Cross-Listing and Pricing Efficiency: The Informational and Anchoring Role Played by the Reference Price

Abstract

We propose that when a firm cross-lists in segmented markets, in pricing the second issued share, the first issued share price as a reference plays both an informational and anchoring role. We develop a model illustrating the dual-role and relating the anchoring bias to the IPO underpricing of the second issued share. Empirically, we examine a group of Chinese firms that first issued foreign shares and then domestic A-shares, in which the anchoring effect contributes to more A-share underpricing. The anchoring model predicts a positive association between differences in costs of capital and the A-share underpricing, and that this positive association is weaker when participants are less likely to resort to this anchoring heuristic or/and when the A-share valuation is less uncertain. Empirical results support our dual-role hypothesis.

Keywords: cross-listing, segmented market, anchoring, IPO underpricing

JEL Classification: G12, G14, G15, G24