Consequences of a Two-tiered Regulatory Model: Evidence from Audit Fees and Change in Foreign Private Issuer Status

To investigate the consequences of a two-tiered regulatory approach, we exploit that some foreign-domiciled firms are forced to commence compliance with certain U.S. domestic securities regulation. The U.S. Securities and Exchange Commission permits exemptions from U.S. domestic securities regulation for firms that qualify as Foreign Private Issuers (FPIs). We study the change in audit fees for foreign-domiciled firms that lose or gain FPI status for an arguably exogenous reason while maintaining their cross-listing status. After loss of FPI status, foreign firms are required to comply with U.S. domestic issuers’ reporting requirements, disclosure of insider trading, and compliance with corporate governance requirements of U.S. domestic issuers. We document an increase in audit fees when foreign firms lose their exemptions and must comply with regulatory requirements of U.S. domestic issuers. Further, we find that compliance with the financial statement requirements and disclosure of insider information is associated with an increase in audit fees while fully adopting U.S. corporate governance requirements is associated with a decrease in audit fees.