The impact of international cross-listing on the cost of capital
The question of international capital market integration or segmentation has become an important issue for international investors and for companies seeking to source their capital internationally. Previous research has suggested that international listing represents one effective way to mitigate the effects of international market segmentation. Segmentation is caused by various types of barriers to international investment as restrictions on portfolio investment, liquidity, and a poor institutional environment. Previous studies have shown that liquidity, the size of the investor base, and market segmentation influence the cost of capital. Hence, an international listing may reduce a firm's cost of capital, if it increases the size of the investor base, leads to an increase in the liquidity of a firm's stock, and reduces international market segmentation. The objective of this study is to examine whether an international listing on the London Stock Exchange, NASDAQ, and the New York Stock Exchange (NYSE) has an impact on the cost of capital of firms. The main focus of this study is to investigate if the decision to raise equity capital with the listing affects liquidity and market integration. The purpose of the thesis is fourfold: (1) to investigate whether foreign firms that list on NYSE or NASDAQ experience more positive wealth effects in the pre-listing period and a stronger decline in expected returns in the post-listing period than London listings; (2) to compare changes in the liquidity of stocks when they become internationally listed on one of the three major global stock exchanges, the London Stock Exchange, the New York Stock Exchange (NYSE), and NASDAQ; (3) to examine the effect of alternative international equity offering methods on liquidity and its subsequent impact on the cost of capital; (4) to investigate the transfer of pricing information for non-US companies that conducted a simultaneous initial public offering on the NYSE and on their domestic stock exchange. We find that foreign firms that list on the New York Stock Exchange or NASDAQ experience positive abnormal returns prior to their US listing, and a decline in expected returns in the post-listing period. On the contrary, foreign firms that list on the London Stock Exchange do not experience any significant changes. This suggests that the benefits associated with a US listing are higher, since foreign firms make themselves more accessible for US investors by complying with the stringent disclosure requirements of the Securities and Exchange Commission (SEC). These benefits may even be higher for emerging market firms which use their ADR listing to raise equity capital. Although emerging market firms may try to time their issues to take advantage of some form of "emerging market sentiment", the evidence is only weak. The finding of substantial positive returns of the ADR price for firms that upgrade their previously OTC-traded ADR programme to a listing are rather an indication of the benefits experienced with a listing. The results show that the liquidity of stocks which list on the London Stock Exchange, the New York Stock Exchange, and NASDAQ increases subsequent to the listing. However, firms listing on NYSE appear to experience the strongest abnormal volume effects. In addition to the persistent long-term impact on liquidity, we also document significant short-term trading volume effects of international listings. Our comparison of international listings and control firms matched by nationality, firm size, and industry confirms our finding that internationally listed firms experience an increase in liquidity. This study also provides evidence that 80 percent of our sample firms, which obtained a "full" ADR listing on NYSE or NASDAQ, experience an increase in their total order flow. Moreover, the US order flow of NYSE-listed firms is higher than in their pre-listing domestic market for 83 percent of our sample firms. The results provide evidence that non-US firms which conduct a public offerings in the US have lower bid-ask spreads than private placements. Our sample consists of 231 international equity offerings from 33 countries world-wide; 86 companies conducted a public offering on NYSE or NASDAQ, and 145 companies raised capital in the private placement market. We find that the decision between a public offering or a private placement under Rule 144 A has an impact on the cost of capital of a firm. Our cost-benefit analysis shows that the benefits of a public offering outweigh the cost advantage of private placements. We provide empirical evidence that the interaction between the domestic and the foreign stock market leads to lower bid-ask spreads for internationally listed firms. The investigation of the determinants of domestic and foreign trading volume indicates that international listing increases the total trading volume. Trading volume on the foreign stock exchange appears to be strongly influenced by the percentage of equity issued in the foreign market. In contrast to previous studies that examine "normal" cross-listings, our results show that in many cases NYSE prices seem to lead domestic prices. This result is particularly pronounced for emerging market shares whose domestic markets often appear to be pure satellites of the NYSE market. Our results also show a higher speed of convergence between ADRs and underlying shares for developed market firms implying that arbitrage is undertaken more quickly. A comparative order flow analysis provides consistent evidence since a great number of firms experience a higher trading activity on the NYSE than on their domestic market. While previous evidence suggests that ADR IPOs are less underpriced than US IPOs, our results do not indicate any differences. Moreover, initial returns of emerging market and developed market IPOs do not seem to differ.