Advances in Accounting, incorporating Advances in International Accounting 24 (2008) 243–249

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Advances in Accounting, incorporating Advances inInternational Accounting

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International operations and voluntary disclosures by U.S.-basedmultinational corporations

David Gelb 1, Mark P. Holtzman ⁎, David Mest 2

Stillman School of Business, Seton Hall University, 400 South Orange Avenue, South Orange, NJ 07079, United States

⁎ Corresponding author. Tel.: +1 973 761 9133; fax: +1E-mail addresses: gelbdavi@shu.edu (D. Gelb), holtzm

mestdavi@shu.edu (D. Mest).1 Tel.: +1 973 761 9235; fax: +1 973 761 9217.2 Tel.: +1 973 275 2961; fax: +1 973 761 9217.

0882-6110/$ – see front matter © 2008 Elsevier Ltd. Aldoi:10.1016/j.adiac.2008.09.002

a b s t r a c t

a r t i c l e i n f o

Available online xxxxThis study uses analysts' rforeign disclosure environmWe hypothesize that thesereleasing costly informationmay further our understan

atings of firms' disclosures to examine how the differences between U.S. andents affects the voluntary disclosures of U.S.-based multinational corporations.different disclosure environments discourage U.S-based multinationals fromto competitors. Examining how these differences impact U.S. MNCs' reporting

ding of the relationship between voluntary disclosures and differences amongcountries' accounting standards. Furthermore, it may explain how convergence of mandated accountingstandards might impact voluntary disclosures. Controlling for industry membership, firm size, profitability,earnings–return relations, and capital market activity, we find that U.S. firms with more extensive foreignoperations tend to provide fewer voluntary disclosures. These results are most robust for informal andflexible disclosures, such as investor relations, where the findings indicate a negative relation betweenforeign operations and disclosure.

© 2008 Elsevier Ltd. All rights reserved.

1. Introduction

This paper examines how the disparity between U.S. and foreigndisclosure environments affects the voluntary disclosures of U.S.-based multinational corporations (MNCs). Although the U.S. disclo-sure environment mandates more extensive disclosures than in othercountries, all firms still have considerable latitude when determiningthe nature and extent of their voluntary disclosures (Lang &Lundholm,1993). We hypothesize that costs associated with revealinginformation to foreign competitors discourages firms' voluntarydisclosures (cf. Darrough & Stoughton, 1990; Verrecchia, 1983), sothat U.S. MNCs with significant foreign operations will provide lessvoluntary disclosure than other U.S. MNCs.

Prior research about international accounting generally comparesdifferent countries' reporting and disclosures (cf. Khanna, Palpu &Srinivasan, 2004; Lang, Raedy, & Yetman, 2003), and especiallydifferences between U.S. and foreign reporting (cf. Frost & Kinney,1996). Examining how these differences impact the reporting of onlyU.S. MNCs may further our understanding of the tradeoff between thebenefits from voluntary disclosure and the cost of making proprietaryinformation available to foreign competitors. Furthermore, it mayexplain how new initiatives to replace U.S. GAAP with International

973 761 9217.ma@shu.edu (M.P. Holtzman),

l rights reserved.

Financial Reporting Standards (IFRS) might affect the voluntarydisclosure.

To measure the quality of the sample firms' voluntary disclosures,this study uses analysts' ratings from the annual Association forInvestment Management and Research (AIMR) Corporate InformationCommittee Reports,3 which provide analysts' ratings of the level ofinformation provided in each firm's annual reports, quarterly reports,and investor relations programs.4 We regress these analyst ratings ona measure of companies' foreign operations, controlling for otherfactors thought to affect analyst ratings.

We find that the average disclosure scores for firms with thehighest level of foreign operations are significantly below thedisclosure scores for all other firms, even after controlling for otherfirm specific factors that may affect the level of corporate disclosures.However, when disclosure scores are examined across the entire rangeof firms, we find a significant negative association between the level offirms' foreign operations and disclosure scores only for investorrelations. This is not surprising because investor relations are themostflexible disclosures, and presumably, the most sensitive to incentives,as well as disincentives, to disclose. These results are consistent withour hypothesis that firms will select an optimal level of disclosuresthat trade off the benefits and proprietary costs of voluntarydisclosures.

3 The AIMR has since changed its name to the CFA Institute.4 This data has been used by, among others, Lang and Lundholm (1993), Welker

(1996), Botosan (1997), Sengupta (1998), and Gelb (2000).

5 Lower bid-ask spreads, and the resulting increase in liquidity of the firms' equitysecurities, are associated with lower information costs and a lower cost of capital (seeGlosten & Milgrom, 1985 and Amihud & Mendelson, 1986).

