Cross-listed Companies Research Articles

Free Cash Flow, Growth Opportunities, And Dividends: Does Cross-Listing Of Shares Matter?

<p>Corporate dividend policy should strike a balance between paying cash to shareholders when there are excess resources and retaining sufficient resources in the company to fund worthwhile projects. Using excess resources to pay dividends can help to avoid overinvestment by the company in inappropriate projects and/or other potential misuse of funds by managers for their own benefit. However, companies also need to avoid paying too much in dividends to ensure that adequate resources are available within the company to fund projects that could increase shareholder wealth (i.e., to avoid underinvestment). Cross-listing of company shares can improve governance and oversight, which may make the dividend policies of cross-listed companies more likely to avoid both over and underinvestment.</p> <p>Using a sample of Chinese listed companies from 2003 to 2011, we find that cross-listed companies pay higher dividends than non-cross-listed companies when there are excess resources (measured by free cash flow), thereby reducing the potential for overinvestment/misuse of the resources by cross-listed companies. We also find that the dividends of cross-listed companies are lower than those of non-cross-listed companies when there are greater growth opportunities (measure by the market-to-book ratio), reflecting the reduced potential for underinvestment by cross-listed companies. We find more limited evidence that cross-listings may influence the relationship between dividend volatility and free cash flow and growth opportunities. Overall, our results suggest that companies cross-listing their shares have dividend policies that are more responsive than those of non-cross-listed companies to potential shareholder concerns about over and underinvestment.</p>

Importing Accounting Quality: The Case of Foreign Reverse Mergers

The recent influx of foreign companies to the U.S. capital markets via reverse mergers, transactions that bypass the scrutiny given to IPOs, has raised concerns about the quality of financial reporting by the resulting firms. Using an array of proxies for reporting quality, we find that the reporting quality of these reverse merger (RM) firms, regardless of country of origin, is lower than that of their domestic industry peers and foreign cross-listed companies. However, the evidence is less conclusive regarding the alleged inferior quality of foreign RM firms relative to that of RM firms originating in the U.S. We also find that important determinants of the inferior reporting quality of RM firms are their lower audit quality and weaker external monitoring by the investing public. With few exceptions, investors appear to recognize this quality differential by tempering their reaction to accounting information reported by RM firms, and discounting these firms’ equity values relative to their non-RM industry peers. The findings have implications for investors, market regulators and auditors. They are also relevant for the discussion on the costs and benefits of harmonizing accounting standards and for the debate on the desirability of capital market stimuli in the form of relaxed reporting and disclosure rules.

Cost-of-Capital Effects of IFRS Reporting in the United States

This paper investigates the cost of equity capital effects of the SEC’s decision to eliminate the U.S. GAAP reconciliation requirement for cross-listed companies using IFRS. We use a sample of foreign domiciled firms that are cross-listed in the U.S. to conduct this investigation. We partition our cross-listed sample into three distinct groups: those firms that file using IFRS, those firms that file directly in U.S GAAP, and those that file in their own domestic GAAP with a 20-F reconciliation. For each of these groups we calculate cost of equity capital using a range of traditional measures and examine changes in these measures from 2006 to 2007 – the year that IFRS filers were no longer required to file a 20-F reconciliation. In order to ensure that the changes in the traditional cost of capital measures are not driven by firm fundamentals we control for firm specific factors when calculating an additional residual cost of capital measure. In contrast to prior research, we find evidence of a significant decline in residual cost of equity from 2006 to 2007 for IFRS filers in response to the elimination of U.S. GAAP reconciliations relative to both U.S. and non-U.S. local GAAP filers. Our results suggest that eliminating the reconciliation for IFRS filers does not weaken the information environment relative to U.S. GAAP.

Does eliminating the Form 20-F reconciliation from IFRS to U.S. GAAP have capital market consequences?

This paper investigates the capital market consequences of the SEC's decision to eliminate the reconciliation requirement for cross-listed companies following International Financial Reporting Standards (IFRS). We find no evidence that the elimination has a negative impact on firms' market liquidity or probability of informed trading (PIN). We also find no evidence of a significant impact on cost of equity, analyst forecasts, institutional ownership, stock price efficiency and synchronicity. Moreover, IFRS users do not increase disclosure frequency nor supply the reconciliation voluntarily. Our results do not support the argument that eliminating the reconciliation results in information loss or greater information asymmetry.

Does Eliminating the Form 20-F Reconciliation from IFRS to U.S. GAAP Have Capital Market Consequences?

