The Local Market Perception of Firm Risks During Cross-Listing Events

Abstract

To date, we know very little about how local market perceives the changes in risk structure for the firms listing in overseas market and specifically how relative firm-specific risks (ratio of firm-specific to total risks) vary by listing type and home market development. In this paper we examine the dynamic step-by-step transition of the local market perceptions of relative idiosyncratic risks around the cross-listing events. Using a sample of 606 ADR firms, we find that increases in cross-listed firms’ relative firm-specific risks on the local market around the listing date are only temporary and small for Level I ADRs. We observe the most variations in Level III ADRs. For exchange listed ADRs from emerging markets, we find that before the listing date, there is a significant decrease in relative firm specific risk in the year prior to listing which then increases during the cross-listing, but we do not find similar changes for developed market firms. For developed market firms we only observe significant increases in relative firm specific risks. We interpret these as evidences of negative relationship between firm opaqueness and relative firm specific risks (Jin and Myers, 2006, Journal of Financial Economics, 79, 257-292).

Keywords: Cross-listing, ADR programs, idiosyncratic risks, emerging markets