6 Evans and Sridhar (2002) model the effect of the interaction between productmarket competition, capital market effects, and shareholder litigation on firms'disclosure policies.

244 D. Gelb et al. / Advances in Accounting, incorporating Advances in International Accounting 24 (2008) 243–249

2. Relationship between foreign operations andcorporate disclosures

2.1. Foreign accounting disclosure practices

Researchers and practitioners widely accept that corporatefinancial disclosures made in the U.S. are substantially more extensivethan those made in most foreign countries. This applies to bothmandatory and voluntary disclosures. Fox (1998) notes that U.S. GAAPrequires significantly more information than United Kingdom GAAP,even though the SEC considers U.K. disclosure requirements to becloser to U.S. requirements than those of other countries (exceptCanada). Similarly, Frost and Pownall (1994) find more voluntary andmandatory disclosures in the U.S. than in the U.K. Other countries,such as Germany and Japan, have significantly more lax disclosurestandards (cf. Fox, 1998;WSJ,1997). Leuz and Verrecchia (2000) note aricher disclosure environment in the U.S. than in other countries. Hope(2003) provides evidence that the U.S. and U.K. reporting environ-ments feature higher enforcement levels thanmost other countries. Ina study comparing the opacity of international companies' earnings,Bhattacharya, Daouk and Welker (2003) rank different countries'opacity levels from “one,” the most transparent, to “five,” the mostopaque. The U.S., Norway, Portugal, Brazil, Belgium, Mexico andCanada were all classified as “one,” while most Western Europeancountries were ranked as “two” or “three.” Japan ranked “five.”

Khanna, Palpu and Srinivasan (2004) discover a positive associa-tion between disclosure scores and U.S. market interaction measures,such as U.S. stock market listing, U.S. investment flows, exports to theU.S., and operations in the U.S. Similarly, Lang, Raedy and Yetman(2003) compare characteristics of foreign companies cross-listing onU.S. exchanges to matched foreign firms not cross-listing on U.S.exchanges. Cross-listed firms have less aggressive earnings manage-ment, report more conservative accounting data, report bad newsearlier, and their earnings are more closely related to stock price.

Leuz and Verrecchia (2000) present evidence that German firmscommitting to either International Accounting Standards (IAS) or U.S.GAAP (both of which mandate significantly more extensive disclo-sures than German GAAP) experience lower bid-ask spreads andhigher trading volume than firms using just German GAAP. Bradshaw,Bushee and Miller (2004) indicate that foreign firms exhibiting higherconformity to U.S. GAAP attract increased U.S institutional ownership.

Bushman, Piotroski and Smith (2004) consider factors thatinfluence different countries' corporate transparency, defined as “theavailability of firm-specific information to those outside publicly-traded firms.” Their definition includes the full universe of financialreporting: GAAP reporting and disclosures, legally-mandated disclo-sures and voluntary disclosures. They break corporate transparencyinto two components: (1) financial transparency and (2) governancetransparency. Financial transparency, they say, is a product of politicaleconomy, such as low state ownership of enterprise, low stateownership of banks and low risk of state expropriation of firms'wealth. Governance transparency is a product of a country's legal orjudicial regime, characterized by common-law legal origin and highjudicial efficiency. Therefore, even if generally accepted accountingprinciples were converged across the globe, differences in countries'political economies and legal/judicial regimes would set into motiondifferent legally-mandated and voluntary disclosures.

2.2. Proprietary costs and voluntary disclosures

Theoretical accounting research offers several motivations forfirms to disclose voluntarily. Verrecchia (1983) and Dye (1985) arguethat firms use accounting disclosures to overcome adverse selection.Firms with favorable performance disclose more in order todistinguish themselves from other firms, increasing demand fortheir securities and lowering their cost of capital. Lang and Lundholm

(1993) present evidence consistent with this hypothesis, using datafrom the AIMR reports employed by our study. In a cross-sectionalanalysis of the disclosure policies of the AIMR firms, they find thatdisclosure ratings are positively associated with earnings performancein a cross-sectional analysis of the disclosure policies of the AIMRfirms, suggesting that firms use voluntary accounting disclosures toconvey favorable information to investors. Bhattacharya, Daouk andWelker (2003) provide evidence that increased earnings opacity islinked to higher cost of capital and lower levels of trading in the stockmarket of a country.

