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

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