Year of Graduation
Factors Affecting the Changes in the Size of the Cross-listing Premium
This paper investigates the changes in the size of cross-listing premium for seven European countries from 2000 to 2012 and the factors that can affect these changes. This paper is organized as follows: the review of literature is provided; the cross-listing premium is calculated for all countries for all years; the reasons of changes in the size of premium are analyzed. Cross-listing premium is measured as Tobin’s Q of companies with cross-listing in the USA divided by average Tobin’s Q of all companies from the country without cross-listing. It is shown in the paper that for companies with level II and III ADR cross-listing premium declined dramatically from 60% in 2000 to about 15% in 2000; the decline was especially significant in 2004. For companies with level I ADR size of cross-listing premium was lower than 10% for most of the years and there were no significant changes for such companies. It is shown that the greatest reduction in premiums was for those companies whose characteristics are similar to companies who conduct cross-listing for the purpose of "bonding": for companies with high rates of sales growth and mainly financed by equity rather than debt. The obtained results are consistent with the "bonding" hypothesis, according to which the US legal system and the quality of corporate governance to a greater extent than in other countries protect the rights of minority shareholders, ensure transparency in financial reporting and reduce the possibility of controlling shareholders to extract private benefits for the expense of shareholders. Companies with significant opportunities for growth voluntarily "bind" the possibility of controlling shareholders to extract private benefits of control by listing in a more rigorous jurisdiction in order to attract investment. Under this hypothesis, a significant reduction in premium observed in 2004 can be explained by the fact that in this year the European Union began to adopt directives to toughen regulation of the stock markets in the participating countries, which led to a reduction in the gap between the levels of investor protection in the United States and in Europe.