Uninvited U.S. Investors? Economic Consequences of Involuntary Cross-Listings

Abstract:     
We study the economic consequences of a recent SEC securities regulation change that grants foreign firms trading on the U.S. OTC market an automatic exemption from the reporting requirements of the 1934 Securities Act. We document that the number of voluntary (sponsored) OTC cross-listings did not increase following the regulation change, suggesting that it did not achieve its intended purpose of increasing voluntary OTC cross-listings through a reduction in compliance costs. We do find that the design of the regulation allowed financial intermediaries to create an unprecedented number of involuntary (unsponsored) OTC ADRs: 1,700 unsponsored ADR programs for 920 firms were created for companies that had previously chosen not to cross-list in the United States. We document that foreign firms forced into the U.S. capital markets experience a significant decrease in firm value, and that the decrease in firm value is related to an increase in U.S. litigation risk. We find that depositary banks’ propensity to involuntarily cross-list firms is positively related to banks’ expected fee revenue, and that banks chose firms that incur high costs when involuntarily cross-listed. Our results provide evidence that securities regulation can be exploited for private gain and result in costly unintended consequences.

Number of Pages in PDF File: 57

Keywords: Cross-listing, Securities Regulation, SEC, Rule 12g3-2(b)

JEL Classification: G15, G18, G38, K22, F30

working papers series