Business Faculty Publications


Auditors’ Assessment of the Capital Market Liability of Foreignness

Document Type


Publication Date


Publication Title

Review of Accounting and Finance


audit, Liability of Foreignness, ADR, information asymmetry, international accounting, audit fees, accounting


Accounting | Business | Corporate Finance


components of the CMLOF are institutional distance (civil versus common law system and enforcement), information asymmetry (disclosures and mandatory IFRS adoption), unfamiliarity (exports, English language, and geographical distance), and cultural difference (Hofstede (1980) dimensions of culture). These variables are examined in a regression model that explains audit fees to determine the auditor perception of risk associated with the CMLOF. Findings: Examining the factors that mitigate perceived agency costs, this investigation determines that auditors price risk according to each component of the liability of foreignness. Audit fees are higher for shareholders of firms headquartered in countries exhibiting greater institutional distance, unfamiliarity, and cultural distance. Audit fees are higher for firms when their home country requires additional disclosures or the adoption of IFRS to reduce information asymmetry. Practical Implications: CMLOF is costly for capital market participants and has implications for auditors, shareholders of foreign firms, and managers considering listing in the U.S. Auditors 2 and investors should carefully assess this risk for pricing and valuation, and managers should take action, to the extent possible, to reduce the firm-specific level of unfamiliarity and increase transparency.

This document is currently not available here.