Foreign Institutional Ownership and the Global Convergence of Financial Reporting Practices
VIVIAN W. FANG, MARK MAFFETT, BOHUI ZHANG
Journal of Accounting Research · 2015 · Volume 53 · Issue 3
Abstract
This paper investigates whether foreign institutional investors affect the global convergence of financial reporting practices. Using several measures of reporting convergence, we show that U.S. institutional ownership is positively associated with subsequent changes in emerging market firms’ accounting comparability to their U.S. industry peers. We identify this association using an instrumental variable approach that exploits exogenous variation in U.S. institutional investment generated by the JGTRRA Act of 2003. Further, we provide evidence of a specific mechanism—the switch to a Big Four audit firm—through which U.S. institutional investors affect reporting convergence. Finally, we show that, for emerging market firms, an increase in comparability to U.S. firms is associated with an improvement in the properties of foreign analysts’ forecasts.
Keywords
G32, G34, G38, M41, M42, M48, institutional investors, mutual funds, corporate governance, U.S. GAAP, financial statement comparability, auditor selection, analyst forecasts
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