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Regulatory Intervention and the Effect of Changes in Corporate Governance on Firm Decisions and Market Reactions


Giorgio Gotti


University of Texas at El Paso - Department of Accounting

Stacy A. Mastrolia


Bucknell University - School of Management

October 10, 2008

Journal of Management and Governance, Forthcoming

Abstract:     
This paper investigates whether Italian companies that cross-list in the United States between 1993 and 2005 show (i) a change in their internal policies as anticipated by the bonding hypothesis, (ii) an increase in market value, or (iii) an increase in the access to capital funds. We use the unique environment created by the 1998 Draghi reform which significantly improved the protection of Italian listed companies’ minority shareholders and we further examine the impact of legislated changes in corporate governance in Italy on the decision of Italian companies to cross-list in the United States.

Our results indicate that following the Draghi reform (i) firms that cross-list in the United States modify their dividend and cash policies as anticipated by the bonding hypothesis. Contrary to prior research, (ii) we do not find evidence that cross-listing serves to enhance shareholder value or (iii) is used as a vehicle to more easily access capital funds either before or after the domestic corporate governance is improved.

The results of this study provide evidence that country level legislative innovations intended to enhance a weak corporate governance system can be a valid and effective substitute to the bonding mechanism by providing an alternative signal of a firm’s quality.

Number of Pages in PDF File: 36

Keywords: Italy, ADR, cross-listing, investor protection, regulation change, corporate governance, bonding hypothesis, signaling

JEL Classification: G12, G34, G38, M41, M47

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Date posted: September 27, 2007 ; Last revised: August 14, 2009

Suggested Citation

Gotti, Giorgio and Mastrolia, Stacy A., Regulatory Intervention and the Effect of Changes in Corporate Governance on Firm Decisions and Market Reactions (October 10, 2008). Journal of Management and Governance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1016996

Contact Information

Giorgio Gotti (Contact Author)
University of Texas at El Paso - Department of Accounting ( email )
500 West University Avenue
El Paso, TX 79968-0542
United States
Stacy A. Mastrolia
Bucknell University - School of Management ( email )
Lewisburg, PA 17837
United States
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