The Information Value of Earnings Announcements of US-Listed Foreign Firms

Abstract

Foreign listers account for a growing and substantial share of the U.S. capital market, yet disclosures of foreign listers are generally under-studied. Despite the disclosures of foreign listers appearing in similar forms to those of domestic listers, the regulations and filing requirements of foreign listers differ in substantial ways. Motivated by the economic significance of foreign listers and their distinct reporting regulations, this paper examines the impact of foreign listers’ earnings announcements (EAs) on bid-ask spreads surrounding the EA date and investigates whether and how it is different from the impact of domestic listers’ EAs. Firstly, I find that compared to their domestic counterparts, foreign listers exhibit a greater level of bid-ask spreads in the pre-EA period, a smaller spread increase at announcement, and a greater post-announcement spread decrease. These results together indicate that the EAs of foreign listers disclose relatively more new information to unsophisticated investors than those of domestic listers. In addition, the differences in bid-ask spread patterns between foreign listers and domestic listers are generally more pronounced for foreign listers from weaker regulatory regimes, for those with lower levels of analyst following and lower institutional ownership, and for those updating earnings on a less timely or less frequent basis. These results are all consistent with the notion that the documented differences in bid-ask spread patterns between foreign listers and domestic listers surrounding the EA date are likely to be associated with foreign listers’ weaker information environment. Next, I explore how the textual features of foreign listers’ EAs affect the impact of EAs on bid-ask spreads. I find that foreign listers’ EAs with more words, more numbers, and more forward-looking information are generally associated with a higher bid-ask spread spike at announcement and a smaller bid-ask spread decrease over the ten days after the EA date, suggesting that unsophisticated investors need a longer time to digest additional new information. Additional analyses further support that the disadvantage of unsophisticated investors in processing additional new information is likely to be driven by those EAs with extensive information (i.e., EAs at the top quintile counts of words, numbers or forward-looking sentences), and this disadvantage gradually disappears in a longer window (i.e., within 20 days after the EA date). My study contributes to the foreign disclosure literature by emphasizing the greater information value of foreign listers’ EAs than that of domestic listers’ EAs in reducing bid-ask spreads. It also contributes to policymakers by presenting the potential benefits of implementing more stringent reporting requirements for foreign listers to reduce overall bid-ask spreads, particularly for those from weaker regulatory regimes, those with fewer information intermediaries, and those with less frequent and timely earnings updates.