nach oben

Review of Quantitative Finance and Accounting

Erschienen in:

01.07.2007 | Original Paper

Disclosure and the cost of equity in international cross-listing

verfasst von: Tim V. Eaton, John R. Nofsinger, Daniel G. Weaver

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 1/2007

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

In this paper, we examine the relationship between disclosure level and the cost of equity capital for a sample of international firms cross-listing on the New York Stock Exchange. Increased disclosure has the potential to reduce information asymmetry, reduce the cost of financing and increase analyst following. Using an international asset pricing model, we find that listing firms experience a decrease in both disclosure risk and systematic risk while matching firms do not. Further, we find that the magnitude of the decrease is related to three types of disclosure: accounting standards; analyst following; and exchange/regulatory investor protection. Our results suggest that increased disclosure through accounting standards is beneficial to investors and that disclosure can be accomplished through information intermediaries, e.g., analyst following. For firms with the lowest levels of disclosure prior to cross-listing, all three types of disclosure appear to be valuable.

Nächster Artikel The relation between R&D intensity and future market returns: does expensing versus capitalization matter?

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

The 2002 decision by the European Parliament requiring 7,000 companies with consolidated financial statements listed on the European market to follow international standards by the end of 2005 greatly expands the acceptance for international standards (Reason 2002). Additionally, domestic pressure appears to be increasing in the wake of recent economic events in the US including the collapse of Enron and financial problems by other major firms. In 2002, five former SEC Chairmen (Hills, Williams, Ruder, Breeden, and Levitt) gave testimony before congress at the oversight hearing “Accounting and Investor Protection Issues Raised by Enron and Other Public Companies”. Breeden and Levitt intimated support for the SEC adopting other standards when those of the FASB are inadequate.

Bailey et al. (2006) find that contrary to expectations, firms cross-listing in the United States experience an increase in home country volatility and volume surrounding earnings announcements post cross-listing. Their findings suggest an increase in information asymmetry among investors. They conjecture several interpretations of this anomalous finding.

Accounting disclosure implies that firms communicate with investors through annual reports. Botosan argues that firms can also communicate with investors via analysts. As evidence of the importance of both types, she cites the less than perfect rank correlation between annual report disclosure rankings and other public disclosure rankings found by Lang and Lundholm (1993).

Merton’s model specifically defines information as the expected risk and return of the firm. However, in the interpretation of his model he expands the definition of information as visibility. The term, visibility, has been used in various papers studying incomplete information. In the discussion of his equilibrium model, Merton extends the usefulness of the model by expanding the interpretation to incomplete information more generally. Our paper connects with Merton’s framework in the expanded form. It gives us a general framework from which to connect other theories of information, such as quality of disclosure (Botoson’s 1997) and exchange disclosure quality (Huddart et al. 1999). By using Merton’s most general definition of incomplete information in our model, we can then empirically examine the relative contributions of each more specifically defined information theory.

An alternative to our CAPM model is to use the Fama and French (1993) three-factor model that adds firm size and book-to-market factors to the CAPM beta. Fama and French (1998) extend the model internationally and recommend using a world beta and world book-to-market factor. They implicitly assume that markets are integrated. Griffin (2002) shows that country-specific factors are better for estimating the cost of capital than world factors. However, these factor models are criticized by a number of authors who argue that the factors are not risk measures (see Lakonishok et al. 1994; Ferson et al. 1999 among others). We therefore choose to use a CAPM-based model. Since we are performing an event study, unless there is a structural shift in the pricing of domestic factors following the cross-listing of a single firm, the same misspecification bias (if there is one) should exist in both the pre and post listing periods for each firm. Thus our decision to use a parsimonious model should not affect our results.

Although cross-listing firms may be small relative to United States firms they are generally large relative to firms in their home countries.

If a Eurodollar deposit rate is not available for a specific country, then a reasonable proxy is used. For example, the Euroyen deposit rate is used for many East Asian countries.

Jain (2003)calculates effective spreads using closing prices and spreads for the first 4 months of 2000 and then averages them over the period. It is well established that trade size impacts effective spreads. While Jain’s method implicitly assumes a constant average trade size across exchanges, there is no a priori reason to expect that this biases the comparability of the results.

