Abstract - Cost of Capital and Cash Flow Effects of U.S. Cross-Listings (with Luzi Hail)

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.

Christian Leuz
Wharton School
24.May 2005

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