The Price of Being Foreign: Stock Market Penalties Associated with Accounting Irregularities for U.S.-listed Foreign Firms

We examine the stock market consequences of disclosing accounting irregularities for U.S.-listed foreign firms. After controlling for the severity of the irregularity and other firm characteristics, we find that foreign firms experience significantly more negative short-window stock market reactions following irregularity announcements than do U.S. firms. Moreover, for a subsample of 64 irregularities of foreign firms that are listed on both a U.S. and home country stock exchange, we find evidence that restating firms’ U.S. investors react more negatively to the same irregularity than their home-country investors. This differential market reaction appears related to firm-specific information risks that are greater for foreign firms than U.S. firms. We also find a geographic contagion effect as non-restating firms from the same country experience significant stock price declines following irregularity announcements. Within a country-year, this contagion effect is concentrated among firms with lower accruals quality, suggesting that foreign firms’ irregularities cause U.S. investors to alter their assessment of the earnings quality of non-restating firms from the same country. Collectively, consistent with the reputational bonding hypothesis in prior literature, our results suggest that accounting irregularities cause U.S. investors to reassess the information risk associated with foreign firms.