The Value of Home-Country Governance for Cross-Listed Stocks

European Journal of Finance, Forthcoming

42 Pages Posted: 1 Nov 2010 Last revised: 30 Jul 2014

See all articles by Douglas J. Cumming

Douglas J. Cumming

Florida Atlantic University

Wenxuan Hou

University of Edinburgh - Business School; Shanghai Lixin University of Accounting and Finance

Eliza Wu

The University of Sydney - Business School; Financial Research Network (FIRN)

Date Written: January 31, 2014

Abstract

Governance has many dimensions – corporate governance pertains to the firm’s management whilst sovereign governance pertains to the firm’s exposure to sovereign risk, corruption, and poor regulation. We show that both are important drivers of firm value and this has serious implications for the increasing number of Chinese firms choosing to cross-list in the US. Whilst the legal bonding hypothesis argues that firms from poor-corporate-governance environments can signal their quality by issuing stock in the US it is silent on the role of sovereign governance. Thus, we use a sample of cross-listed firms from 48 countries between 1996 and 2008 and find that the home country’s sovereign governance quality, but not its corporate governance quality (as proxied by the anti-director rights index) continue to influence the market values of cross-listed firms. Furthermore, cross-listed firms from strong governance countries that have higher market values than non-cross-listed firms or firms from weak governance countries. These results highlight the importance of distinguishing between the myriad types of governance when analyzing the bonding hypothesis and the drivers of cross-listed stocks’ valuations, and emphasize the continued importance of sovereign governance for cross-listed firms.

Keywords: cross-listing, governance, law and finance

JEL Classification: G15, G38, K22

Suggested Citation

Cumming, Douglas J. and Hou, Wenxuan and Wu, Eliza, The Value of Home-Country Governance for Cross-Listed Stocks (January 31, 2014). European Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1700485 or http://dx.doi.org/10.2139/ssrn.1700485

Douglas J. Cumming (Contact Author)

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Wenxuan Hou

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

HOME PAGE: http://www.wenxuanhou.com

Shanghai Lixin University of Accounting and Finance ( email )

Eliza Wu

The University of Sydney - Business School ( email )

University of Sydney
Darlington
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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