Cross Listing, Bonding and Firms' Reporting Incentives : A Discussion of Lang, Raedy and Wilson (Jae 2006)

Lang, Raedy and Wilson (2006) examine the properties of U.S. GAAP accounting numbers provided by cross-listed firms and compare them to those of U.S. firms. Using a wide range of properties related to earnings management, timely loss recognition, and value relevance, LRW show that accounting data are not comparable across cross listed and U.S. firms, despite the fact that all firms use the same accounting standards. In this paper, I discuss how these findings advance the literature and what they imply for the effectiveness of cross listing as a bonding mechanism. My discussion highlights that the documented reporting differences cannot be solely attributed to weak U.S. legal and SEC enforcement. I emphasize that accounting standards provide discretion and that cross-listed firms are likely to have different incentives than U.S. firms to use this discretion. To illustrate, I document that cross listed and U.S. firms differ with respect to their ownership concentration and that these differences are associated with differences in earnings management. Consistent with the authors' findings, I also provide evidence that home-country institutions continue to influence cross-listed firms' reporting behavior