See Table 1 for the distribution of matching firms across countries.

The change in the incomplete information premium for these two firms is 0.00 and −0.02, respectively.

We also create a dummy variable indicating whether the Government alone set the accounting standards for a country. Not surprisingly, we find that the government set GAAP variable and the private sector set GAAP variable are strongly and negatively correlated. Otherwise we find little evidence of correlation at traditional levels of significance. The exception is that the government set GAAP variable is strongly positively related to the number of analysts a firm has following it. We will examine this relationship further in a later section of the paper.

All regressions are checked for evidence of multicollinearity by examining variance inflation factors. None was found.

Although firms may increase the number of analysts that follow them after cross-listing, there is no theory indicating the marginal disclosure value of each analyst. Indeed it intuitively makes sense that the marginal disclosure value of each analyst is higher for low analyst following firms. Our hypotheses relate to which firms will benefit most from cross-listing related disclosure gains.

There are a small number of firms in our sample that list on the London Stock Exchange either within a year of listing on the NYSE (3) or more than a year before the NYSE listing (5). Listing on the LSE does not require the adoption of another accounting method. Excluding the three firms that list on the LSE within a year of listing on the NYSE yields similar results to those reported here. Of the firms that cross-list on the LSE before the NYSE listing, four experience an increase in exchange disclosure. For these four firms, we change their exchange disclosure measure to that of the UK and rerun our regressions. The results are little changed from those reported in Table 5. Therefore, the significance levels and our conclusions are not impacted. The results in Table 6 are unaffected.

Table 6

Sorting analysis

A. Analyst following and accounting disclosure
Analyst following	Accounting disclosure
Analyst following	Low (government)	High (private sector)	F-test
No analysts	−0.788% (−2.41)*** [8]	−0.055%(−0.28)[15]	5.11**
Analysts	−0.000% (−0.00)[12]	−0.122%(−1.01)[25]	0.20
F-test	5.43**	0.07
B. Analyst following and exchange disclosure
Analyst following	Exchange disclosure
Analyst following	Low (high spread)	High (low spread)	F-test
No analysts	−0.436% (−2.81)*** [23]	−0.076% (−0.46) [20]	2.51*
Analysts	−0.289% (−1.56)*[17]	−0.078% (−0.60) [34]	0.86
F-test	0.40	0.00
C. Exchange disclosure and accounting disclosure
Exchange disclosure	Accounting disclosure
Exchange disclosure	Low (government)	High (private sector)	F-test
Low (high spread)	−0.641%(−3.00)*** [12]	−0.028% (−0.05)[2]	1.17
High (low spread)	0.173% (0.66) [8]	−0.100%(−0.80)[38]	0.83
F-test	5.82**	0.02

The table reports the mean change in the information premium for subgroups of firms sorted according to, Accounting disclosure, and Exchange disclosure. For each variable, firms are sorted into two groups. For Analyst following the partitions are no analyst following and any analyst following. For Accounting disclosure, firms are separated into high and low disclosure groups, where high disclosure firms are from countries where the private sector is involved in setting the accounting standards. Low accounting disclosure firms are from countries where only the government sets the accounting standards. For Exchange disclosure firms are sorted according to the average effective spread for the top 25 capitalization firms listed on the home countries exchange. Low Exchange disclosure indicates that the average effective spread for home-country firms is above the median of exchanges in our sample. High Exchange disclosure indicates that that the average effective spread for home-country firms is below the median of exchanges in our sample. Effective spread is defined as\({2\left| {P-\frac{(bid+ask)}{2}} \right|}\), where P is the trade price; \({\frac{(bid+ask)}{2}}\) is the midpoint of the quoted spread at the time of the trade, and |·| is an absolute value indicator. In each panel quadrants are formed and the differences of means are calculated using F-tests to test the equality between quadrants. The t-statistics in parentheses are White (1980)-corrected for heteroscedasticity. The number of firms in each quadrant is reported in brackets

***, **, and * indicate statistical significance at 1%, 5%, and 10% level, respectively, using a one-tailed test

Ali, A., & Hwang, L. S. (2000). Country-specific factors related to financial reporting and the value relevance of accounting data. Journal of Accounting Research, 38, 1–21.CrossRef

Amihud, Y., & Mendelson, H. (1986). Asset prices and the bid ask spread. Journal of Financial Economics, 17, 223–249.CrossRef

Amir, E., Harris, T. S., & Venuti, E. K. (1993). A comparison of the value-relevance of US versus non-US GAAP accounting measures using form 20-F reconciliations. Journal of Accounting Research, 31, 230–275.CrossRef

Ashbaugh, H., & Olsson, P. (2002). An exploratory study of the valuation properties of cross-listing firms’ IAS and US GAAP earnings and book values. Accounting Review, 77(1), 107–126.

