When Do Institutional Investors Monitor Better? Evidence from Us Cross-Listed Firms

Existing research on institutional distance falls short in distinguishing between geographic and market proximity in terms of their association with investors’ monitoring influence. We examine the effects of foreign firms’ proximity to the US on their equity performance. We use a unique set of empirical settings by choosing foreign firms with stocks traded in the US. Our findings show that non-US institutional investors domiciled in the same country where the firms are incorporated are negatively associated with firms’ earnings management. However, we do not find a significant relationship between US institutional ownership and earnings management in our sample of cross-listed stocks. Our findings, therefore, indicate an advantage of geographic proximity over stock market proximity. We also provide evidence that the geographic proximity advantage is stronger in firms with higher information opacity, and the choice of earnings management variables does not alter the results