Other studies (cf. Benston, 1986; Diamond, 1985; and Fishman &Hagerty, 1989) argue that more informative disclosures allowinvestors to more effectively and efficiently monitor managers, raisingdemand for a firm's securities and lowering its cost of capital. Usingsample firms' public disclosures and the AIMR data employed in thisstudy, Lang and Lundholm (1993, 2000) find that firms increase theirdisclosures prior to securities offerings. Similarly, Frankel, McNicholsand Wilson (1995) find that firms that frequently access the capitalmarkets are more likely to release earnings forecasts to investors.Providing more extensive disclosures lowers firms' cost of debt andequity capital (Botosan, 1997; Botosan & Plumlee, 2002; Lang &Lundholm, 2000; Sengupta, 1998).5

However, accounting disclosures are costly. In the absence ofdisclosure costs, as each firm with favorable private informationdiscloses, each remaining firm with favorable information (relative toother firms that have not yet disclosed) would disclose, in order todifferentiate itself from the remaining firms that have not yetdisclosed. Ultimately full disclosure by all firms would result (Dye,1985; Verrecchia, 1983). However according to Verrecchia, firms'concerns about revealing proprietary information to existing compe-titors will limit voluntary disclosures. Darrough and Stoughton (1990)formally model the tradeoff between a firm's desire to conveyfavorable information to the financial markets (and thereby lowerits cost of capital) and its need to protect proprietary information frompotential competitors. They predict a negative association betweenthe level of a firm's favorable disclosures and the threat of competitorentry into its product markets.6 Using Canadian firms, Clarkson,Richardson and Kao (1994) present empirical evidence consistentwith Darrough and Stoughton's model. Harris (1998) finds that thelevel of competition in an industry affects the quality of firms'segment reporting. Similarly, Gelb (2000) finds that proprietary costsare an important determinant of the means employed to signalfavorable news to the capital markets (such as information about salesvolume or profitability in specific geographic or product segments).

These studies suggest that a firm's optimal disclosure level willreflect the tradeoff between the reduced cost of capital associatedwithmore extensive disclosures and the need to protect proprietaryinformation. Verrecchia (1983) notes that, because the firm willavoid providing competitors with information that they can exploit,competitors' disclosureswill affect afirm's optimal disclosure level. Forinstance, the AICPA Special Committee on Financial Reporting arguesthat when disclosure requirements are uniform, the insight thatcompetitors gain is at least partially offset by the insights obtained bythe company from its competitors' disclosures (AICPA, 1994).

3. Hypothesis and basic research design

Although all U.S. firms operate within the same political andcapital structure and must follow the same set of generally accepted

Table 1Sample composition

Panel A: Composition of sample by industry

Industry Firms Firm years

Aerospace 9 40Airline 4 9Apparel 11 50Chemical 21 116Construction 14 34Container 9 28Diversified companies 17 51Electrical equipment 15 86Financial services 9 49Food 20 78Health care and services 23 187Machinery 29 141Natural gas 4 24Metals 19 42Petroleum 50 219Paper 13 63Publishing/Media 14 105Retail 15 89Specialty chemicals 24 176Textiles 3 12Total sample 323 1599

Panel B: Composition of Sample by Year N=1599Year No.

1981 1291982 1211983 1171984 1091985 811986 861987 1051988 1381989 1611990 1681991 1461992 1351993 103

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accounting principles, they still have considerable latitude whendetermining the extent of their financial disclosures, especially thevoluntary information that they provide in annual and quarterlyfinancial reports and in the amount of additional disclosures availableto investors and analysts. However, as discussed in Section 2.1, thedisclosure environment in foreign countries is considered to besignificantly more lax than in the U.S. This laxity creates a dilemma forU.S. MNCs as they trade off the benefits from increased disclosuresagainst the proprietary costs of disclosing information to foreigncompetitors. Since all U.S. MNCs derive similar benefits fromdisclosure, the costs associated with providing private informationto foreign competitors should discourage voluntary disclosures by U.S.MNCs with significant foreign operations. This leads to the followingtestable hypothesis (stated in alternate form):

H1a. U.S. firms with more extensive operations in foreign productmarkets are likely to provide less disclosures overall than U.S. firmswith less extensive foreign operations.

4. Empirical procedures

4.1. The data set

This study uses the following data sources:

1. Ratings of firms' accounting disclosures from the annual AIMRReports for the period 1981 through 1993.

2. Sample firms' financial data from the Compustat database.3. Sample firms' stock returns from the CRSP database.4. Data on firms' securities offerings (debt and equity) from the

Securities Data Company's (now part of Thomson FinancialSecurities Data) New Issues database.

The population of non-bank firms with foreign operations (asdefined in Section 4.3) included in the AIMR rankings for the years1981 through 1993 consists of 323 firms and 1599 firm years. Weexclude banks because their accounting differs significantly fromother sectors. We also exclude industries not broken down into thethree categories, and we exclude firms that were not given anumerical ranking in the AIMR Report.

