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E-MailAudra Boone is a senior financial economist at the U.S. Securities and Exchange Commission in the Division of Economic and Risk Analysis. This post is based on an article authored by Dr. Boone, Kathryn Schumann, Assistant Professor of Finance at James Madison University, and Joshua White, Assistant Professor of Finance at the University of Georgia. The views expressed in the post are those of Dr. Boone and do not necessarily reflect those of the Securities and Exchange Commission, the Commissioners, or the Staff.
The U.S. Securities and Exchange Commission (SEC) established the ongoing reporting regime for U.S.-listed foreign firms when most of these filers were large, well-known companies that had a primary trading venue on a major foreign exchange. Accordingly, prior work argues that the SEC exempted these firms from producing quarterly and event-driven filings beyond those mandated by their home country or exchange. [1] Specifically, the SEC stipulates that foreign firms must supply ongoing disclosures on a Form 6-K only when they publicly release information outside the U.S. (e.g., updates on earnings, acquisitions, raising capital, or payout structure). [2]
The composition of foreign firms listing in the U.S. has evolved over the years towards one with more firms stemming from less transparent countries and those lacking a primary listing outside the U.S. Notably, foreign firms with these characteristics likely have fewer ongoing reporting mandates, and thus considerable discretion regarding the information they supply to the SEC. Yet, there is little evidence on how the deference to home country requirements affects ongoing reporting and information flows in more recent periods. Studying these issues helps understand the relative trade-offs of creating a competitive landscape for attracting foreign firm listings and ensuring meaningful information flows to investors, thus balancing capital formation and investor protection.
In our paper, The Information Content and Investor Reaction to SEC Disclosures by Foreign Firms, that was recently made publicly available on SSRN, we examine how home country characteristics condition the supply and demand of foreign firm information in the U.S. To conduct our analyses, we develop a sample of 1,011 U.S.-listed foreign firms stemming from 53 countries that file a total of 92,186 6-Ks over the period 2003 to 2013. We proxy for the home country information environment using four measures: transparency and disclosure indexes from the World Bank, economic development, and financial reporting requirements. We also hand collect information on whether the foreign firm lists on an exchange outside the U.S to proxy for additional ongoing disclosures associated with foreign exchange reporting requirements. We find that 35% of foreign firms furnishing 6-Ks in 2013 are only listed in the U.S., which is a dramatic increase from just 15% in 2003.
We first investigate how home country characteristics affect the propensity for firms to provide ongoing disclosures via 6-Ks. Results indicate that firms incorporated in countries with weaker information environments produce significantly fewer ongoing disclosures. For example, foreign firms from countries with a low transparency rating supply almost 20% fewer ongoing disclosures per year than those from countries with a high transparency rating. Moreover, we find that firms from high transparency countries increase their disclosure frequency over time whereas those from low transparency countries remain relatively constant. As a point of further comparison, benchmarking against comparable domestic firms confirms that the propensity to provide ongoing disclosures is much lower when a firm is from a country with a weaker information environment, but there are no statistical differences in disclosure frequency when the foreign firm stems from a stronger home country information environment.
We next investigate whether or not investors access filings and trade based on the information content supplied in 6-Ks. If 6-Ks furnish new, value-relevant information, we expect to observe significant demand and market reactions. In contrast, it is possible that investors have already gleaned the relevant content from news reports, the firm’s foreign filings, or analyst reports, and thus 6-Ks might not elicit significant investor interest or trading.
Using Internet search traffic on the SEC’s EDGAR website as a proxy for information demand, we find that individual investors frequently access information on 6-Ks, and their targeted information requests are greater when the firm stems from a weaker information environment. In contrast, 6-K search requests deemed to be from automated web programs (i.e., algorithms that download numerous filings at once) are mostly a function of firm size rather than the information environment. Analysis of EDGAR search traffic for a foreign firm’s prior filings shows that the average new 6-K filing triggers a 20% increase in search traffic for its most recent annual report. These findings suggest that 6-Ks provide information that investors demand and assist them in updating prior information provided by foreign firms.
We measure the market response to 6-K disclosures using abnormal trading volume and absolute returns. Regressions reveal that the volume and price responses are greater for firms from countries with weaker information environments, even when holding constant other firm factors that are typically related to the market response. From these results we infer that the market views 6-Ks as an important disclosure medium since those by foreign firms from relatively poor information environments provide the market with the largest incremental value-relevant information.
As a final test, we examine the relationship between a foreign firm’s ongoing and annual disclosures. We focus on the correlation between 6-K filing frequency and the market response around the annual earnings announcement. The empirical results show that the firms providing more frequent 6‑K disclosures experience a smaller market response when reporting their annual financial performance. Therefore, firms supplying greater interim information via 6-Ks have less residual uncertainty that must be reconciled at the time of the earnings release.
Overall, our paper highlights how home country characteristics condition the supply, demand, and reaction to 6-Ks. We find that a growing and large proportion of foreign firms in our sample have no public trading venue outside of the U.S., which underscores the importance of these disclosures. It is important to note that while the evidence indicates that 6-Ks reduce information asymmetries, the tests do not allow us to assert that greater mandated disclosures for foreign firms would yield more informative content for investors. Nevertheless, our work highlights the importance of 6-Ks as a source of value-relevant information for U.S. investors.
The full paper is available for download here.
[1] Davidoff, S. 2010. Rhetoric and reality: A historical perspective on the regulation of foreign private issuers. University of Cincinnati Law Review 79:619–649.
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[2] Specifically, foreign firms deemed to be foreign private issuers must furnish a report on a 6-K with information if the firm (i) makes or is required to make public pursuant to the law of the jurisdiction of its domicile or in which it is incorporated or organized, or (ii) files or is required to file with a stock exchange on which its securities are traded and which was made public by that exchange, or (iii) distributes or is required to distribute to its security holders. Depending on the type of information, this form must include either a full version or summary in English.
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