This paper investigates the capital market consequences of the SEC’s decision to eliminate the reconciliation requirement for cross-listed companies following International Financial Reporting Standards (IFRS). We find no evidence that the elimination has a negative impact on firms’ market liquidity or probability of informed trading (PIN). We also find no evidence of a significant impact on cost of equity, analyst forecasts, institutional ownership, stock price efficiency and synchronicity. Moreover, IFRS users do not increase disclosure frequency nor supply the reconciliation voluntarily. Our results do not support the argument that eliminating the reconciliation results in information loss or greater information asymmetry.

Evolution of Control of Cross-Listed Companies

Some – such as La Porta et al. (1999) explain the dispersed control, which is the norm in common law countries, by the better protection of minority shareholders. Conversely, concentrated control, which prevails in civil law countries, is thought to be caused by low shareholder protection. This paper examines whether changes in the legal environment of a company, via cross-listing, affect its control structure. In particular, we investigate whether companies that cross-list on common law markets evolve towards dispersed control. Using a sample of 126 companies that have cross-listed on 18 stock markets during the period of 1990 to 2000, our analysis does not reveal that cross-listing on common law markets affects the subsequent control structure of the sample companies. We find that company characteristics such as initial control structure and risk are better determinants of the evolution of control. In addition, we find that firms that incorporate in countries with good quality of accounting are more likely to evolve towards a dispersed control structure. Our results suggest that the optimal ownership and control structure varies across companies.

Contrarian investment strategies work better for dually-traded stocks: Evidence from Hong Kong

We investigate the profitability of contrarian investment strategies for equities listed on the Hong Kong Stock Exchange (HKEX), which are separated into cross-listed firms and firms listed only in Hong Kong. We also investigate the relationship between stock returns and past trading volume for these equities. We report significantly higher contrarian profits for the period investigated and find that this is a persistent feature of stock returns for cross-listed companies. We also document that contrarian portfolios earn returns as high as 8.01% per month for the dually-traded companies and just 1.83% for only HKEX-listed firms. We find that volume has only a limited ability to explain contrarian profits. All extreme profits disappeared after adjusting for the Fama and French three-factor model.

Prestigious Stock Exchanges: A Network Analysis of International Financial Centers

In this paper, we use methods from social network analysis to assess the relative importance of financial centers around the world. Using data from virtually the entire universe of global equity activity, we present two sets of complete rankings for up to forty-five separate locations for the 1990-2006 period. The first phase of our analysis evaluates international stock exchanges based on their ability to attract global initial public offerings (IPOs). The second phase compares the capacity of these exchanges to provide an efficient trading platform for cross-listed companies. U.S. exchanges are effectively the unique hosts for cross-border equity activity originating from many other locations. Moreover, they are the destination of choice for most companies coming from locations with highly prestigious exchanges. We find that, despite a diminished ability to attract cross-border IPOs, U.S. exchanges have maintained an undisputable lead in global equity activity throughout the entire sample period. We do find evidence of the rising importance of competing exchanges - in particular, the London Stock Exchange, the Deutsche Borse, and the Hong Kong Stock Exchange - and also of an expanding role for a number of emerging market stock exchanges. However, this rising pattern reflects improved competitive conditions in a growing global market rather than a sudden decline in the activity of U.S. exchanges.

Did the Sarbanes-Oxley Act Affect Corporate Risk-Taking? The Study of Cross-Listed Companies

Did the Sarbanes-Oxley Act Affect Corporate Risk-Taking? The Study of Cross-Listed Companies

Is the International Diversification Potential Diminishing? Foreign Equity In and Out of the US

