Local Institutions, Audit Quality, and Corporate Scandals of US-Listed Foreign Firms

Lei Chen ()
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Lei Chen: Southwestern University of Finance and Economics

Journal of Business Ethics, 2016, vol. 133, issue 2, No 11, 373 pages

Abstract: Abstract Using data on shareholder-initiated class action lawsuits in the US, I investigate the corporate scandals of US-listed foreign firms. The shareholders of scandal firms suffer considerable loss in both the short term and the long term. I document that firms domiciled in countries with weak institutions are more likely to be embroiled in corporate scandals, but such a relation can be moderated by the presence of Big 4 auditors. Investors automatically adjust for undiscovered misconduct when valuing the stocks of non-scandal firms (i.e., the spillover effect). Investors rely on the audit quality to form their expectations about the severity of undiscovered misconduct, and thus impose less negative spillovers on firms with Big 4 auditors, especially when the firms are from countries with weak institutions. Taken together, my results suggest that listing on US exchanges does not fully compensate for weak local institutions; voluntarily bonding to a more stringent audit process has an incremental effect on protecting shareholder interests and enhances the confidence of investors in firms’ financial integrity.

Keywords: Corporate scandals; US-listed foreign firms; The bonding theory; Class action lawsuits; Spillover effect; Big 4 auditors (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s10551-014-2370-x

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