Disclosure of Related Party Transactions Under IFRS: Does Cross-Listing Reduce the Legal Origin Disclosure Gap?
Authors: Santos Edilene Santana , Schiozer Rafael F. , Ponte Vera Maria Rodrigues 
Published: August 2022

Synopsis The research problem We investigate whether cross-listing in the United States is associated with a reduction in disclosure deficiencies about related party transactions (RPTs) related to the legal traditions of firms’ countries of origin. Motivation The extant literature shows that there is a disclosure disparity associated to the firms’ legal origin (civil or common law) and the countries’ institutions (regulation, enforcement, and market scrutiny). The literature has not examined whether cross-listing in the United States mitigates (or eliminates) the disclosure gap for firms from civil law countries and countries with worse institutions. We focus on RPTs because the US Securities and Exchange Commission has put particular emphasis on regulation of this type of disclosure. Hypotheses H1: Among domestically listed firms, those from countries with common law tradition present superior level of RPT disclosure than firms from countries with a civil law tradition. H2: Cross-listed firms have a superior level of RPT disclosure compared to domestically listed firms from the same country. H3: Among cross-listed firms, those from countries with common law tradition present a superior level of RPT disclosure than firms from countries with a civil law tradition. Target population Firms from countries that have adopted international financial reporting standards (IFRS). We sample firms from the G20 countries that have adopted IFRS because of their representativeness in the world economy. Adopted methodology Ordinary least squares (OLS) regressions with firm and industry-year fixed effects. Two-stage least squares (instrumental variables) regressions to tackle endogeneity issues. Analyses We manually collected data from the financial reports of 531 firms from the G20 countries that have adopted IFRS to compute indices of compliance with disclosures required by IAS 24. We performed double-difference regressions, comparing firms across their legal origin (common law versus civil law), and cross-listing status (cross-listed in the United States versus domestically listed only). In addition, we studied the institutional channels that drive the disclosure gap between common and civil law firms. Findings For domestically listed firms, we found that firms from the common law tradition have RPT disclosure levels superior to those of firms from the civil law tradition. We found that the level of RPT disclosure is associated with countries’ regulatory quality, rule of law, and control of corruption. However, we did not find any differences in the level of RPT disclosure among firms cross-listed in the United States that can be associated with firms’ legal origin or with other home-country institutional features. Our results suggest that the regulatory enforcement and scrutiny of capital markets imposed by the US market compensate for home-country institutional deficiencies and eliminate differences in firms’ RPT disclosures across legal origins.