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Abstract. This study examines post-listing equity price performance of foreign firms which cross-listed sponsored American Depository Receipts (ADRs) on the New York and the American Stock Exchanges during the period 1982-1992. We use three valuation metrics - price-to-book, priceto-cash-earnings, and price-to-earnings - which are adjusted for the home country and world industry indices to which the listing firm's stock belongs. We find positive valuation effects associated with cross-listing for both country-benchmarked and industry-benchmarked price ratios. Variables that proxy for home country characteristics such as governance styles, disclosure quality, market liquidity, and so forth are unable to explain the cross-sectional variation in the data. Our results thus suggest that cross-listing in the U.S. enhances valuations for listing firms by simply reducing the overall effect of segmentation among different national securities markets.
INTRODUCTION
There has been considerable theoretical and empirical research on segmentation of international capital markets, its links to stock prices and expected returns in the context of international portfolio diversification, and the role of cross-border listings of company shares to overcome such segmentation. The theoretical underpinnings of the links between capital market segmentation, stock prices and expected returns, and cross-listing can be traced to Black [1974], Stapleton and Subrahmanyam [1977], Stulz [1981], Errunza and Losq [1985], and Alexander, Eun and Janakiraman [1988]. The essential argument is as follows: when capital markets are segmented, in the sense that expected returns on riskequivalent securities can differ in different capital markets, firms will have the incentive to adopt operating and financial policies that can counter the negative effects of such segmentation. On the operating side, the firm can choose direct or portfolio investment, through either outright acquisition or through a merger; on the financial side, the firm could cross-list its stock in foreign equity markets to make its shares more easily available to a broader investor base. Our focus in this paper is on the valuation effects to home country investors from cross-listing in a stock market other than the home country market.
If markets are completely integrated, cross-listing a firm's stock in other markets should have no impact on stock prices, since investors could presumably undertake such financial market transactions directly and efficiently, without the firm acting on their behalf. Arbitrage, in short, will keep expected...