Earnings Management and Cross Listing: Are Reconciled Earnings Comparable to US Earnings?

We compare the characteristics of US GAAP earnings for US firms with reconciled earnings for non-US firms cross listing on US markets. We find that the reconciled earnings for non-US firms differ systematically from US GAAP earnings for US firms, and are characterized by more evidence of smoothing, a greater tendency to manage earnings towards a target, a lower association with share price and less timely recognition of losses. Further, splitting by country of domicile, firms from countries with relatively weak local investor protection environments show more evidence of earnings management in the reconciled accounts, suggesting that the extra layer of regulation imposed by the SEC does not supplant the effect of the local regulatory environment. While evidence of earnings management is stronger for cross-listed firms that reconcile to US GAAP than for those that prepare local accounts in accordance with US GAAP, both sets show more evidence of earnings management than the matched US firms, suggesting that reconciliation may explain part, but not all, of the results.