Uninvited U.S. Investors? Economic Consequences of Involuntary Cross-Listings

59 Pages Posted: 9 Jan 2010 Last revised: 16 Nov 2013

See all articles by Peter Iliev

Peter Iliev

Pennsylvania State University - Department of Finance

Darius P. Miller

Southern Methodist University (SMU) - Finance Department

Lukas Roth

University of Alberta - Department of Finance and Statistical Analysis

Multiple version iconThere are 2 versions of this paper

Date Written: October 25, 2013

Abstract

We study the economic consequences of a recent SEC securities regulation change that grants foreign firms trading on the U.S. OTC market an automatic exemption from the reporting requirements of the 1934 Securities Act. We document that the number of voluntary (sponsored) OTC cross-listings did not increase following the regulation change, suggesting that it did not achieve its intended purpose of increasing voluntary OTC cross-listings through a reduction in compliance costs. We do find that the design of the regulation allowed financial intermediaries to create an unprecedented number of involuntary (unsponsored) OTC ADRs: 1,700 unsponsored ADR programs for 920 firms were created for companies that had previously chosen not to cross-list in the United States. Our difference-in-differences analysis based on a matched sample approach documents that foreign firms forced into the U.S. capital markets experience a significant decrease in firm value, and we further show that the decrease in firm value is related to an increase in U.S. litigation risk. We also find that depositary banks’ propensity to involuntarily cross-list firms is positively related to banks’ expected fee revenue, and that banks chose firms that incur high costs when involuntarily cross-listed. Our results provide evidence that securities regulation can be exploited for private gain and result in costly unintended consequences.

Keywords: Cross-listing, Securities Regulation, SEC, Rule 12g3-2(b)

JEL Classification: G15, G18, G38, K22, F30

Suggested Citation

Iliev, Peter and Miller, Darius P. and Roth, Lukas, Uninvited U.S. Investors? Economic Consequences of Involuntary Cross-Listings (October 25, 2013). Available at SSRN: https://ssrn.com/abstract=1533603 or http://dx.doi.org/10.2139/ssrn.1533603

Peter Iliev

Pennsylvania State University - Department of Finance ( email )

348 Business Building
University Park, PA 16802
United States

Darius P. Miller (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States

Lukas Roth

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32E Business Building
Edmonton, Alberta T6G 2R6
Canada
780-492-4431 (Phone)
780-492-3325 (Fax)

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