Table 1 breaks down the sample by industry and year, indicatingthat the sample is quite heterogeneous, although the chemical, healthcare, machinery, petroleum, and publishing sectors are heavilyrepresented. Although there are fewer observations for 1985 and1986 than for other years, there does not appear to be a significantclustering of observations by year.

4.2. AIMR ratings

To measure the level of voluntary disclosure, we use dis-closure ratings published in the annual AIMR Reports from 1981through 1993. These reports provide intra-industry rankings offirms' disclosure practices for each year. A committee of analystswho follow each industry rate the firms in that industry, assigningdisclosure rankings based on annual reports and 10-Ks (ANNUAL),quarterly reports and other published materials voluntarilyissued by the firm (QUARTERLY), and the firm's investor relationsprogram (INVESTOR). They also provide an aggregate score(TOTAL), which is a weighted average of the three individualscores. Healy, Hutton and Palepu (1999) provides a copy of thechecklist used by analysts to evaluate a firm's disclosures. Thescores for the ANNUAL and QUARTERLY categories are based on amix of mandatory and voluntary disclosures while the score for theINVESTOR category is based on the nature and extent of manage-ments' responses to analysts' queries and their accessibility toinvestors and analysts.

There is an obvious bias by these committees to ignore smallerfirms in each industry because these tend to be less closely followedby analysts. Furthermore, because this study focuses exclusively onMNCs, the results may not generalize to smaller firms.

Unfortunately, AIMR Reports are no longer published. This studycannot use a more recent alternative, the S&P Transparency andDisclosure Survey, published in 2002 (see Khanna et al., 2004),because this Survey is based on disclosure differences between U.S.firms and foreign firms, instead of disclosure differences between U.S.firms. For example, Bushee (2004) indicates that “for U.S. firms codedby S&P, 98.5% of firms have scores of 7 or 8, indicating that the S&Pmeasure captures mandatory disclosures and a set of voluntarydisclosures that are almost universal among U.S. S&P 500 firms.”Although the AIMR data is over ten years old, the research questionaddressed in this study is still relevant because significant differencesremain in the disclosure environments of different countries,especially with respect to voluntary disclosures.

The empirical methodology of this study takes into account certainimportant characteristics of the AIMR data. First, industry-specificanalyst committees calculate the AIMR ratings but the composition ofthese committees, as well as the rating criteria, may change from yearto year. Hence, one cannot meaningfully rank the firms on theirdisclosures across industries in a given year, or even across yearswithin an industry. Prior researchers who use the AIMR rankingstherefore form percentile rankings of the firms within their AIMRindustry grouping for each year. Second, as Lang and Lundholm note,although a higher score within an industry-year group implies a moreinformative disclosure (as measured by the analyst committee), there

Table 2Descriptive statistics for sample firms stratified by level of foreign operations

Mean 25th

percentileMedian 75th

percentile

Panel A: firms in top quintile of foreign operations (N=233)Total AIMR disclosure score 0.49 0.27 0.48 0.70Annual report 0.49 0.26 0.48 0.73Quarterly reports 0.49 0.29 0.48 0.69Investor relations 0.48 0.26 0.48 0.68Foreign operations 0.63 0.44 0.66 0.80Market capitalization ($ millions) 4752 735 2197 5003

Panel B: firms in second quintile of foreign operations (N=359)Total AIMR disclosure score 0.54 0.30 0.59 0.78Annual report 0.54 0.29 0.56 0.77Quarterly reports 0.54 0.29 0.56 0.77Investor relations 0.54 0.29 0.58 0.79Foreign operations 0.43 0.27 0.42 0.56Market capitalization ($ millions) 5590 787 2176 5994

Panel C: firms in third quintile of foreign operations (N=374)Total AIMR disclosure score 0.56 0.32 0.58 0.79Annual report 0.56 0.34 0.59 0.81Quarterly reports 0.55 0.31 0.56 0.79Investor relations 0.54 0.32 0.58 0.77Foreign operations 0.28 0.12 0.25 0.40Market capitalization ($ millions) 5771 787 2178 6003

Panel D: firms in fourth quintile of foreign operations (N=359)Total AIMR disclosure score 0.52 0.30 0.51 0.77Annual report 0.51 0.27 0.51 0.76Quarterly reports 0.50 0.27 0.51 0.73Investor relations 0.54 0.31 0.56 0.78Foreign operations 0.18 0.06 0.15 0.25Market capitalization ($ millions) 4712 985 2057 4512

