Governance Tensions in MNCs’ Financial Reporting Quality

Drawing on institutional theory , corporate governance bonding theory and corporate governance arbitrage theory , this study investigates how the institutional complexity of a multinational corporation (MNC), impacts its accounting quality. We employ a unique sample of MNCs registering affiliates or subsidiaries in offshore financial centers (OFCs). Our analyses show that MNCs cross-listing in the U.S., exhibit lower abnormal accruals, higher accruals quality and more persistent earnings patterns compared to MNCs not-cross-listing in the U.S., thus supporting the corporate governance bonding theory . However, the positive association between cross listing and accounting quality is negatively moderated by a MNC’s choice of OFC subsidiaries or affiliates, thereby suggesting that the internal institutions underlying foreign subsidiaries do relate to the accounting quality of the parent firm. Moreover, a MNC’s OFC choice also negatively moderates the relation between home country governance and accounting quality, thus lending further support to corporate governance arbitrage theory . Our study underscores, to regulators and investors, the co-existence of international mobility of good governance and bad governance for MNCs. Therefore, it is important to enhance monitoring efforts for MNCs with opaque and complex structures, to better detect opportunistic earnings management. offshore attitude index quality to 2, the on OFCindex*Cross_Listing positive significant 1 to 4 0.017, 0.018, 0.010, respectively), but negative and significant across Column 5 10 (coefficients = ‒ 0.114, ‒0.014, ‒0.015). These results suggest that the accounting quality of cross-listed MNCs is reduced as a MNC’s OFC subsidiaries or affiliates exhibit increasing offshore attitude indexes: higher offshore attitude index scores for cross-listed MNCs are associated with higher absolute values of abnormal accruals ( AAC ), higher positive abnormal accruals ( PAAC ), lower accruals quality ( AQ ), lower modified accruals quality ( MAQ ) and lower earnings persistence ( EPERS ). For example, for cross-listed MNCs, if the OFCindex increases by one, absolute value abnormal accruals AAC 0.030 0.017 1 0.013 1). A series of F-tests on the coefficients of the sum of Cross_listing and OFCindex*Cross_listing shows that we significantly reject the hypothesis that the sum of the coefficients equals zero (e.g. F-value equals 16.90 column 3, 2.03 7, and 9.79 column 9, respectively). This evidence is consistent with Hypothesis 2 that the association between cross-listing and accounting quality for MNCs is weaker for MNCs operating in OFCs with high offshore attitude indexes. The findings signify that the corporate governance bonding associated with accounting quality for MNCs are by the corporate , than from with weak Regarding Hypothesis 3, the coefficients on OFCindex*GOVindex (GoodGov) are positive and significant from Column 2 to 4 (coefficients = 0.008, 0.005, 0.007 respectively), but negative and significant across Column 6 ‒ 10 (coefficients = ‒0.070, ‒0.325, ‒0.057, ‒0.002, ‒0.010 respectively). These results suggest that the impact of a MNC’s home country governance on its accounting quality is negatively moderated by offshore attitude indexes. A series of F-tests on the coefficients of the sum of GOVindex (GoodGov) and OFCindex*GOVindex (OFCindex*GoodGov) shows that we significantly reject the hypothesis that the sum of the coefficients equals zero in most regressions. This evidence is consistent with Hypothesis 3 that the association between home country governance and accounting quality for MNCs is weaker for MNCs operating in OFCs with high OFC attributes, thus providing further support to corporate governance arbitrage theory .