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The Long-Term Effects of Cross-Listing, Investor Recognition, and Ownership Structure on Valuation

The Long-Term Effects of Cross-Listing, Investor Recognition, and Ownership Structure on Valuation. Michael R. King, Bank of Canada Dan Segal, Univ. of Toronto November 2006.

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The Long-Term Effects of Cross-Listing, Investor Recognition, and Ownership Structure on Valuation

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  1. The Long-Term Effects of Cross-Listing, Investor Recognition, and Ownership Structure on Valuation Michael R. King, Bank of Canada Dan Segal, Univ. of Toronto November 2006

  2. “[C]ompanies listed in the U.S. … have found that a U.S. listing pays off in a higher profile, greater access to new capital, a wider shareholder base and more liquidity for their stock.” Financial Post April 6,1996 Karolyi (2004) ‘conventional wisdom’

  3. Motivation • How permanent are valuation gains? • How do they vary across time? • How do effects vary cross-sectionally? • Firm characteristics (growth, ROA, leverage) • Ownership (widely-held, control 20%+,dual-class) • Endogeneity issue • Matching methods (size, industry) • 2SLS: 1st – investor holdings, 2nd – Tobin’s q • Before & after using only cross-listed firms

  4. Findings • Only transitory increase in valuation from cross-listing; disappears in 3 years • Not explained by changing U.S. shareholder base • Outperform initially if attract larger number or % holdings of U.S. investors • No variation by ownership structure at high levels • Widening of investor base & improved info environment are distinct effects • Dual-class benefit at low levels when others do not • Reduced info asymmetry (Jensen & Meckling 1976)

  5. Overview • Hypothesis development • Data and methodology • Univariate tests • Importance of U.S. investors • Cross-sectional variation by owner type • Cross-listing – before and after

  6. Merton (1987) investor recognition • Investors only buy stocks they know about • Shadow cost of incomplete information … (1) • …leads to higher expected excess returns (2) • Studies focus on change in investor base (qi) or change in visibility

  7. First hypothesis (H1) • Foerster & Karolyi (1999) event studies (ARs) • Change in investor base primary; liquidity secondary • Baker et al (2002), Lang et al (2003) • Increased analyst following & media following • Improved information environment • Cross-country studies with industry controls • Few firm controls (size, capital raising, earnings growth) • Focus on point in time • H1: Higher number or percentage hldgs by U.S. investors  higher Tobin’s q

  8. Second hypothesis (H2) • Permanent or transitory? • Foerster & Karolyi (1999) find pre-listing run-up & post-listing decline [-1,1] in ARs ; could be investor recognition or liquidity • Mittoo (2003) same pattern for Cdn firms [-1,3]; reject liquidity as longer horizon explanation • Sarkissian & Schill (2004) study ARs of firms listed in 1998 over [-10,10]; permanent gains are due to investor familiarity • Gozzi et al (2005) study Tobin’s q [-2,2]; focus on changing components, not investor base • H2: Permanent gains if maintain wider investor base over time

  9. Third hypothesis (H3) • U.S. investors avoid closely-held foreign firms • Edison & Warnock (2004), Leuz, Lins & Warnock (2005), Ferreira & Matos (2006) • Improvement in info environment is key • Lang et al (2004), Ammer et al (2005) • Impact of concentrated ownership; separation of cash-flow vs. control • Morck et al (1988), Claessens et al (2002), Lins (2003), Lemmon & Lins (2003), Doidge et al (2006) • H3: Firms with control 20%+ or dual-class have lower investor recognition than widely-held firms

  10. Fourth hypothesis (H4) • Increased valuations due to reduced info asymmetry; greater monitoring (bonding) • Coffee (1998, 2002), Stulz (1998), Reese & Weisbach (2002), • Firm-level effect vs. country-level effect (LLSV) • Doidge et al (2004) controlling shareholders weigh costs vs. private benefits • Doidge (2004) benefits should be larger when agency problems greatest e.g. firms with dual-class shares • H4: Firms with control 20%+ or dual-class benefit more at low levels of investor holdings

  11. Data and methodology • 16 year panel 1989-2004: match Xlist with non-Xlist (size, industry); 2,802 obs; 683 firms • Control for: time-zone, form of XLIST, legal effects • Univariate tests; panel regressions with fixed effects; time variation in all dummies e.g. Xlist, owner type, control % • Endogeneity: matching methods, before-after

  12. Cross-listing & ownership structure Non-XLIST XLIST Blue = WidelyYellow = DualRed = Control20%+

  13. Table 2: Importance of U.S. investors

  14. Table 2: Importance of U.S. investors (2) • Split XLIST dummy into low vs. high based on median number of investors (INUM) or % investors (IHOL) • Only firms in upper halves increase in valuation • Firms that fail to widen investor base same as non-XLIST

  15. Table 3: Time-series effects • Interact INUM with year dummies relative to XLIST • Only INUM year 0 & 1 significant; monotonic decline • Similar but weaker for IHOL

  16. Table 4: Ownership effects • Control 20%+ valued similarly to widely-held firms • Dual-class have lower valuations on average • XLIST have higher valuations on average • No significance from interaction terms

  17. Table 5: Ownership & U.S. investors • Only firms in INUMHI / IHOLHI increase in valuation • Control 20%+ do worse at higher # or % • Dual-class same at higher; do better at lower # or %

  18. Cross-listing – before and after • Address endogeneity using only cross-listed firms • 120 firms cross-listed 1990-2003 • Exclude IPOs/spin-offs or less than [-1,1] • 69 firms, median 7 yrs (min 3 yrs, max 11 yrs) • Repeat analysis in Tables 2-5

  19. Table 6: XLIST before - after • Dual-class benefit more from cross-listing • Clear time-series pattern; benefit mis-specified

  20. Summary • Widening of U.S. investor base & improved info environment are distinct effects • Valuations peak in year 0 then fall monotonically at all levels of U.S. investor holdings and across all ownership structures • U.S. investors less willing to invest in dual-class • Dual-class benefit more even when they fail to widen their U.S. investor base • Reduction in info asymmetry has separate impact on valuation for firms with greatest agency problems

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