Panel E: firms in bottom quintile of foreign operations (N=274)Total AIMR disclosure score 0.51 0.29 0.51 0.76Annual report 0.53 0.35 0.52 0.76Quarterly reports 0.48 0.26 0.44 0.70Investor relations 0.53 0.28 0.57 0.78Foreign operations 0.10 0.03 0.07 0.15Market capitalization ($ millions) 3490 648 1625 3674

246 D. Gelb et al. / Advances in Accounting, incorporating Advances in International Accounting 24 (2008) 243–249

is no theoretical mapping between the disclosure scores and any ofthe variables theorized to affect disclosure. Our empirical tests use thepercentile rankings of the sample firms in their AIMR industry-yeargrouping in order to make the data less sensitive to any bias in theratings. For example, a significant number of foreign-based companiescompeting with domestic companies in steel production may lowerthe average steel firm's disclosure level, when compared to a differentindustry that experiences minimal competition from foreign-basedfirms. However, this study does not compare a steel manufacturer'srating against firms in other industries. Instead, this study ranks eachfirm's disclosure rating within its industry. This methodology allowsus to focus on firm-specific factors (such as the level of internationaloperations) that would affect the disclosure level, while excludingconfounding incentives or disincentives to disclose that are associatedwith the firm's industry and product market.

Following most of the research using the AIMR ratings, we use thelevel of, rather than the change in, the disclosure score.7 Although alevels test is potentially vulnerable to correlated omitted variables,several factors support this approach. First, as discussed above, thisstudy uses the firm's disclosure ranking within its industry groupingfor the year. This process matches the sample firms by industry andyear to control for potential omitted variables. Second, as Healy,Hutton and Palepu point out, disclosure reductions are relatively rare.Most importantly, as Healy et al. find, significant disclosure changesoften accompany major restructurings, so that changes in disclosuremay themselves be correlated with other confounding factors (such asgood or bad news or major corporate events). For these reasons, wefollow most of the previous literature and use the levels approach.

4.3. Measuring foreign operations

To measure multinationality, the level of foreign operations, weuse the foreign tax ratio (foreign income tax expense relative to totalincome tax), following Lee and Kwok (1988). They point out thatgreater data availability for this measure allows for larger samplesthan for alternate measures of multinationality. They find that theSpearman rank correlations between the foreign tax ratio and othermeasures of multinationality, such as the foreign sales, income andasset ratios, are all significant (at significance levels of less than onepercent). Consequently, they propose that the foreign tax ratio, readilyavailable from Compustat for the entire sample period, appears to bethe most appropriate measure for multinationality. To focus onmultinational corporations (MNCs), this study includes only firmsthat paid at least one percent of their income tax to foreign entities.

5. Empirical results

We partition the sample into quintiles based on each firm's level ofinternational operations. Table 2 presents descriptive statistics for theAIMR aggregate, annual reports, quarterly reports, and investorrelations disclosure rankings for the firms in each quintile (of foreignoperations) of their AIMR industry-year group.8 Table 2 indicates that

7 See Lang and Lundholm (1993) for a discussion of possible noise and bias in theAIMR ratings. They conclude that although the AIMR data are based on analysts'perceptions, noise and bias are unlikely to significantly affect the rankings. The levelsapproach has been employed by (among others) Lang and Lundholm (1993), Botosan(1997), Sengupta (1998), and Gelb (2000). Healy, Hutton and Palepu (1999) used thechanges approach.

8 Table 2 indicates that the number of firms in each quintile is not the same. The topand bottom quintiles have the lowest number of firms because, as discussed in Section4.2, the rankings of the level of foreign operations (as well as the other variables usedin this study) are computed within each of the AIMR industry groupings for each year.There are over 200 industry-year groups in the sample. The SAS ranking algorithmplaces any remainders first in the middle quintiles, and then in the bottom quintile.Thus, if an industry has 11 firms, one of the middle quintiles will have three firms.Because of the large number of industry-year groups, the middle quintiles have morefirms than the top and bottom quintiles.

firms with higher levels of foreign operations appear to provide lessextensive disclosures, consistent with the hypothesis of this study. Themean percentile disclosure-rating for the aggregate and all three sub-categories is lowest for firms in the highest quintile of foreignoperations. The mean aggregate disclosure score for firms in the topquintile of foreign operations is 0.49. In contrast, the mean aggregatedisclosure rating for the other quintiles ranges from 0.51 to 0.56.

Table 2 clearly indicates that the negative relation between firmdisclosures and foreign operations is nonlinear, and not evenmonotonic for most of the disclosure categories. However, the meaninvestor relations score decreases monotonically from the bottomquintile to the middle, and then to the top quintile. On the other hand,the mean annual report rating is highest for the middle quintile.

