24 Why are foreign firms listed in the U.S. worth

WhyareforeignfirmslistedintheU.S.worthmore?CraigDoidge,G.AndrewKarolyi,andRenéM.Stulz*Revised,January2003*Respectively,AssistantProfessorofFinance,RotmanSchoolofManagement,UniversityofToronto,ProfessorofFinanceandDean’sDistinguishedResearchProfessor,andProfessorofFinanceandEverettD.ReeseChairofBankingandMonetaryEconomicsattheFisherCollegeofBusinessoftheOhioStateUniversity.RenéStulzisalsoaresearchassociateoftheNationalBureauofEconomicResearch.WethankGeorgeBenston,DavidBrown,JohnCoffee,SteveCosslett,SimeonDjankov,EugeneFama,GastonGelos,AlanHess,CheolEun,MarkFlannery,KenGarbade,CharlesHimmelberg,DavidHirshleifer,PremJain,JonKarpoff,DongLee,CraigLewis,KarlLins,LubomirLitov,RodolfoMartell,RonMasulis,JianpingMei,DariusMiller,AndyNaranjo,VinceReinhart,MarkRoe,SergeiSarkissian,JimShapiro,AndreiShleifer,BillSchwert,MichaelWeisbach,IngridWerner,twoanonymousreferees,seminarparticipantsatEmoryUniversity,theFederalReserveBankofNewYork,HarvardUniversity,IndianaUniversity,theOhioStateUniversity,theUniversityofBritishColumbia,theUniversityofCaliforniaatLosAngeles,theUniversityofChicago,theUniversityofFlorida,theUniversityofKentucky,theUniversityofMinnesota,theUniversityofRochester,theUniversityofUtah,theUniversityofWashington,RiceUniversity,andVanderbiltUniversity,andattendeesattheGeorgiaTechInternationalFinanceConference,attheWorldBankConferenceonMarketLiberalization,attheStanfordLawSchoolConferenceonInternationalCross-listings,andattheWesternFinanceAssociationforhelpfulcomments.RobinGreenwoodfromHarvardmadeexcellentsuggestionsforthemodelincludedinthispaper.AbstractAttheendof1997,foreigncompanieswithsharescross-listedintheU.S.hadTobin’sqratiosthatwere16.5%higherthantheqratiosoffirmsfromthesamecountrythatwerenotlistedintheU.S.Thevaluationdifferenceisstatisticallysignificantandreaches37%forthosecompaniesthatlistonmajorU.S.exchanges.Thedifferencepersistsevenaftercontrollingforanumberoffirmandcountrycharacteristics.Weproposeatheorythatexplainsthisvaluationdifference.Inourtheory,aU.S.listingreducestheextenttowhichcontrollingshareholderscanextractprivatebenefitsfromcontrolbutincreasesthefirm’sabilitytofundgrowthopportunities.Consequently,firmsthatlistarethoseforwhichthebenefitstocontrollingshareholdersfrombeingbetterabletotakeadvantageofgrowthopportunitiesasaresultoflistingexceedthelossofprivatebenefitsofcontrol.Ourtheoryfurtherpredictsthatthegrowthopportunitiesofcross-listedfirmswillbemorehighlyvaluedthanthoseoffirmsnotlistedintheU.S.bothbecausecross-listedfirmsarebetterabletotakeadvantageoftheseopportunitiesandbecauseasmallerfractionofthecashflowofthesefirmsisexpropriatedbycontrollingshareholders.Weshowthatsalesgrowth,usedasaproxyforgrowthopportunities,isvaluedmorehighlyforfirmslistedintheU.S.,andthatthiseffectisgreaterforfirmsfromcountrieswithpoorerinvestorrights.1.IntroductionWhyisitthatfewerthanoneintenlargecompaniesfromoutsidetheU.S.choosetocross-listtheirsharesonU.S.markets?SurveysofmanagerstypicallyfindthattheyperceivemanybenefitsfromlistingintheU.S.Inparticular,theymentionthatfirmsbenefitfromlistingbecauseitlowerstheircostofcapital,givesthemaccesstoforeigncapitalmarkets,increasestheirabilitytoraiseequity,increasestheirshareholderbase,makestheirstockmoreliquid,andaddsvisibility,exposure,andprestige(Mittoo,1992,FantoandKarmel,1997).Atthesametime,thedirectcostsassociatedwithalistingthatmanagersreportseemsmallincomparisontothebenefits.ThesecostsincludetheSecuritiesandExchangeCommission(SEC)reportingandcompliancerequirements,aswellasthelegalcostsandinvestment-bankingfeesassociatedwiththelisting.Inanumberofcases,thedirectinitialcostshaveevenbeenpickedupbythedepositarybanks.1Giventhisapparentimbalancebetweenbenefitsandcosts,whyisitthatwedonotseemorecompanieslistingintheU.S.?DofirmsthatlistintheU.S.actuallybenefitfromlisting?Arefirmsthatcross-listworthmorethanfirmsthatdonot?WhyisitthatwedonotseemorecompanieslistingintheU.S.?Isitthatthemanagersandcontrollingshareholdersoffirmsthatdonotlistwouldnotbenefitfromlistingwhenothershareholdersmight?Toaddressthesequestions,wefirstcomparethevalueofforeignfirmslistedintheU.S.tothevalueofforeignfirmsthatarenotlistedintheU.S.UsingtheWorldscopedatabaseuniverseoffirms,wefindthatfirmslistedintheU.S.haveaTobin’sqratiothatis16.5%higherthantheqratiooffirmsfromthesamecountrythatdonotlistintheU.S.Wecalltheexcessvalueoflistedfirmsrelativetootherfirmsthe“cross-listingpremium.”Thecross-listingpremiumdependsonthetypeoflistingafirmchooses.Itreachesashighas37%forcompaniesthatlistonmajorU.S.exchanges,butismuchsmallerforover-the-counterlistingsandprivateplacements.1See“ConcernarisesoverADRpayouts,”byAlisonBeard,FinancialTimes,July23,2001.1Thepremiumpersistsaftercontrollingforanumberofcountry-levelfactorsandfirm-specificcharacteristics.Thoughconsiderableattentionhasbeendevotedtoexplainingthecorporatediversificationdiscount(LangandStulz,1994;BergerandOfek,1995),nonehasbeenpaidtothecross-listingpremiumforexchange-listedfirmswhichisabouttwicethesizeofthediversificationdiscount.Weprovideatheorythatexplainswhyfi