Over the past two decades international markets have become more open, leading to a common perception that global capital markets have become more integrated. In this paper, I will ask what this integration and its resulting higher correlation would imply about the diversification potential across countries. Moreover, this question relates to the related questions of whether the optimal foreign portfolio allocation has changed over time. For this purpose of answering these questions, I intend to examine two basic groups of international returns: (1) foreign market indices and (2) foreign stocks that are listed and traded in the US. I will examine the first group since this is the standard approach in the international diversification literature. I intend to study the second group since some have argued that US-listed foreign stocks are the more natural diversification vehicle (Errunza et al (1999)). In order to consider the possibility of shifts in the covariance of returns over time, I develop in the proposal an extension of the break-date estimator of Bai and Perron (1998,2003) to test for and estimate possible break dates along with their standard errors. In the preliminary results, I find that the covariances among country stock markets have indeed shifted over time for a majority of the countries. However, in contrast to the common perception that markets have become significantly more integrated over time, the covariance between foreign markets and the US market have increased only slightly from the beginning to the end of the last twenty years. At the same time, the foreign stocks in the US markets have become significantly more correlated with the US market. To consider the economic significance of these parameter changes, I calibrate a simple portfolio decision model in which a US investor could choose between US and foreign portfolios. I find that the optimal allocation in foreign market indices actually increases over time while the optimal allocation into foreign stocks in the US has decreased. These results suggest that while diversification potentials have declined, they remain important for foreign stocks that are not listed in the US market. A number of features are missing from my preliminary analysis detailed below. First, I have so far focused upon American Depositary Receipts (ADRs) on the NYSE as the group of US-listed foreign stocks. However, Canada is the foreign country that has the greatest number of cross-listed companies, yet these are not included as ADRs. Therefore, I intend to include the Canadian stock market and the cross-listed stocks from Canadian companies in the analysis. Second, the analysis described in the proposal below conditions foreign stocks in the US on the residual of the foreign stock market on the US. The model based upon this assumption was the more straightforward version to work out initially. However, it has the undesirable feature that it implies that the betas of foreign stocks listed in the US shift if the foreign market as a whole shifts. I am currently working on an extension that relaxes this assumption and allows independent breaks between individual foreign stocks listed in the US and foreign stock markets as a whole. Third, while I focus upon the NYSE stocks in order to avoid spurious effects from the “tech bubble” in the late 1990s, it may be useful to consider the foreign stocks listed on NASDAQ as well. My projected time line for finishing this project is as follows: • By December 2006 – Collect Canadian data; rerun analysis with Canadian effects included. • By April 2007 – Finish joint estimation allowing for differential changes between foreign market and foreign stocks listed in the US. • By August 2007 – Consider whether to include NASDAQ; Write up draft; Submit to journal • By August 2008 – Finalize comments and suggestions from referees; Final paper delivered Of course, the time line can be earlier or later depending upon unforeseen obstacles or breakthroughs.

Sarbanes-Oxley and the Cross-Listing Premium

This article tests whether the Sarbanes-Oxley Act (SOX) affected the premium that investors are willing to pay for shares of foreign companies cross-listed in the United States. I find that from year-end 2001 (pre-SOX) to year-end 2002 (after SOX adoption), the Tobin's q and market/book ratios of foreign companies subject to SOX (cross-listed on levels 2 or 3) declined significantly, relative to Tobin's q and market/book ratios of both (i) matching non-cross-listed foreign companies from the same country, the same industry, and of similar size, and (ii) cross-listed companies from the same country that are not subject to SOX (listed on levels 1 or 4), whose Tobin's q and market/book ratios declined only slightly and increased in some specifications, compared to matching non-cross-listed companies. Thus, the premium associated with trading in the United States was roughly constant, while the premium associated with being subject to U.S. regulation declined. The biggest losers were companies that were more profitable, riskier, and smaller, companies with a higher level of pre-SOX disclosure, and companies from well-governed countries. These results are consistent with the view that investors expected SOX to have greater costs than benefits for cross-listed firms on average, especially for smaller firms and already well-governed firms. In a related paper, Kate Litvak, The Effect of the Sarbanes-Oxley Act on Foreign Companies Cross-Listed in the U.S., Journal of Corporate Finance, vol. 13, pp. 195-228 (2007), http://ssrn.com/abstract=876624, I conduct an event study of the reaction of level-23 cross-listed companies, and find that their prices declined during SOX-relevant event periods, relative to level-14 cross-listed companies and non-cross-listed companies.

SOX Around the World - Corporate Transparency and Risk Management Disclosure of Foreign Issuers in the United States

We investigate how the Sarbanes-Oxley Act (SOX) impacted corporate transparency in the statutory risk disclosure of foreign private issuers listed in the United States. We examine whether SOX is complementary to and consistent with the existing national standards that foreign issues are obliged to comply with in addition to SOX. Furthermore, we elaborate on the perceived cost and benefits of the Act for cross-listed companies. Results from a questionnaire-based survey suggest that the introduction of the SOX made the U.S. financial market less attractive to currently cross-listed foreign companies as well as potential new foreign issuers.

Ripples Through Markets: Inter-market Impacts Generated by Large Trades

This paper investigates the impacts of very large trades for cross-listed companies where parallel markets suffer from information frictions. We use a sample of large trades executed on London Stock Exchange's SEAQ-I market for European cross-quoted firms and investigate their impact on home market prices when transparency is opaque. We find that (a) London large trades produce price impacts in home markets even though no timely information is published, (b) market makers appear to pre- and postposition their inventories by splitting orders across markets, and (c) the price discovery process across markets changes significantly around large trades with the foreign market making a significantly bigger contribution to price discovery, even though information opaqueness exists.

