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

Author

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  • Hail, Luzi

    (U of Pennsylvania)

  • Leuz, Christian

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.

Suggested Citation

  • Hail, Luzi & Leuz, Christian, 2005. "Cost of Capital and Cash Flow Effects of U.S. Cross Listings," Working Papers 05-2, University of Pennsylvania, Wharton School, Weiss Center.
  • Handle: RePEc:ecl:upafin:05-2
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    File URL: http://www.researchgate.net/publication/4893929_Cost_of_Capital_and_Cash_Flow_Effects_of_U.S._Cross_Listings
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    References listed on IDEAS

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    Cited by:

    1. Ugur Lel & Darius P. Miller, 2008. "International Cross-Listing, Firm Performance, and Top Management Turnover: A Test of the Bonding Hypothesis," Journal of Finance, American Finance Association, vol. 63(4), pages 1897-1937, August.
    2. Foucault, Thierry & Gehrig, Thomas, 2008. "Stock price informativeness, cross-listings, and investment decisions," Journal of Financial Economics, Elsevier, vol. 88(1), pages 146-168, April.
    3. Kerstin Kiefer & Philipp Schorn, 2007. "Auswirkungen der IFRS-Umstellung auf die Risikoprämie von Unternehmensanleihen - Eine empirische Studie für Deutschland, Österreich und die Schweiz," SFB 649 Discussion Papers SFB649DP2007-056, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    4. 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.
    5. Jochen R. Andritzky, 2007. "Capital Market Development in a Small Country; The Case of Slovenia," IMF Working Papers 07/229, International Monetary Fund.
    6. Leuz, Christian, 2006. "Cross listing, bonding and firms' reporting incentives: A discussion of Lang, Raedy and Wilson (2006)," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 285-299, October.
    7. Tay, Nicholas S.P. & Oladi, Reza, 2011. "Listings from the emerging economies: An opportunity for reputable stock exchanges," International Review of Economics & Finance, Elsevier, vol. 20(3), pages 388-394, June.
    8. Craig Doidge & G. Andrew Karolyi & Karl V. Lins & Darius P. Miller & René M. Stulz, 2009. "Private Benefits of Control, Ownership, and the Cross-listing Decision," Journal of Finance, American Finance Association, vol. 64(1), pages 425-466, February.

    More about this item

    JEL classification:

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

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