Growth opportunities and earnings management by cross-listed and U.S. firms

Using a sample of cross-listed and U.S. firms, we examine whether firms’ growth opportunities are associated with discretionary accruals and/or real activities management. While existing papers have reported mixed evidence for U.S. firms, we are the first to explicitly compare earnings management of cross-listed growth versus cross-listed value firms. Using the Tobin’s Q ratio as our proxy for growth opportunities, we compare earnings management by: (i) cross-listed growth versus cross-listed value firms, (ii) cross-listed growth versus U.S. growth firms, and (iii) cross-listed value versus U.S. value firms. We find significantly more management of discretionary accruals and real activities for cross-listed growth firms than the cross-listed value firms. In addition, the difference in earnings management between cross-listed and U.S. firms is concentrated in the growth firms, as there are no significant differences in earnings management between the cross-listed and U.S. value firms. Our findings have implications for analysts and investors interested in cross-listed firms. A better understanding of earnings management by firms with high or low growth opportunities can enable them to better assess the quality of earnings of these companies.