Somewhat surprisingly, Table 2 suggests how countervailingeffects might influence disclosure. The firms in the middle quintilesof foreign operations have higher market capitalization than those inthe top and bottom quintiles. Prior research suggests a positiverelation between disclosure and firm size (cf. King, Pownall, &Waymire, 1990; Lang & Lundholm, 1993) and a positive relationbetween foreign operations and firm size. (Robb, Single and Zarzeski,2001 find a positive relation between firm size and global focus, andthe level of disclosures in annual reports, focusing on companies inthree countries: the U.S., Australia and Canada), However, even if, ashypothesized, the relation between foreign operations and disclosurewere negative, it is unlikely to be monotonic.

As Darrough and Stoughton (1990) argue, the firm faces a tradeoffbetween its desire to lower its cost of capital (by conveying favorableinformation to investors) and its need to protect proprietary

Table 3Descriptive statistics for control variables

Variable Mean 25th percentile Median 75th percentile

Panel A: firms in entire sample (N=1599)MVAL 4950 786 2042 4982RETa 0.013 −0.160 −0.010 0.150PROFIT 0.174 0.128 0.166 0.211STDDEV 0.278 0.188 0.245 0.327CORR 0.021 −0.330 0.022 0.370

Panel B: firms in top quintile of foreign operations (N=233)MVAL 4752 735 2197 5003RET −0.001 −0.190 −0.010 0.160PROFIT 0.160 0.118 0.155 0.194STDDEV 0.280 0.190 0.229 0.330CORR 0.035 −0.305 0.570 0.370

Panel C: firms in bottom quintile of foreign operations (N=274)MVAL 3490 648 1625 3674RET 0.018 −0.150 −0.010 0.150PROFIT 0.181 0.134 0.179 0.232STDDEV 0.291 0.192 0.268 0.347CORR 0.020 −0.323 0.014 0.341

a The annual market-adjusted stock return for the current fiscal year.

10 Following Lang and Lundholm (1993), offerings in the subsequent two years areincluded to control for increased disclosures prior to a new security offering.11 Gelb and Zarowin (2002) present evidence that the stock prices of high-discloserfirms are more informative (as measured by the future earnings response coefficient)

247D. Gelb et al. / Advances in Accounting, incorporating Advances in International Accounting 24 (2008) 243–249

information from potential competitors. It is difficult to predict themarginal costs (and benefits) of disclosure at each level of foreignoperations.

Finally, the different aspects of disclosure vary in their flexibility.Presumably, the more informal and flexible aspects of disclosurecaptured by the investor relations score are more sensitive toincentives or disincentives to disclose. Therefore, we would expectthe negative relation between voluntary disclosure and proprietarycosts to be strongest when proprietary costs are highest, even thoughthe empirical relation that emerges from this tradeoff may notnecessarily be monotonic.

As discussed above, since other firm attributes such as size andperformance may also affect firms' disclosure practices, we estimate amultivariate rank regression equation that controls for the these otherattributes. Following Lang and Lundholm (1993), we include firm size,performance, volatility of past stock returns, the earnings-returncorrelation, and the frequency of securities offerings as controlvariables. The resulting regression equation becomes (firm subscriptsomitted):

DISCt ¼ a0 þ a1FOROPt þ a2MVALt þ a3PROFITt þ a4STDDEVt

þ a5CORRt þ a6OFFERt þ et ð1Þ

where:

DISCt the firm's percentile rank in its AIMR industry-yeardisclosure rating.

FOROPt the firm's percentile rank for foreign operations in its AIMRindustry-year grouping.

MVALt the natural logarithm of the total market capitalization ofthe firm, measured at the beginning of the current fiscalyear.

PROFITt current year operating income before depreciation, amorti-zation and taxes, scaled by total assets and adjusted forindustry effects by subtracting the Compustat 3-digitindustry median.9

STDDEVt the standard deviation of market-adjusted annual returnsover the preceding ten fiscal years.

9 Market-adjusted returns measure a broader range of performance than current-period earnings, but may be endogenous and reflect the firm's disclosure policy. Asdiscussed below in Section 6, we re-estimate the regressions using market-adjustedreturns and obtain results similar to those reported.

CORRt the correlation between annual earnings and annual stockreturns, computed for the six years preceding the currentyear.

OFFERt a dummy variable set to one if the firm publicly-issued debtor equity securities in the current or following two fiscalyears.10

Panels A, B and C of Table 3 present descriptive statistics for thesevariables, for the entire sample, and for the firms in the top andbottom quintiles of foreign operations, respectively. Table 3 indicatesthat firms in the top quintile of foreign operations, relative to the firmsin the bottom quintile, are larger, exhibit somewhat lower earningsand stock return performance, and appear to have a somewhat higherearnings-return correlation.

