The Reputation of Underwriters, the Bonding Hypothesis, and the Impact on the Information Environment of U.S. Cross-listed Firms

The Reputation of Underwriters, the Bonding Hypothesis, and the Impact on the Information Environment of U.S. Cross-listed Firms
Author: Gilberto Ramos Loureiro
Publisher:
Total Pages: 166
Release: 2007
Genre: Corporate governance
ISBN:

Abstract: The first essay of this dissertation tests whether hiring a reputable underwriter to sponsor equity offerings of foreign firms, that occur when they cross-list on a U.S. stock exchange, is a "reputational bonding" mechanism. In line with the Bonding Hypothesis of Stulz (1999) and Coffee (1999, 2002), I find that foreign firms that cross-list in the U.S. and undertake IPOs are more likely to employ reputable underwriters if the firms come from countries with poor shareholder protection. The additional monitoring provided by reputable underwriters may help overcome the skepticism of U.S. investors, and explains the higher valuation these firms obtain after the offering. There is, however, a price to be paid for this bonding benefit. I find that issuers from countries with low shareholder protection tend to be more underpriced if they are sponsored by prestigious underwriters. In the second dissertation essay, I examine whether the decisions to raise equity and hire a reputable underwriter to conduct the offering impacts the information environment of foreign firms cross-listed on a U.S stock exchange. Using a sample of cross-listed firms from 1980 to 2004, I find that those that raise equity and hire a reputable underwriter, within three years after cross-listing, observe higher analyst coverage and more accurate earnings forecasts. Furthermore, I conclude that these improvements in the firm's information environment are likely to positively affect firm value -- the empirical evidence shows a positive relation between analyst coverage/forecast accuracy and Tobin's q. More importantly, the valuation of firms sponsored by top underwriters tends to be more sensitive to improvements in forecast accuracy. Overall, the results of this essay complement the findings of Lang et al. (2003) and shed some light on the monitoring role of reputable underwriters via their impact on firm's information environment.

The Reputation of Underwriters

The Reputation of Underwriters
Author: Gilberto R. Loureiro
Publisher:
Total Pages: 44
Release: 2010
Genre:
ISBN:

In the spirit of the Bonding Hypothesis proposed by Stulz (1999) and Coffee (1999, 2002), I find that foreign firms that cross-list in the U.S. and undertake IPOs are more likely to employ reputable underwriters if the firms come from countries with poor shareholder protection. The additional monitoring provided by reputable underwriters may help overcome the skepticism of U.S. investors, and partially explains the higher valuation these firms obtain after the offering. There is, however, a price to pay for this bonding benefit. I find that issuers from countries with weaker shareholder protection tend to be more underpriced if they are sponsored by prestigious underwriters.

The Impact of Hiring a Reputable Underwriter on the Information Environment of Cross-Listed Firms

The Impact of Hiring a Reputable Underwriter on the Information Environment of Cross-Listed Firms
Author: Gilberto R. Loureiro
Publisher:
Total Pages: 54
Release: 2010
Genre:
ISBN:

In this paper I examine how the information environment of cross-listed firms is affected by a mechanism of reputational bonding: the choice of a reputable underwriter to sponsor an equity offering. Using a sample of cross-listed firms from 1980 to 2004, I find that those that raise equity and hire a reputable underwriter, within three years after the event, observe higher analyst coverage and more accurate earnings forecasts. Empirical evidence shows that these improvements in the firm's information environment are positively related to firm value. More importantly, the improved accuracy of firms sponsored by top underwriters has an additional positive impact on their Tobin's q. Overall, the results of this paper show that top underwriters play an important monitoring role, via their impact on firm's information environment.

International Cross-Listing and the Bonding Hypothesis

International Cross-Listing and the Bonding Hypothesis
Author: Michael R. King
Publisher:
Total Pages: 49
Release: 2013
Genre:
ISBN:

The authors describe a new view of cross-listing that links the impact on firm valuation to the firm's ability to develop an active secondary market for its shares in the U.S. markets. Contrary to previous research, cross-listing may not provide benefits for all firms, even when those firms meet the highest regulatory requirements for disclosure and supervision. When cross-listed firms are divided into two groups on the basis of their share turnover in the home market relative to the U.S. market, the firms that develop active trading in the U.S. market experience an increase in valuation. Cross-listed firms that remain predominantly traded in the home market following cross-listing are valued similarly to non-cross-listed firms. To gain the full benefits of cross-listing, a foreign firm must convince investors that their shareholder rights will be protected. The effectiveness of this reputational bonding is witnessed in the amount of trading on the U.S. market relative to the home market.

