Abstract
This study investigates the impact of changing the listing level of American Depositary Receipts (ADRs) on the information environment of ADRs. Specifically I examine four main listing levels of ADRs and analyze whether ADRs that change (upgrade/downgrade) their listing level have greater/less analyst coverage, increased/decreased forecast accuracy, and increased/decreased forecast dispersion. In addition, since analyst forecast accuracy differs depending on ADRs’ home country legal institutions, this study also investigates whether analyst forecast accuracy differs depending on ADRs’ home country legal institutions. Specifically, I examine whether the impact on information environment is different for ADRs from countries with different legal systems and disclosure regulations. The SEC has segmented ADRs into four listing levels which have different reporting and regulatory requirements. The SEC and disclosure requirements vary across the four ADR programs. Level II and Level III are exchange listed ADRs, Level I is traded OTC, and Level IV private placement. ADRs that trade in the U.S. market (exchange listed) have more stringent requirements and must adhere to stronger enforcement of accounting standards. Thus, their regulatory and hence quality of information environment is higher. If ADRs that trade on Level II and Level III must follow a more rigorous regulatory requirement, then do analysts and investors in the U.S. markets adjust the pricing of securities to reflect this difference in ADR listing levels? The sample consists of 448 ADR firms from emerging and developed markets around the world that cross-listed on U.S. markets and eventually changed their listing level between 1999 and 2010. I classify the firms based on their listing level which symbolizes the degree of regulatory adherence. To proxy for the information environment, I examine analyst forecast. I analyze the level of significant difference in forecast accuracy, number of analyst forecast, and forecast dispersion when ADRs change their listing level. I present empirical evidence consistent with the hypotheses that an upgrade (downgrade) of ADR listing level is associated with a decrease (increase) in analysts’ forecast error, and number of analyst following. These results indicate that a change in the information environment around U.S. cross-listing is a combination of both the bonding hypothesis effect and the ADR listing level effect.
Highlights
There is increasing evidence in the literature that suggests that a country’s institutional frameworks play an important role for access to capital (e.g., La Porta et al, 1997; 2000)
This suggests that a foreign firms’ information environment should be a function of cross-listing, because the firm is committing to an increased level of disclosure and strict regulations in order to comply with U.S Generally Accepted Accounting Principles (GAAP) and Securities and Exchange Commission’s guidelines (SEC)
This study investigates whether the information environment of American Depository Receipts, hereafter American Depositary Receipts (ADRs), changes when these ADRs reallocate their listing level
Summary
There is increasing evidence in the literature that suggests that a country’s institutional frameworks play an important role for access to capital (e.g., La Porta et al, 1997; 2000). The results of Doidge, Karolyi, and Stulz (2004) support the functional convergence hypothesis, which suggest that cross-listed firms gain by moving from an information environment of poor quality information to one of increased enforcement, and increased disclosure and transparency (Coffee, 2002) This suggests that a foreign firms’ information environment should be a function of cross-listing, because the firm is committing to an increased level of disclosure and strict regulations in order to comply with U.S Generally Accepted Accounting Principles (GAAP) and Securities and Exchange Commission’s guidelines (SEC). Private placements under Rule 144A do not require SEC registration or any additional disclosures Given these regulatory consequences, I hypothesize that, if cross-listings improve the information environment and increase analysts’ accuracy and following, the effects are strongest for level II and III exchange listings. The study aims to understand how the reallocation and change of ADR listing levels impacts analysts’ forecast accuracy and following
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