.

⁷ The year 1999 was during the period when the International Accounting Standards Committee (IASC) was working on a set of core standards for possible endorsement by IOSCO for use in all cross-border listings (IASC, 2000).

⁸ The 1934 Exchange Act requires quarterly reporting and filing of Form 20-F in accordance with US GAAP. Level I and 144A are exempt from these requirements (Bank of New York, 2001).

⁹ Firms that list in the USA and prepare a Form 20-F may raise additional equity capital (for example, by issuing Level III ADRs) or trade shares but not raise new capital (when they trade Level II ADRs). Non-20-F firms may raise capital by listing on a non-US foreign exchange (for example, in London, Paris, Frankfurt, Tokyo or Australia) or they may trade shares without raising capital (on the non-US foreign exchanges noted or through Level I ADRs, traded in the US OTC market).

¹⁰ The literature on long-run performance following seasoned equity offerings (SEOs) has generally supported this view, finding negative abnormal long-run returns after SEOs (Loughran and Ritter, 1995; Spiess and Affleck-Graves, 1995). Fama (1998), Brav et al. (2000) and Eckbo et al. (2000) have questioned the methodology underpinning this view. Recently, Eberhart and Siddique (2002) addressed such methodological concerns and provided evidence to support the earlier view. They also showed that SEOs benefit bondholders at equity holders' expense.

¹¹ Of course, firms from common law countries could choose a non-20-F exchange such as the London Stock Exchange rather than a Form 20-F US exchange.

¹² The list from AMEX indicated that there were no cross-listed firms that were not also listed on the NYSE or NASDAQ. The Frankfurt Stock Exchange did not have a list of cross-listed companies.

¹³ These firms were exempt from Form 20-F requirements because they listed on NASDAQ before October 1983.

¹⁴ Return on assets is negative and significant (p < 0.10) suggesting non-20-F firms are more profitable. When alternative specifications of the variables are used in robustness tests (not reported in detail) they are not significant. Alternative variables include size (log of total assets), profitability (return on equity), growth (Tobin's q), leverage (debt/debt plus book value of equity) and internationality (proportion of foreign assets).

¹⁵ The result is confirmed when alternative specifications of the variables are used in robustness tests (not reported in detail). Alternative variables include internationality (foreign assets, significant and positive p < 0.05) and size (total assets, significant and negative p < 0.01).