Lost in Translation: Why Distance Undermines Institutional Monitoring on Earnings Quality

ABSTRACT This study examines how institutional distance shapes the effectiveness of institutional investors' monitoring of corporate earnings quality. Using a sample of 3125 firm‐year observations for non‐US firms cross‐listed on US exchanges from 2001 to 2017, we distinguish between two forms of proximity: geographic proximity, which captures the informational advantages of home‐country institutions (IO_Home), and market proximity, which reflects US institutions' familiarity with the listing market (IO_US). We employ panel regressions with firm and year fixed effects and double‐clustered standard errors and find a significant and positive association between IO_Home and all three earnings attributes: persistence, value relevance and timeliness. In contrast, IO_US shows no significant monitoring effect. These findings support the geographic proximity advantage over the market proximity advantage. Moreover, geographic advantage exerts a stronger effect in firms with greater information opacity (proxied by research and development intensity) and remains robust in instrumental variable estimation that addresses selection endogeneity. Our results highlight the critical role of geographic closeness, rather than market familiarity, in determining institutional monitoring effectiveness on earnings quality.