Competition Among Exchanges Through Simplified Disclosure Requirements: Evidence from the American and Global Depositary Receipts

Accounting and Business Research, 44 (1), 2014

63 Pages Posted: 19 Jul 2014

See all articles by Oksana Kim

Oksana Kim

Minnesota State University

Matt Pinnuck

University of Melbourne - Department of Accounting and Business Information Systems

Date Written: January 17, 2014

Abstract

In this study we address the ongoing debate as to whether the competition among the world’s major exchanges through simplified disclosure requirements is justified. Companies from across the globe have a choice of cross-listing shares as either American or Global Depositary Receipts (ADRs and GDRs, respectively). The former are primarily listed on the US exchanges – NYSE, NASDAQ and AMEX – whereas the latter are issued into non-US markets such as the London Stock Exchange (LSE). The GDRs listed on the LSE are subject to simplified disclosure requirements compared to their exchange-listed ADR peers that have to meet more stringent compliance standards. Proponents of the ‘light touch’ approach argue that firms cross-listing as GDRs are not subject to the higher reporting costs faced by ADRs yet still face similar valuation benefits. Those who challenge this approach argue that simplified disclosure requirements set by the LSE will ultimately be recognised by the market as ineffective, diverting traders from investing in GDRs. This study provides evidence that supports the LSE’s ‘light touch’ approach and shows that the benefits of information risk reduction for ADRs and GDRs are comparable. The explanation for this finding is that the two avenues through which information asymmetry is expected to be resolved after cross-listing – disclosure and analysts – are substitutive and make equally important contribution to information risk reduction, eventually leading to similar cost of capital decline for ADRs and GDRs.

Keywords: cross-listing, ADR, GDR, disclosure, cost of capital, information risk

JEL Classification: G12, G14, G15, G18, M41

Suggested Citation

Kim, Oksana and Pinnuck, Matthew, Competition Among Exchanges Through Simplified Disclosure Requirements: Evidence from the American and Global Depositary Receipts (January 17, 2014). Accounting and Business Research, 44 (1), 2014, Available at SSRN: https://ssrn.com/abstract=2467840

Oksana Kim (Contact Author)

Minnesota State University ( email )

Minnesota State University, Mankato
Mankato, MN 56001
United States
5073895411 (Phone)

Matthew Pinnuck

University of Melbourne - Department of Accounting and Business Information Systems ( email )

Victoria
Melbourne, Victoria 3010 3010
Australia

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