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.
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 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
To continue reading
Request your trial