Market and Regional Segmentation and Risk Premia in the First Era of Financial Globalization
University of Cambridge - Judge Business School, Department of Finance & Accounting
Michael J. Schill
University of Virginia – Darden Graduate School of Business Administration
November 15, 2014
Darden Business School Working Paper No. 2179088
We study the role of geography-induced information costs in the financing of U.S. railroad investments from 1865 to 1913. The selected industry and time period provide us with a natural experiment to analyze the benefits of foreign listing due to the unique geography-specific nature of its assets and the intense level of foreign listing activity of U.S. firms in London. We find that the borrowing costs for U.S. railroads listed in New York exhibited a premium of 0.68% to U.S. railroads listed in London in the 1870s. By the 1910s this premium had declined by 0.30%, suggesting diminishing gains to a foreign listing through time as information costs fell and markets became less segmented. We also find that both borrowing costs and investment-cash flow sensitivity are lower for U.S. railroads from the North and Central regions than from the South and West. This implies that the benefits of cross-listing vary inversely with the distance and information costs between each U.S. region and London. Our results offer novel evidence on the importance of geography and information costs for global financial opportunities.
Number of Pages in PDF File: 52
Keywords: Bond cross-listing, Equity cross-listing, Bond yield, Return on assets
JEL Classification: F36, G15, G30, O16
Date posted: November 23, 2012 ; Last revised: November 26, 2014
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