Analyzing Earnings Management for Cross-listed Firms and Interaction between Two Futures Exchanges

The first essay examines the impact of investor protection, market monitoring, and liquidity on the firm-level and country-level earnings management using a sample of 432 firms from 34 countries cross-listed in the U.S. The major findings are as follows: First, cross-listed firms from countries with strong legal system, strong outside investor rights, more institutional investors, and higher financial transparency are less likely to engage in earnings management. In addition, in countries with strong investor protection or market monitoring, the level of earnings management is more pronounced for illiquid firms as compared to liquid firms. Second, cross-listed firms following IFRS have lower propensity in earnings management than those following the U.S. GAAP. Third, the degree of earnings management for cross-listed firms is greater in the home country than in the U.S. market. Fourth, cross-listed firms have higher earnings management in the pre-listing period than in the post-listing period. Fifth, foreign firms listed in U.S. major markets have lower propensity to engage in earnings management than those listed in the OTC market. The findings remain robust with the inclusion of industry fixed effects and GMM estimation. All findings are largely consistent with my hypotheses that better investor protection, greater market monitoring, and higher liquidity reduce the extent of earnings management. The second essay examines the relative contribution to price discovery process of EURO/USD currency futures traded on two major exchanges: Chicago Mercantile Exchange (CME) and Intercontinental Exchange (ICE), using the intraday data in 2010. The relative contribution to price discovery is estimated using the information share approach of Hasbrouck (1995). Empirical findings indicate that CME accounts for approximately 87% of price discovery in the EURO/USD market and its contribution is substantially larger in the morning than that in the afternoon. This study also examines the effect of trading characteristics, including volume, quoted bid-ask spread, and price volatility, on information share. CME’s price discovery leadership is attributed to its high trading activity, low transaction costs, and lower volatility. The results support the liquidity hypothesis that a market with greater liquidity contributes more to price discovery