PDF Ebook The Dark Side of International Cross-Listing: Effects on Rival Firms at Home
The analysis focuses on the stock price impact of firms’ U.S. cross-listing on home-market rival firms. A theoretical model is presented that indicates the effect is ambiguous, depending upon the positive price impact of a decrease in the cost of capital for rival firms versus a negative price impact of a market perception of lower growth prospects for rivals. The empirical work uses both listing dates and announcement dates of forthcoming ADR programs. An event study approach is employed to analyze the impact on the home market price of the rival firm around the dates of listing and announcement of listing. We find negative cumulative average abnormal returns for the rival firms around the announcement and listing dates, consistent with rival firms being hurt by the listing. The evidence suggests that investors see rivals as having poorer growth prospects relative to the listing firm. We also find evidence that the positive effect that listers experience is associated with their being viewed as having better growth prospects.
When foreign firms list their shares on a U.S. stock exchange, this may affect the stock price of the listing firm. It may also affect stock prices of firms in the same industry and country as the listing firm, as investors revise their expectations of firm values. This paper studies the stock price impact on home-market rival firms of firms’ cross-listing in the United States.
Existing empirical evidence indicates that a firm listing its shares in the United States experiences a positive change in its share price at home. 1 Yet positive or negative spillover effects may be experienced by its primary home-market rival which is not listed in the U.S. A positive spillover effect could be generated if the U.S. listing provides a positive signal for both the listing firm and its primary home-market rivals. This could involve a market integration effect where home market firms are now priced in a global context rather than in a segmented market. Foerster and Karolyi (1999) and Errunza and Miller (2000) find a strong negative impact of cross-listings on the cost of capital. Eaton, Nofsinger and Weaver (2003) show that the cost of capital falls for cross listing firms, and that the size of the fall is related to the disclosure quality of the home country. If there is also a fall in the cost of capital for rival firms that are not cross-listed, then rivals may benefit from the cross-listing. However, it is also possible that rival firms may be harmed by a firm’s U.S. listing. When a firm lists in the U.S. it meets the stringent disclosure requirements of U.S. regulations and bonds with the U.S. market, and thus might be better able to exploit growth opportunities. If rivals are seen as firms with relatively lower growth opportunities with respect to the listing firm, then this creates a negative impact on the rival.
Looking at the effects of cross-listings on rival firms is an interesting topic in itself. However, it is also an important topic in that it might help us understand the source of positive effects that firms experience by cross-listing. There are two main hypotheses regarding why firms experience positive abnormal returns when they create an ADR program, and these two hypotheses have different implications for rival firms. The first is the risk sharing hypothesis, and the second is the growth opportunities hypothesis.
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PDF Ebook The Dark Side of International Cross-Listing: Effects on Rival Firms at Home
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