The Cost of Complying With U.S. GAAP and Cross-Listed Firms’ Valuations

Abstract

The study examines the capital market consequences of foreign firms’ cost of complying with U.S. GAAP. It builds upon a prior research that explores the effect of foreign firms’ U.S. GAAP compliance cost on their cross-listing decisions and listing choices (Lin 2011). Two cost constructs established at the firm level, reconciliation and disclosure, are adopted as proxy for firms’ compliance cost. The valuation analyses confirm the existence of cross-listing and exchange-listing premium. Although individual firms’ reconciliation costs play a little role in valuation, disclosure costs are found to negatively affect the value of cross-listed firms, i.e., firms with less disclosure of accounting information than what U.S. rules require, thus incurring higher disclosure costs, are valued less by the market. This result holds even after the strength of home country disclosure regime is considered. This study extends prior research by investigating the role of firm-specific compliance costs on valuation and provides new evidence on the source of the cross-listing premium.