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The impact of cross-listing in the United States on the precision of public and private information

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Abstract

Our study explores the source of improvement in the information environment from cross-listing shares on US stock exchanges. Are the improvements from cross-listing in the United States achieved more through public or private information channels? While we find evidence that US cross-listing is significantly associated with improvements in both public and private information precision, the association is stronger between cross-listing and improvements in private information precision. This suggests that the improvement in the information environment for cross-listed firms is largely due to analysts expending more effort on firm-specific information discovery as opposed to broader improvements in overall public disclosure. This research should influence international business scholars that improvements in the information environment do not occur solely through public information channels. They also occur through investors’ private information search activities.

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Notes

  1. Beginning in 2007, the SEC makes an exception to the requirement to reconcile financial information with US GAAP under form 20-F for firms already reporting under International Financial Reporting Standards.

  2. Bailey et al. (2006) and Fernandes and Ferreira (2008) are two exceptions.

  3. However, we point out that the number of US listings, which increased gradually until the late 1990s, have experienced a notable decline after the turn of the century. For instance, as of the end of 2002, the number of internationally cross-listed stocks had retreated to 2300 from its 1997 high of 4700 (Karolyi, 2006).

  4. Raising capital by way of a public issue (i.e., Level III ADRs) requires additional disclosure of an SEC F-1 filing (prospectus) for a public offering and an F-2 or F-3 filing for subsequent offerings (Bailey et al., 2006). In contrast, firms that do not list on an organized stock exchange (i.e., Level I ADRs and Rule 144a) are subject to less stringent supervision by the SEC.

  5. We include Rule 144a sample firms with Level I ADRs as cross-listed non-exchange firms as both types of firms are not subject to US GAAP reporting requirements.

  6. For instance, theory suggests that firms can demonstrate over time, that through good internal behavior, they deserve a reputational discount in the market for external capital (Diamond, 1991).

  7. In fact, as of 2007, the SEC no longer requires exchange-listing foreign registrants that use International Financial Reporting Standards (IFRS) to file US GAAP reconciliations. Given that IFRS are used in over 110 countries around the world, the new requirement eliminates the reconciliation requirement for the majority of foreign registrants.

  8. Prior literature suggests the external audit adds credibility to firm-provided financial information by providing a third-party assessment on the quality of information (Palmrose, 1988; Simunic, 1980).

  9. Alternatively, we measure the level of private information search activity by the precision of private information relative to the precision of public information incorporated into analysts’ earnings forecasts. Based on BKLS (1998), this variable is defined as D/[SE−D/N]. Our main results are not sensitive to this alternative measurement of the private information search level.

  10. Most previous studies on cross-listing have also used the WORLDSCOPE database including Lang et al. (2003), Doidge et al. (2004), and Fernandes and Ferreira (2008).

  11. The mean precision of public information for exchange-listed firms (rh=5.951) exceeds the combined precision of public information for non-cross-listed firms and non-exchange-listed-cross-listed firms (rh=5.455 and 5.773) with a t-statistic of 6.57 (p<0.001).

  12. To test for the exogeneity of our instruments, we regress the residuals from the second stage overall uncertainty model on the exclusionary variables, that is, instruments. Untabulated results show that with the exception of OWNCONC, the other three instruments, namely GROWTH, ACCTSTD, and LEGORG, are insignificant, suggesting they are reasonable instruments.

  13. A possible explanation for this discrepancy is the difference in sample composition, which is due to different sample restrictions. For example, Fernandes and Ferreira (2008) drop firms with total assets under $100 million from the sample while we do not. Since these two variables are country-level variables, the results can be sensitive to the countries represented in the sample.

  14. We use this propensity matching criterion, rather than for example caliper distance matching, in order to maximize the sample size. Using the latter approach, a caliper distance of 0.03 results in a smaller sample size (6340 firm-year observations as opposed to 6456), but yields similar results.

  15. Our study compares foreign firms cross-listing in the United States with foreign firms not cross-listed in the United States. An interesting avenue for future research would be to compare the improvements in the analysts’ information environment between firms cross-listing in the United States and domestic US firms.

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Acknowledgements

We are thankful for helpful suggestions from Charlene Henderson, Ole-Kristian Hope, Bob Lipe, Gary Meek, Wayne Thomas, and seminar participants at Chulalongkorn University, Korea University, and the 2010 Oklahoma State University Accounting Research Conference.

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Authors and Affiliations

  1. William S. Spears School of Business, Oklahoma State University, Stillwater, USA

    Don Herrmann

  2. DeGroote School of Business, McMaster University, Hamilton, Canada

    Tony Kang

  3. Korea University Business School, Korea University, Seoul, Korea

    Yong Keun Yoo

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  1. Don Herrmann
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  2. Tony Kang
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Correspondence to Tony Kang.

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Received by David Reeb, Area Editor, 11 June 2014. This article has been with the authors for three revisions.

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Herrmann, D., Kang, T. & Yoo, Y. The impact of cross-listing in the United States on the precision of public and private information. J Int Bus Stud 46, 87–103 (2015). https://doi.org/10.1057/jibs.2014.51

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