Essays on cross listings

Abstract

This PhD dissertation consists of three essays on cross listings: a. The Operating Performance of Exchange-Listed American Depositary Receipts. b. Cross Listing, Bonding and Corporate Governance. c. Cross Listing on U.S. Stock Exchanges and the Earnings Management Hypothesis. The questions analyzed in this dissertation arise because of possible frictions in the transition of information from corporations to markets. To overcome informational frictions a company might choose to list its equity on foreign exchanges with strong legal institutions. The U.S. is considered to be a country with strong and strict legal institutions. Coffee (2002) suggest that cross-listed firms on U.S. stock exchanges face (1) the increased enforcement by the Securities and Exchange Commission, (2) a more demanding litigation environment, and (3) enhanced disclosure and reconciliations to U.S. generally accepted accounting principles. All of these cross listing effects may reduce the information asymmetry between the management of the firm and markets. Prior literature has examined the role and impact of cross listing among others on valuation, cost of capital, access to capital and information environment. However, other questions arise naturally such as do firms experience improvements in their profitability after the listing? To what extent the suggested U.S. securities laws are actually enforced in relation to foreign issuers and how these securities laws affect firm's corporate governance? What is the cross listed firms' management behaviour in terms of managing financial statements? This dissertation consists of three essays on cross listings designed to address these questions. The first essay examines the operating performance of non-US firms that enter major US stock exchanges through American Depositary Receipts (ADR). We provide evidence that capital- raising cross-listed firms experience improvement in operating performance after the listing relative to a non-cross-listed matched sample of firms and relative to the pre-listing period. No such result is observed for non-capital-raising cross-listed firms. These results suggest that the type of ADR conveys information about post-listing operating performance. Moreover, we provide evidence for a positive relation between the cross listing announcement abnormal returns and the post listing abnormal changes in operating performance. This relation suggests that the market anticipates the post-listing abnormal changes in operating performance. The second essay examines the relationship between cross listing and corporate governance. We find that cross-listed firms have more independent board and audit committees after the listing relative to a non-cross-listed matched sample of firms and relative to the pre-listing period. Moreover, cross-listed firms experience changes in their ownership structure after the listing. Finally, we provide evidence that the sensitivity of the relation between cross-listed firm's valuation with audit committee independence and ownership structure becomes more important after the listing. These results are consistent with the bonding role of the cross listings on US stock exchanges. The third essay examines managers' behaviour around the cross listing in terms of earnings management. We use Canadian cross-listed firms to tone down the informational effect of the cross listings due to the economic proximity between Canadian and US markets. In this way incentives for management of earnings might be stronger. We provide evidence that firms report earnings in excess of cash flows by taking positive discretionary accruals prior to their listing in US. Furthermore, discretionary accruals reverse after the listing, resulting in a negative relation between pre-listing discretionary current accruals and post-listing net income growth relative to a matched sample. The market does not reflect this information and thus cross-listed firms are found to underperform a matched sample by about 12% for the three-year period after the listing.