Cost of Capital Effects and Changes in Growth Expectations around U.S. Cross-Listings
University of Pennsylvania - The Wharton School
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network
ECGI - Finance Working Paper No. 46/2004
Wharton Financial Institutions Center Working Paper Series #06-19
This paper examines whether cross-listing in the U.S. reduces foreign firms' cost of capital. While prior studies document that U.S. cross-listings are associated with substantial increases in firm value, the sources of these valuation effects are not well understood. We estimate the cost of capital effects implied by market prices and analyst forecasts, which allows us to explicitly account for changes in growth expectations around cross-listings. We find strong evidence that firms with cross-listings on U.S. exchanges experience a decrease in their cost of capital, which is economically significant and sustained. Consistent with the bonding hypothesis, we document that these effects are larger for firms from countries with weaker institutional structures. Cross-listings in the over-the-counter market are associated with minor reductions in firms' cost of capital, and private placements seem to have adverse effects. We also document positive valuation effects for all types of U.S. cross-listings stemming from changes in (financial analysts') growth expectations. The latter result could reflect that firms seek to cross-list when their growth opportunities happen to expand.
Keywords: Cross-listing, bonding hypothesis, cost of equity, disclosure, law and finance, international finance
JEL Classification: G12, G15, G38, G30, K22, M41
Date posted: October 19, 2006 ; Last revised: July 19, 2008
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