Table 4 presents the results for separate regressions for theaggregate AIMR disclosure rating as well as all three sub-categories ofdisclosure. Since the AIMR variables and the foreign operationsvariable have been ranked within industry-year groupings, wecalculate all control variables in the same manner. In addition, sincefirms can be included in the sample in multiple years, we estimateseparate regressions for each year (1981 to 1993). We present theaverage estimated coefficients (across the 13 years in the study). P-values, which test whether the average estimated coefficients areequal to zero, are reported in parentheses. P-values are based on aone-tail test for FOROP and two-tail tests for all control variables. Theaverage Adjusted R2 is the mean Adjusted R2 across the 13 annualregressions.

The regression results in Table 4 suggest that the type of disclosureshapes the relation between foreign operations and disclosure. Thequality of the more informal and flexible disclosures, as measured bythe investor relations score, is negatively related to the level of a firm'sforeign operations, after controlling for other firm attributes.Consistent with the hypothesis of this study, the average coefficientof FOROPt is negative and significant (p-valueb0.05) based on a one-tail test. An increase of one percentile rank in foreign operations isassociated with almost a five percentile decline in the investorrelations score, on average.11 In contrast, in the aggregate and annualreports regressions, the coefficient of FOROPt is negative butinsignificant. However, the coefficient in the quarterly reportsregression is positive but insignificant.

The signs of the coefficients of the control variables are generallyconsistent with prior studies. As predicted by prior research,disclosures increase with size; the coefficient of MVALt is positiveand highly significant in all four regressions (p-valueb .04) in all butthe quarterly report regressions. As the positive coefficient of OFFERt

indicates, there is a positive relation between the level of a firm'sdisclosures and its capital market activity. A firm that publicly issuesdebt or equity securities in the current or following two fiscal years islikely to score approximately three percentiles higher in the aggregateAIMR, quarterly report and investor-relations disclosure ratings, onaverage (p-valueb .04). However, the coefficient of PROFITt is negativein all the regressions and significant in the aggregate AIMR andquarterly report regression.12 Although prior research finds a positiverelation between performance and disclosure, this does not appear tobe the case for our sample, comprised solely of U.S. MNCs. The positive

than those of low-discloser firms. However, they find that more extensive investorrelations disclosures are most highly associated with higher future ERCs. Their resultsunderscore the importance of these findings that foreign operations have a negativerelation with the investor relations score.12 These findings suggest that among U.S. MNCs, more profitable firms may havegreater concerns over releasing proprietary information to foreign competitors and aretherefore less likely to provide more informative disclosures.

Table 4Results of rank regression tests of the effect of international operations on firms'disclosure policies using the firms' percentile rankings for foreign operations

Independentvariables

Dependent variables in the rank regressions

Total AIMRscore

Annualreports

Quarterlyreports

Investorrelations

INTERCEPT 0.493 (0.000) 0.490 (0.000) 0.506 (0.000) 0.474 (0.000)FOROP −0.011 (0.359) −0.021 (0.130) 0.036 (0.161) −0.049 (0.049)MVAL 0.093 (0.038) 0.149 (0.000) 0.063 (0.139) 0.088 (0.012)PROFIT −0.069 (0.021) −0.048 (0.152) −0.086 (0.001) −0.020 (0.489)STDDEV 0.030 (0.144) 0.017 (0.455) 0.001 (0.941) 0.052 (0.025)CORR −0.045 (0.100) −0.066 (0.035) −0.041 (0.088) −0.045 (0.048)OFFER 0.034 (0.001) 0.010 (0.198) 0.032 (0.000) 0.038 (0.034)Average adjusted R2 0.015 0.013 0.015 0.018

Table 5Results of rank regression tests of the effect of international operations on firms'disclosure policies using an indicator variable to measure the firms' foreign operations

Independentvariables

Dependent variables in the rank regressions

Total AIMRscore

Annualreports

Quarterlyreports

Investorrelations

INTERCEPT 0.503 (0.000) 0.489 (0.000) 0.542 (0.000) 0.457 (0.000)HFOREIGN −0.062 (0.004) −0.048 (0.003) −0.047 (0.049) −0.059 (0.001)MVAL 0.098 (0.027) 0.152 (0.000) 0.071 (0.104) 0.087 (0.017)PROFIT −0.086 (0.003) −0.055 (0.100) −0.111 (0.000) −0.024 (0.345)STDDEV 0.029 (0.163) 0.015 (0.500) −0.001 (0.967) 0.058 (0.020)CORR −0.046 (0.069) −0.066 (0.033) −0.042 (0.075) −0.044 (0.027)OFFER 0.031 (0.001) 0.010 (0.161) 0.029 (0.001) 0.035 (0.041)Adjusted R2 0.018 0.016 0.013 0.016

