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Cost of Capital and Cash Flow Effects of U.S. Cross Listings

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Author Info
Hail, Luzi (U of Pennsylvania)
Leuz, Christian

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Abstract

This paper examines cost of capital and cash flow effects of cross-listings in the U.S. Prior studies document that cross-listings generally have substantial effects on firms' market values. However, the sources of these valuation effects are not yet well understood. We estimate the cost of capital effects implied in market prices and analysts' consensus forecasts, which allows us to control for cash flow effects (e.g., changes in growth opportunities) associated with crosslisting. We provide strong evidence that cross-listing on a U.S. exchange reduces firms' cost of capital. The effect is statistically and economically significant, even after controlling for traditional risk factors, country or firm-fixed effects and firms' cross-listing choices. We document that these effects are larger for firms from countries with weaker institutional structures, consistent with the idea that cross-listings are a way to "opt out" of the home country's institutional framework. In contrast, cross-listings in the U.S. OTC market are associated with only minor reductions in firms' cost of capital and private placements even seem to have adverse effects. Reconciling these findings with firms' cross-listing choices, we document substantial cash flow effects for all three types of ADRs, suggesting that cross-listing in the U.S. improves firms' ability to exploit and generate growth opportunities.

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Paper provided by University of Pennsylvania, Wharton School, Weiss Center in its series Working Papers with number 05-2.

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Date of creation: Apr 2005
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Handle: RePEc:ecl:upafin:05-2

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G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Doidge, Craig & Karolyi, G. Andrew & Lins, Karl V. & Millers, Darius P. & Stulz, Rene M., 2005. "Private Benefits of Control, Ownership, and the Cross-Listing Decision," Working Paper Series 2005-2, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  2. Foucault, Thierry & Gehrig, Thomas, 2006. "Stock Price Informativeness, Cross-Listings and Investment Decisions," CEPR Discussion Papers 5722, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Nikolaev, Valeri & Lent, Laurence van, 2005. "The endogeneity bias in the relation between cost-of-debt capital and corporate disclosure policy," Discussion Paper 67, Tilburg University, Center for Economic Research. [Downloadable!]
  4. Ugur Lel & Darius P. Miller, 2006. "International cross-listing, firm performance and top management turnover: a test of the bonding hypothesis," International Finance Discussion Papers 877, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  5. Doidge, Craig & Karolyi, G. Andrew & Lins, Karl V. & Miller, Darius & Stulz, Rene M., 2005. "Private Benefits of Control, Ownership, and the Cross-Listing Decision," Working Papers 05-1, University of Pennsylvania, Wharton School, Weiss Center. [Downloadable!]
  6. Sarkissian, Sergei & Schill, Michael J., 2004. "Are There Permanent Valuation Gains to Overseas Listing? Evidence from Market Sequencing and Selection," Working Papers 05-4, University of Pennsylvania, Wharton School, Weiss Center. [Downloadable!]
  7. Craig Doidge & G. Andrew Karolyi & Karl V. Lins & Darius P. Miller & Rene M. Stulz, 2005. "Private Benefits of Control, Ownership, and the Cross-Listing Decision," NBER Working Papers 11162, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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