Insider Trading and International Cross-Listing

We use a unique dataset of all insider trading transactions in the UK over the period 1999-2003 and test the hypothesis that insider trading is informative. The study further concentrates on whether insider trades in cross-listed companies are less informative than insider trades in domestically quoted companies. Consistent with previous evidence, we find that for the sample as a whole, insiders are contrarians as they buy after significant price decline and sell after significant price increase. The announcement date and post-announcement date abnormal returns are positive in the case of buys and negative for the sells. However, we show that most of the event date and post-event date abnormal performance happens in domestically-listed companies. We find that the information content of insider trading in internationally cross-listed companies is relatively small. The results confirm bonding effects mainly in case of sales as we observe reduced abnormal returns. However, the effect in case of purchases is reverted and abnormal returns are significantly higher for cross-listed companies. We conjecture that such findings my result from asymmetric effect of possible expropriation. The expropriation may be more severe in case of sales when insiders cash out in the anticipation of bad news leaving the uninformed investors in long positions in loosing stocks. On the other hand the expropriation in case of purchases is less harmful when both insiders and outsiders gain from the price increase. Hence the bonding effect may be more pronounced for sales.

Liability Exposure Effects on Earnings Conservatism: The Case of Cross-Listed Firms

In this study we investigate earnings conservatism of cross-listed and domestically listed companies. We expect that conservatism will be more pronounced for cross-listed companies because they face the threat of litigation from a wider audience of shareholders than companies with a domestic listing only. Specifically, we compare conservatism of Dutch firms with a listing in the US to conservatism of Dutch firms without a US listing. The motivation to investigate this specific setting is that the liability exposure of managers and auditors in the US market is considered as far more burdensome than in the Dutch market. Another interesting issue is that firms with a cross-listing in the US have to comply with different reporting standards; in our case Dutch GAAP and US GAAP. Therefore we not only compare conservatism of Dutch GAAP earnings of cross-listed companies versus that of domestically listed companies, but also conservatism of US GAAP earnings versus their Dutch GAAP counterparts. It is difficult to predict the outcomes of the latter question. One the one hand, if company managers view US GAAP earnings as especially important for US shareholders and Dutch GAAP earnings as especially relevant for Dutch shareholders they may try to apply conservatism accordingly. On the other hand, it can be argued that cross-listed companies cater to their US investors by presenting more conservative Dutch GAAP earnings numbers, so that it is not necessary to make US GAAP earnings incrementally conservative. Empirical findings for the period from 1993 to 2000 show that Dutch GAAP earnings of cross-listed firms are significantly more conservative than earnings reported by firms with a domestic listing only. Maybe surprizing is the outcome that US GAAP earnings numbers reported by cross-listed companies are slightly less conservative than their Dutch GAAP counterparts, although the difference is not significant. This may imply that company managers view the Dutch GAAP earnings information as especially relevant in communica

The Cost of Capital of Cross-Listed Firms

This paper analyses the cost of capital of firms with foreign equity listings. Our purpose is to shed light on the question whether international and domestic asset pricing models yield a different estimate of the cost of capital for crosslisted stocks. We distinguish between (i) the multifactor ICAPM of Solnik (1979) and Sercu (1980) including both the global market portfolio and exchange rate risk premia and (ii) the single factor domestic CAPM. We test for the significance of the cost of capital differential in a sample of 336 cross-listed stocks from nine countries in the period 1980-99. Our hypothesis is that the cost of capital differential is substantial for firms with international listings, as these are often large multinationals with a strong international orientation. We find that the asset pricing models yield a significantly different estimate of the cost of capital for only 12% of the cross-listed companies. The size of the cost of capital differential is around 50 basis points for the US, 80 basis points for the UK and 100 basis points for France.

Equal access to information: Do cross-listed firms' stock prices respond to earnings disclosed in overseas and local markets?

We estimate stock price responses to earnings disclosed by 110 cross-listed companies as a function of the order of information release in the US and the UK to address selective disclosure and capital market integration. We find that firms did not disclose the same information simultaneously in both countries. We find little evidence of US or UK price response to disclosures released only in the other country, suggesting that direct and simultaneous disclosure in each market is necessary to ensure equal access to information about cross-listed firms. Securities market regulators' concerns about cross-country conformity of disclosure appear to be warranted. © City University of Hong Kong.