The impact of securities regulation on earnings properties and valuation: An analysis of European cross-listed firms

The objective of this study was to determine if the securities regulation in a foreign country is related to the earnings quality as well as to the valuation of European firms cross-listed in Europe. The study specifically compared the post-listing earnings quality and the valuation of 94 European firms cross-listed in 11 European stock exchanges during 1991--2001 to those of a controlled sample of non-cross-listed firms. Earnings quality was assessed by relying on four different metrics that represent the use of reporting discretion to manage and smooth earnings. The valuation was assessed by relying on three valuation multiples that link market prices to accounting fundamentals. The regulatory strictness was represented by three indices of securities regulation capturing the public enforcement, disclosure requirements, and private enforcement aspects of the securities regulation in each of the foreign countries.; The results provide weak evidence of a positive association between earnings quality and the foreign securities regulation during the post-listing period for one of the four earnings quality metrics. The empirical tests were unable to support an association between any of the valuation metrics and the strictness of the foreign exchange in the post-listing period. The overall findings suggest that for European firms cross-listed in European exchanges the foreign disclosure and regulatory requirements have little or no effect on the reporting incentives and consequently on the reported earnings of the firms. Furthermore, the European cross-listed firms do not seem to obtain the benefits of higher valuation by cross-listing in a jurisdiction with stricter regulatory requirements.