The Impact of Cross‐Listing on the Home Market's Information Environment and Stock Price Efficiency

Published date01 August 2016
Date01 August 2016
The Financial Review 51 (2016) 299–328
The Impact of Cross-Listing on the Home
Market’s Information Environment and
Stock Price Efficiency
Olga Doddand Aaron Gilbert
Auckland University of Technology
We empirically examine changes in informationasymmetry and informational efficiency
of cross-listed stocks in their home market around a cross-listing in the United States. Weesti-
mate intraday market microstructure measures of information asymmetry and price efficiency,
and find that a U.S. cross-listing significantly improves the quality of a firm’s information
environment and stock price efficiency in the home market. This improvement is stronger for
cross-listings that take place after the adoption of Sarbanes-Oxley Act. Our results demon-
strate that stricter disclosure from a U.S. cross-listing is beneficial, in line with the legal and
reputational bonding hypotheses.
Keywords: cross-listing, information environment, information asymmetry, informational
efficiency of stock prices
JEL Classifications: G14, G23, G30
Corresponding author: Department of Finance, Auckland University of Technology, PrivateBag 92006,
1142 Auckland, New Zealand; Phone: +64 9 921 9999, ext 5423; Fax: +64 9 921 9940; E-mail:
C2016 The Eastern Finance Association 299
300 O. Dodd and A. Gilbert/The Financial Review 51 (2016) 299–328
1. Introduction
Cross-listing, which is a firm’s listing of its shares on a foreign stock exchange
in addition to its home market, continues to be a prominent feature of global financial
markets. At the end of 2014, 528 non-U.S. stocks from 47 countries were listed on
the NYSE, comprising 21% of total NYSE listings.1From a firm’s perspective, the
benefits of cross-listing may include greater stock liquidity,lower costs of capital, and
higher market valuation (Diamond and Verrecchia, 1991; Easley and O’Hara, 2004;
Chemmanur and Fulghieri, 2006). These benefits are most likely gained by listing on
exchanges that have a better information environment through stricter disclosure and
more active regulators, institutions, and analysts. Greater information production in
the foreign host market after cross-listing should carry back to the cross-listed firm’s
home market, improving the stock’s information environment and price efficiency
at home (Domowitz, Glen and Madhavan, 1998). In this paper, we empirically test
whether cross-listing on the major U.S. exchanges is associated with an improvement
in information environment and stock price efficiency of the cross-listing stock in its
home market.
Several of the commonly proposed explanations for cross-listing have impli-
cations for information asymmetry and the stock price efficiency of a cross-listed
firm. The legal bonding hypothesis argues that firms benefit from cross-listing in
markets with stricter rules and laws. Cross-listing firms must meet the mandatory
disclosure and listing requirements of the foreign market in addition to the existing
disclosure requirements in the home market.2This should result in greater informa-
tion dissemination to markets following the cross-listing. In particular, cross-listing
on U.S. exchanges involves registration and compliance with the listing require-
ments of the U.S. Securities and Exchange Commission (SEC) that entail additional
mandatory information disclosure (Coffee, 2002). Leuz (2003) points out that, for
firms that cross-list in the United States, it is compulsory to file form 20-F, which
requires extensive disclosure of the firm’s financial and business information, in
addition to requiring restatements of accounting information as per either U.S. Gen-
erally Accepted Accounting Principles (GAAP) or International Financial Reporting
Standards (IFRS) post-2008.3Firms also face scrutiny from the SEC and become
1Data source: the NYSE website
2Severaltheoretical papers focus on the rationale to cross-list on stock exchanges with stringent listing and
disclosure requirements. Fuerst (1998) shows that firmscross-list on stock exchanges with strict disclosure
requirements to signal their quality.Huddart, Hughes and Brunnermeier (1999) show that stock exchanges
increase disclosure requirements in order to compete for order flow; that is, greater disclosure reduces
costs of trading and attracts liquidity.Chemmanur and Fulghieri (2006) show that cross-listing on a foreign
exchange with high disclosure standards enhances investors’ effectivenessin producing information and
reduces investors’ monitoring costs.
3Eaton, Nofsinger and Weaver(2007) show that accounting standards play a role in reducing information
asymmetry after a cross-listing in the United States. Differences in accounting standards are becoming
less relevant in recent years due to a significant effort undertaken in harmonization and international

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