Why do Foreign Investors Demand Comparability? Evidence from Unsponsored ADRs

We study the sources of demand for accounting comparability. We hypothesize that U.S. investorsinterested in investing in a foreign firm potentially have two different types of demands forcomparability: (i) comparability to U.S. firms which report under U.S. GAAP (which we label asU.S. comparability) and (ii) comparability to other foreign firms which the investor is interestedin investing in (which we label as regional comparability). The findings in prior literatureexamining U.S. institutional investors are consistent with channel (i). We explore unsponsoredADRs as a setting where we expect channel (ii) to be particularly important. We find that regional(but not U.S.) comparability increases the ex-ante likelihood that a depository bank selects aforeign firm for the creation of unsponsored ADRs, and the ex-post trading in the unsponsoredADR by U.S. investors. Our results imply an implicit tradeoff in the costs and benefits of increasedcomparability and suggest that one has to consider not only if comparability matters in a specificcontext, but also to whom it is aimed for