The joint role of the bonding mechanisms and the reduction in market segmentation in valuation of firms cross-listed as Global Depositary Receipts (GDRs)

Abstract

Using a sample of GDRs cross-listed in London, we revisit the debate regarding the validity of the market segmentation and the bonding hypotheses for a cross-listing phenomenon. Unlike prior studies that relied on emerging/developed market partitioning of countries, we use equity trading costs to determine the degree of market segmentation, which is a more direct and less noisy measure of this construct. Additionally, there is little correlation between this metric and the level of home-country investor protection for examined GDRs, therefore providing stronger settings to distinguish between the segmentation and bonding explanations. We find that legal bonding mechanisms and reduction in segmentation have a positive impact on changes in firm value upon cross-listing, when examined as standalone frameworks. Next, we report that these two frameworks have a joint, complementary impact on changes in firm value upon cross-listing, based on the country-level Rule of Law metric. Conversely, we find that the positive association between the capital raising activity and changes in firm value upon cross-listing is less significant for countries from the most segmented markets. Finally, we find that analysts following [accuracy] is an effective reputational bonding mechanism for firms from the most [least] segmented markets primarily after cross-listing. This study sheds light on the complexity of the interplay between major valuation theories and different types of bonding mechanisms in the case of cross-listing.