The farther from the United States, the more clearly companies communicate corporate performance, says a new study from the University of British Columbia’s Sauder School of Business.
To be published in The Accounting Review, the forthcoming study finds that distance from the U.S. predicts how clear a foreign firm’s annual report and earnings press releases will be.
“We discovered that foreign firms work harder to write clearer text and present more numerical data than their U.S. counterparts,” says Sauder Accounting Prof. Russell Lundholm.
The findings contradict perceptions that foreign companies struggle to compete in the U.S. market due to an inability to clearly articulate their operations in English.
“Our results suggest that foreign firms are responding to a perceived reluctance on the part of U.S. investors to own them. They are using simple language that is easy to understand and they are also offering more quantified facts about their performance,” Lundholm adds.
Are their efforts fruitful? The researchers find that foreign firms with the clearest disclosures consistently also achieve greater success with investors in U.S. financial markets.
The researchers also found that the more a country’s accounting standards and investor protection laws differ from the U.S., the more likely a firm from that country is to produce disclosure statements that are clear and easily understood.
For the study, the researchers examined the mandatory Management Discussion and Analysis (MD&A) section of firms’ 10-K financial forms, as well as voluntary earnings press releases from 2000 to 2012. They assessed and scored the use of language and numbers from 3,499 foreign firms listed on the U.S. stock exchange and compared them with U.S.-based competitors.
Professor Russell Lundholm’s study: Restoring the tower of Babel: How Foreign Firms Communicate with U.S. Investors will be published in the July 2014 edition of The Accounting Review and was co-authored by Sauder School of Business Assistant Professors Rafael Rogo and Jenny Li Zhang.