Firms Far from the U.S. Write More Clearly
The further a company is from the United States, the clearer its press releases and financial disclosure statements are, according to a recent paper by Russell Lundholm, Rafael Rogo, and Jenny Li Zhang, all of the Sauder School of Business at the University of British Columbia. Startled by this finding, I called up Professor Lundholm and asked him to explain. Here’s an edited version of our conversation.
Why are far-flung firms seemingly more motivated to make their communications clear?
It’s related to the “home bias” problem. For a variety of reasons, investors have a bias against firms outside their home country, which makes them less willing to hold their stock. The bias increases with the distance between the investor and the firm. For instance, US investors are pretty happy to hold Canadian stock, but less inclined to hold UK stock, and even less inclined to hold Australian stock. Now flip it around and look at it from the point of view of the firm. If you’re in Australia and want to attract U.S. investors, you have to go the extra mile.
We found that the further the firm is from the investor, the more effort the firm puts in. That’s true whether it’s a regulatory statement, and MD&A disclosure, or a press release.