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coefficient of STDDEVt in the investor relations regression (p-valueb0.03) suggests that presentations to analysts and other investorrelations programs, which comprise the more informal and voluntaryaspects of firms' disclosures, tend to increase with the volatility ofstock returns. The negative and significant (p-valueb0.10) coefficientof CORRt is consistent with prior studies. Firms' disclosures appear todecrease as the earnings-return correlation increases. Multicollinear-ity does not appear to be affecting the reported results. The varianceinflation factor (VIF) in all of the regression tests is lower than 1.4 forany of the independent variables.

As shown in Table 2, firms with very high levels of foreignoperations (highest quintile) appear to have lower disclosure scoresthan all other firms. In order to focus on these firms, we estimate theregression equations using a dummy variable HFOREIGNt, set to onefor each firm in the top quintile for foreign operations in its AIMRindustry-year group, or otherwise set to zero.13 These results arepresented in Table 5. The average coefficient of HFOREIGNt is negativeand significant for all regressions with a p-valueb0.01 in the aggregateAIMR disclosure regression, as well as the annual report and investorrelations regressions and a p-valueb0.05 in the quarterly regression..On average, being in the top quintile of foreign operations is associatedwith a decrease of 6.2, 4.8, 4.7, and 5.9 percent in the aggregate AIMR,annual report, quarterly report, and investor relations disclosureratings, respectively. These results, consistent with the hypothesis ofthis study, suggest that firms with more extensive foreign operationsprovide less informative disclosures. The other regression coefficientsare similar to those reported in Table 4.

6. Robustness of results

The reported rank regression results are robust to the controlvariables used, the specific research design and the assumption ofindependence of observations. We obtained results similar to thosereported in Tables 4 and 5 when:

• substituting OLS regression for rank regression,• substituting annual market-adjusted stock return as a controlinstead of operating income,

• re-estimating regressions by stratifying the sample on foreignoperation by quartiles instead of quintiles, or

• by using a dummy variable assigned to one if the firm is in the topquintile, negative one if the firm is in the bottom quintile, and zerootherwise.

7. Conclusions

This study uses analysts' ratings of firms' disclosures to examinethe association between foreign operations and the disclosure

13 A slightly different approach, using a dummy variable set to one (negative one) ifthe firm is in the top (bottom) quintile of foreign operations, and zero otherwise, yieldsalmost identical results.

practices of U.S.-based MNCs. We find that U.S. firms with moreextensive foreign operations tend to provide less informativeaccounting disclosures. These results are especially strong for moreinformal and flexible disclosures, such as investor relations, where thefindings indicate a negative relation between foreign operations anddisclosure. In contrast, for more traditional GAAP-based disclosures,these findings are significant only for firms in the top quintile offoreign operations.

Because of our sample of AIMR firms, it is possible that theseresults do not generalize to smaller firms. Although this sample runsfrom 1981 to 1993, it can be argued that subsequent convergence ofcertain GAAP standards has focused primarily on European Unionmembers, and their convergence with International AccountingStandards. It has not significantly eliminated differences in thedisparity between U.S. and foreign voluntary disclosure environ-ments, nor has it eliminated differences between the underlyinglegal and economic environments in the U.S. and foreign countries.We believe the results of this study provide interesting informationas U.S. standard-setters consider convergence with IFRS.

If the costs of making proprietary information available tocompetitors discourage MNCs from issuing voluntary disclosures,then it follows that U.S. MNCs might prefer to avoid any disclosuresnotmatched by their foreign competitors. Therefore, the results of thisstudy may indicate that rigorous disclosure standards in the U.S.(relative to those of other countries) place U.S. MNCs at a perceiveddisadvantage against foreign-based competitors.

Interestingly, the results also suggest that current efforts to convergeGAAPwill not result in the “level playing field,” one that would improveand equalize overall disclosures by U.S. MNCs and foreign entities. AsGAAP converges, different countries' political economies and legalenvironments are likely to continue to effect differences in companies'legally-mandated and voluntary disclosures.

Acknowledgement

We are indebted to Jeffrey Callen, Dan Tinkelman, and participantsat the 2003 Mid-Atlantic AAA Regional Conference for helpfulcomments. The authors wish to thank the Stillman School of Businessfor financial support.

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