Foreign Firms in the Less-Regulated Us Market
20 Pages Posted: 10 Dec 2004
The effects of trading Level I ADRs in the US OTC market were investigated for 119 firms from Hong Kong, the United Kingdom (UK), Australia, Japan, South Africa, Germany and Brazil during the period February 1992 to April 2001. Since firms that undertake Level I ADR programs do not reconcile domestic accounting information with US GAAP and receive less scrutiny from analysts and regulators, it may be expected that the benefits of a Level I ADR program are limited. Surprisingly, we found that after commencement of a Level I ADR program 30% of sample firms showed at least one favorable change in accounting variables and market measures. Statistically significant increases in assets and equity capital and reserves were recorded by firms from five countries, and significant increases in debt by firms from four countries. When we account for changing leverage, the cost of equity capital (as measured by world market beta) was unaffected for 76% of firms, fell for 17% and increased for 7%. The results show that, even though US GAAP accounting and disclosure requirements are not met, trading Level I ADRs in the less-regulated OTC market has benefits for some firms.
Keywords: International cross-listing, foreign stock exchange listing, Level I ADRs, US OTC market
JEL Classification: M41, M44, M45, M47, G15, G32
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