Cost of Capital Effects and Changes in Growth Expectations around U.S. Cross-Listings

ECGI - Finance Working Paper No. 46/2004

Wharton Financial Institutions Center Working Paper Series #06-19

63 Pages Posted: 19 Oct 2006 Last revised: 20 Nov 2011

Luzi Hail

University of Pennsylvania - The Wharton School

Christian Leuz

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

Multiple version iconThere are 2 versions of this paper

Date Written: November 23, 2008

Abstract

This paper examines whether cross-listing in the U.S. reduces foreign firms' costs of capital. While prior studies show 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 cost of capital effects implied by market prices and analyst forecasts, which accounts for changes in growth expectations around cross-listings. We find strong evidence that firms with cross-listings on U.S. exchanges experience a significant decrease in their cost of capital between 70 to 120 basis points. These effects are sustained and still present after the passage of the Sarbanes-Oxley Act. Consistent with the bonding hypothesis, we find smaller cost of capital reductions for firms that cross-list in the over-the-counter market and for exchange-listed firms from countries with stronger home-country institutions. For exchange-traded cross-listings, the reduction in cost of capital accounts for more than half of the increase in value around cross-listings, whereas for the other types of cross-listings the valuation effects are primarily attributable to contemporaneous revisions in growth expectations.

Keywords: Cross-listing, corporate governance, bonding hypothesis, cost of equity, disclosure, law and finance, international finance

JEL Classification: G12, G15, G38, G30, K22, M41

Suggested Citation

Hail, Luzi and Leuz, Christian, Cost of Capital Effects and Changes in Growth Expectations around U.S. Cross-Listings (November 23, 2008). ECGI - Finance Working Paper No. 46/2004; Wharton Financial Institutions Center Working Paper Series #06-19. Available at SSRN: https://ssrn.com/abstract=1161329 or http://dx.doi.org/10.2139/ssrn.1161329

Luzi Hail

University of Pennsylvania - The Wharton School ( email )

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Christian Leuz (Contact Author)

University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://faculty.chicagobooth.edu/christian.leuz/

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org

European Corporate Governance Institute (ECGI)

Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Center for Financial Studies (CFS) ( email )

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Frankfurt am Main, 60323
Germany

University of Pennsylvania - Wharton Financial Institutions Center

3641 Locust Walk
Philadelphia, PA 19104-6218
United States

CESifo Research Network

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Munich, DE-81679
Germany

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