Look at Me Now: What Attracts U.S. Shareholders?
U.S. Federal Reserve Board of Governors
Sara B. Holland
University of Georgia - C. Herman and Mary Virginia Terry College of Business
David C. Smith
University of Virginia - McIntire School of Commerce
Francis E. Warnock
University of Virginia - Darden Business School; National Bureau of Economic Research (NBER)
March 11, 2005
Board of Governors of the Federal Reserve System International Finance Discussion Paper No. 815
EFA 2004 Maastricht No. 4086
AFA 2006 Boston Meetings Paper
This paper investigates the underlying determinants of home bias using a comprehensive data set on U.S. investors' aggregate holdings of every foreign stock. Among those foreign stocks that are not listed on U.S. exchanges, which account for more than 96 percent of our usable data sample, we find that U.S. investors prefer firms with characteristics associated with greater information transparency, such as stronger home-country accounting standards. We document that a U.S. cross-listing is economically important, as U.S. ownership of a foreign firm roughly doubles upon cross-listing in the United States. We explore the cross-sectional variation in this "cross-listing effect" and find that the increase in U.S. investment is greatest for firms that are from weak accounting backgrounds and are otherwise informationally opaque, suggesting that the key effect of cross-listing is improvements in disclosure that are valued by U.S. investors. By contrast, cross-listing does not increase the appeal of stocks from countries with weak shareholder rights, suggesting that U.S. cross-listing cannot substitute for legal protections in the home country. Nor does the cross-listing effect appear to be driven simply by increased "familiarity" with the stock or lowered cross-border transactions costs.
Number of Pages in PDF File: 52
Keywords: Cross-Listing, ADR, Home Bias, Selection Bias
JEL Classification: G11, F21, C35, M4
Date posted: August 30, 2005
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