Bailey, W., Karolyi, G. A., & Salva, C. (2006). The economic consequences of increased disclosure: Evidence from international cross-listings. Journal of Financial Economics, 81(1), 175–213.CrossRef

Baker, K., Nofsinger, J., & Weaver, D. (2002). International cross listing and visibility. Journal of Financial and Quantitative Analysis, 37(3), 495–521CrossRef

Bartov, E., Goldberg, S. R., & Myungsun, K. (2005). Comparative value relevance among German, US and internaional accounting standards: A global perspective. Journal of Accounting, Auditing and Finance, 20(2), 95–119.

Botosan, C. A. (1997). Disclosure level and the cost of equity capital. Accounting Review, 72, 323–349.

Botosan, C. A., & Plumlee, M. A. (2002). A re-examination of disclosure level and expected cost of equity capital. Journal of Accounting Research, 40(1), 21–40.CrossRef

Campbell, J., Hermanson, H., & McAllister, J. (2002). Obstacles to international accounting standards convergence. Journal of Accountancy (May), 21–24.

Carrieri, F., Errunza, V., & Majerbi, B. (2006). Does emerging market exchange risk affect global equity prices? Journal of Financial and Quantitative Analysis, 41, 511–540.CrossRef

Cheng, C., Collins, D., & Huang, H. (2006). Shareholder rights, financial disclosure, and the cost of equity capital. Review of Quantitative Finance and Accounting, 27, 175–204.CrossRef

Coffee, J. (2002). Racing toward the top? The impact of cross-listing and stock market competition on international corporate governance. Northwestern University Law Review, 93, 641–708.

Doidge, C., Karolyi, G. A., & Stulz, R. M. (2004). Why are foreign firms listed in the US worth more? Journal of Financial Economics, 71, 205–238.CrossRef

Easley, D., & O’Hara, M. (2004). Information and the cost of capital. Journal of Finance, 59, 1553–1583.CrossRef

Errunza, V., Miller, D.P. (2000). Market segmentation and the cost of capital in international equity markets. Journal of Financial and Quantitative Analysis, 35, 577–600CrossRef

Fama, E., & French, K. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33, 3–56.CrossRef

Fama, E., French, K. (1998). Value versus growth: The international evidence. Journal of Finance, 53, 1975–1999.CrossRef

Ferson, W., Sarkissian, S., & Simin, T. (1999). The alpha factor asset pricing model: A parable. Journal of Financial Markets, 2, 49–68CrossRef

Foerster, S. R., & Karolyi, G. A. (1999). The effects of market segmentation and investor recognition on asset prices: Evidence from foreign stocks listing in the US. Journal of Finance, 54, 981–1013.CrossRef

Foerster, S. R., Karolyi, G. A. (2000). The long-run performance of global equity offerings. Journal of Financial and Quantitative Analysis, 35, 499–528.CrossRef

Griffin, J. (2002). Are the Fama and French factors global or country specific. Review of Financial Studies, 15, 783–803.CrossRef

Harris, M. S., & Muller, K. A. III (1999). The market valuation of IAS versus US-GAAP accounting measures using Form 20-F reconciliations. Journal of Accounting and Economics, 26, 285–312.CrossRef

Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31, 405–440.CrossRef

Henry, P. B. (2000). Stock market liberalization, economic reform, and emerging market equity prices. Journal of Finance, 55, 529–564.CrossRef

Huddart, S., Hughes, J. S., & Brunnermeier, M. (1999). Disclosure requirements and stock exchange listing choice in an international context. Journal of Accounting and Economics, 26, 237–269.CrossRef

Hung, M. (2000). Accounting standards and value relevance of financial statements: an international analysis. Journal of Accounting & Economics, 30(3), 401–420.CrossRef

Irani, A. (2004). The effect of regulation fair disclosure on the relevance of conference calls to financial analysts. Review of Quantitative Finance and Accounting, 22, 15–28.CrossRef

Jain, P. (2003) Institutional design and liquidity on stock exchanges around the world, Working Paper, Indiana University.

