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Cost of Capital Effects and Changes in Growth Expectations around U.S. Cross-Listings

ECGI - Finance Working Paper No. 46/2004

Wharton Financial Institutions Center Working Paper Series #06-19

Posted: 19 Oct 2006 Last revised: 19 Jul 2008

Luzi Hail

University of Pennsylvania - The Wharton School

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network

Date Written: October 2006

Abstract

This paper examines whether cross-listing in the U.S. reduces foreign firms' cost of capital. While prior studies document that U.S. cross-listings are associated with substantial increases in firm value, the sources of these valuation effects are not well understood. We estimate the cost of capital effects implied by market prices and analyst forecasts, which allows us to explicitly account for changes in growth expectations around cross-listings. We find strong evidence that firms with cross-listings on U.S. exchanges experience a decrease in their cost of capital, which is economically significant and sustained. Consistent with the bonding hypothesis, we document that these effects are larger for firms from countries with weaker institutional structures. Cross-listings in the over-the-counter market are associated with minor reductions in firms' cost of capital, and private placements seem to have adverse effects. We also document positive valuation effects for all types of U.S. cross-listings stemming from changes in (financial analysts') growth expectations. The latter result could reflect that firms seek to cross-list when their growth opportunities happen to expand.

Keywords: Cross-listing, bonding hypothesis, cost of equity, disclosure, law and finance, international finance

JEL Classification: G12, G15, G38, G30, K22, M41

Suggested Citation

Hail, Luzi and Leuz, Christian, Cost of Capital Effects and Changes in Growth Expectations around U.S. Cross-Listings (October 2006). ECGI - Finance Working Paper No. 46/2004; Wharton Financial Institutions Center Working Paper Series #06-19. Available at SSRN: https://ssrn.com/abstract=938230

Luzi Hail

University of Pennsylvania - The Wharton School ( email )

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215-898-8205 (Phone)
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Christian Leuz (Contact Author)

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States
773-834-1996 (Phone)

HOME PAGE: http://faculty.chicagobooth.edu/christian.leuz/

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org

European Corporate Governance Institute (ECGI)

Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Center for Financial Studies (CFS) ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

University of Pennsylvania - Wharton Financial Institutions Center

3641 Locust Walk
Philadelphia, PA 19104-6218
United States

CESifo Research Network

Poschinger Str. 5
Munich, DE-81679
Germany

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