The Effect of Shareholder Litigation Risk on the Information Environment

The Effect of Shareholder Litigation Risk on the Information Environment
Author: Siko Sikochi
Publisher:
Total Pages: 51
Release: 2014
Genre:
ISBN:

I examine the effects of shareholder litigation risk on cross-listed firms' information environment, as captured by information asymmetry. In order to disentangle the effects of shareholder litigation risk from those of confounding factors, I exploit a quasi-natural experiment in the form of a reduction in shareholder litigation risk resulting from the 2010 Supreme Court ruling in Morrison v. National Australia Bank. After the ruling, I document higher information asymmetry for cross-listed firms, especially for the firms with low US share activity. I also find higher information asymmetry in bad news firm-quarters and for firms from countries with weak legal institutions. I interpret my findings as evidence that shareholder litigation risk is an important factor in shaping the information environment. By implication, these findings suggest that improvements in foreign firms' information environment upon listing in the US, as documented in prior literature, stem in part from the greater litigation risk associated with the US listing.

Bonding and Dominance in Securities Markets

Bonding and Dominance in Securities Markets
Author: Amir N. Licht
Publisher:
Total Pages: 108
Release: 2003
Genre:
ISBN:

This paper questions the bonding hypothesis on cross-listing - namely, the idea that firms may list on a foreign stock market with a view to renting that market's superior corporate governance system. A critical review of extant evidence reveals that an opposite, quot;avoiding hypothesisquot; more aptly describes firms' cross-listing behavior in this regard. The dominant factor in global cross-listing patterns appears to be informational distance, which comprises aspects of geographical and cultural distance. The greater the distance between an issuer's origin and destination markets the greater are the hurdles to utilizing the destination market's regulatory regime. Drawing on recent advances in psychological research, this paper concretizes the notion of cultural distance in the context of corporate governance. Potential effects of such distance are demonstrated using Korean corporate governance as a representative case of Confucian governance. The paper concludes with a discussion of home-market dominance in price formation processes of cross-listed stocks.

Adrs, Analysts, and Accuracy

Adrs, Analysts, and Accuracy
Author: Mark H. Lang
Publisher:
Total Pages: 39
Release: 2012
Genre:
ISBN:

This paper investigates the relation between cross listing in the U.S., with its resulting commitment to increased disclosure, and the information environment of non-U.S. firms. We find that firms that cross-list on U.S. exchanges have greater analyst coverage and increased forecast accuracy relative to firms that are not cross listed. A time-series analysis shows that the change in analyst coverage and forecast accuracy occurs around cross listing. We also document that firms that have more analyst coverage and higher forecast accuracy have a higher valuation. Further, the change in firm value around cross listing is correlated with changes in the firm's information environment. Our findings support the hypothesis that cross-listed firms have better information environments, which are associated with higher market valuations.

An Unexpected Test of the Bonding Hypothesis

An Unexpected Test of the Bonding Hypothesis
Author: Louis Gagnon
Publisher:
Total Pages: 68
Release: 2017
Genre:
ISBN:

In its June 2010 Morrison v. National Australia Bank ruling, the U.S. Supreme Court unexpectedly decided that key fraud-related provisions of U.S. securities laws would only apply to transactions in foreign securities that take place on U.S. exchanges. We document a statistically significant and economically large increase in the price of U.S. cross-listed foreign stocks relative to their currency-adjusted equivalent home-market shares around the decision, which we associate with the newly differentiated legal status accorded U.S. cross-listed shares by Morrison. We interpret the market's reaction to the decision as affirming that investors, both foreign and domestic, value how U.S. securities laws apply, an important element of the “bonding” hypothesis as a motive for international cross-listings.

Do U.S. Analysts Improve the Local Information Environment of Cross-Listed Stocks?

Do U.S. Analysts Improve the Local Information Environment of Cross-Listed Stocks?
Author: Amir Amel-Zadeh
Publisher:
Total Pages: 57
Release: 2018
Genre:
ISBN:

This paper examines whether and how U.S. analysts contribute to an improvement in the home market information environment of foreign firms cross-listed in the United States. Comparing return and trading volume reactions to U.S. analyst recommendation revisions to local analysts' for cross-listed stocks from 40 countries, we find strong evidence of a U.S. analyst location premium. We strengthen the identification of this effect by examining a subsample of analysts that move locations allowing us to isolate the effect of the location from unobserved differences in analyst, broker and firm characteristics. The U.S.-location premium to information production cannot be explained by a bonding or certification role of U.S. analysts or by higher U.S. investor demand for U.S. analyst services. Rather, we find evidence that U.S. analysts have an advantage in understanding U.S. GAAP reconciliations of cross-listed firms and that this advantage disappears with the adoption of IFRS.