Spillovers of risk disclosures by cross-listed firms on NYSE to homemarkets: The role of audit quality and home market investor protection regimes

In this study the industrial organization theory of knowledge spillovers in multinational corporations is applied to audit knowledge transfers in global audit firm networks. For firms cross-listed on the NYSE we examine (1) how the characteristics of the global audit firm network affect early disclosures made in their home market and (2) whether the impact of the global audit network on the disclosures made in the home market depends on the investor protection regime in the home-country. Using the annual report of 311 firm-year observations over the period 2007-2008, we find that cross-listed firms audited by a home-country auditor who belong to a global audit firm network where the U.S. auditor is industry specialist, are more likely to have spillovers of business and industry risk disclosures to the annual report in the home market. Furthermore, we find that the knowledge flows are weaker to audit firms with stronger knowledge bases, which shows that home-country auditor industry specialist earns less in terms of knowledge transfers from the global audit network. Finally, results show that knowledge spillover effects are smaller to low than high quality investor protection regimes except if the home-country auditor is also an industry specialist. This shows that in weak investor protection regimes, the U.S. and the home-country specialist are complements in improving early and voluntary business and industry risk disclosures in the annual report.status: publishe