Jorion, P. (1991). The pricing of exchange rate risk in the stock market. Journal of Financial and Quantitative Analysis, 26(3), 363–376.CrossRef

Lakonishok, J., Shleifer, A., & Vishny, R. (1994). Contrarian Investment, Extrapolation and Risk. Journal of Finance, 49(5)1541–1578.CrossRef

La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (1998). Law and finance. Journal of Political Economy, 106, 1113–1155.CrossRef

La Porta, R., Lopez-de-Silanes, F., & Shleifer, A., (1999). The quality of government. Journal of Law, Economics, and Organization, 15, 222–279.CrossRef

Lang, M. H., Lins, K. V., & Miller, D. P. (2003a). ADRs, analysts, and accuracy: Does cross listing in the US improve a firm’s information environment and increase market value? Journal of Accounting Research, 41, 317–345.CrossRef

Lang, M. H., Lins, K. V., & Miller, D. P. (2004). Concentrated control, analyst following and valuation: Do analysts matter most when investors are protected least? Journal of Accounting Research, 42, 589–623.CrossRef

Lang, M. H., & Lundholm, R. (1993). Cross-sectional determinants of analyst ratings of corporate disclosures. Journal of Accounting Research, 31, 246–271.CrossRef

Lang, M. H., Smith-Raedy, J., & Yetman, M. H. (2003b). How representative are firms that are cross listed in the United States? An analysis of accounting quality. Journal of Accounting Research, 41, 363–386.

Leuz, C. (2003). IAS versus US GAAP: Information asymmetry-based evidence from Germany’s new market. Journal of Accounting Research, 41(3), 445–472.CrossRef

Merton, R. C. (1987). Presidential address: A simple model of capital market equilibrium with incomplete information. Journal of Finance, 42, 483–510.CrossRef

NYSE Research, www.nyse.com

Patro, D., Wald, J., & Wu, Y. (2002). Explaining exchange rate risk in world stock markets: A panel approach. Journal of Banking and Finance, 26, 1951–1972.CrossRef

Quinn, L. (2004). What’s the state of international accounting standards? Strategic Finance (April), 35–39

Reason, T. (2002). On the same page. CFO, 18 (5), 89–92.

Rees, L., & Elgers, P. (1997). The market’s valuation of nonreported accounting measures: Retrospective reconciliations of non-US and US GAAP. Journal of Accounting Research, 35, 115–126.CrossRef

Reese, W. Jr., & Weisbach, M. (2002). Protection of minority shareholder interests, cross listings in the United States, and subsequent equity offerings. Journal of Financial Economics, 66, 65–104.CrossRef

Stulz, R. M. (1999). Globalization, corporate finance, and the cost of capital. Journal of Applied Corporate Finance, 12(3), 8–25.CrossRef

Valero-Tonone, M. (2002). The effects of cross-listing on rival firms, Arizona State University, Working paper.

White, H. (1980). A heteroscedasticity-consistent covariance matrix estimator and direct test for heteroscedasticity. Econometrica, 48, 817–838.CrossRef

Titel: Disclosure and the cost of equity in international cross-listing
verfasst von: Tim V. Eaton
John R. Nofsinger
Daniel G. Weaver
Publikationsdatum: 01.07.2007
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 1/2007
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-007-0024-0

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Weitere Artikel der Ausgabe 1/2007

Takeover motives in a weak regulatory environment surrounding a market shock: a case study of New Zealand with a comparison of Gondhalekar and Bhagwat’s (2003) US findings

The role of stochastic volatility and return jumps: reproducing volatility and higher moments in the KOSPI 200 returns dynamics

The relation between R&D intensity and future market returns: does expensing versus capitalization matter?

Recap of the 17th Annual Conference on Financial Economics and Accounting (with PowerPoint of Professor Katherine Schipper's Keynote Speech)