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

• Published date: 01 August 2016
• Date: 01 August 2016
• DOI: http://doi.org/10.1111/fire.12110

The Financial Review 51 (2016) 299–328

The Impact of Cross-Listing on the Home

Market’s Information Environment and

Stock Price Efficiency

Olga Dodd∗and Aaron Gilbert

Auckland University of Technology

Abstract

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:

olga.dodd@aut.ac.nz.

C2016 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 https://www.nyse.com/.

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