Abstract This study investigates the asymmetric market responses to earnings announcements by comparing European-listed firms with their sponsored American Depository Receipts (ADRs). Leveraging a novel paired-sample design, we control for firm fundamentals to isolate the effect of institutional and regulatory environments on investor behavior. Our analysis focuses on earnings surprise and earnings management and their impact on cumulative market-adjusted returns (CMAR) over the earnings announcement window. ADRs elicit significantly stronger positive reactions to earnings surprises and more severe penalizations for earnings management relative to their European counterparts. Our results are robust to accounting standard alignment (IFRS and U.S. GAAP). The study reveals that differences in market reaction stem primarily from investor composition, legal enforcement and disclosure environment. In addition, it provides empirical support for both the Bonding Hypothesis and Investor Recognition Hypothesis. It highlights the role of U.S. institutional frameworks in amplifying investor sensitivity to earnings quality. Our results carry implications for cross-listed firms, global investors, and policymakers aiming to harmonize financial reporting and governance standards across capital markets.
BOTCHWEY et al. (Mon,) studied this question.