Cross-Listing

Cross-Listing

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Cross-listing can be defined as the listing of a company’s shares in a stock exchange beyond its home country boundaries. It can also be termed as a secondary listing for firms those which are already listed in their home country. Typically, when companies grow bigger and diversify business, they opt for cross-listing to raise capital from larger and more liquid foreign markets. In 2009, nearly 3100 firms cross listed their equity on major overseas stock exchanges globally (World Federation of Exchanges, 2010, list provided in appendix) . It is not only pursued by companies from developed countries but companies from emerging countries are also actively participating. Some major global cross-listing destinations are – New York Stock Exchange, NASDAQ, London Stock Exchange, Tokyo Stock Exchange, Shanghai Stock Exchange, and so on.
The key focus of this paper will be on examining the stock price reaction and the patterns of returns before and after listing date for a diverse sample of firms from different countries specifically in the case of London Stock Exchange (LSE). Existing literature has enough evidence that cross-listings on US exchanges are associated with considerable positive stock market reactions (Foerster and Karolyi, 1999; Miller, 1999). However, there has been limited research on the impact of cross-listing on non US exchanges. This serves as a primary motivation for my interest to explore and gain understanding on a stock’s return in its home market as result of cross-listing on LSE.
The rest of this paper is structured in the following manner. Section 2 provides a literature review, while section 3 outlines the data, sample and research methodology. Section 4 presents the empirical results and its discussions. Finally, in section 5 I draw a conclusion.



In this section, I present an overview of the existing literature that has been reviewed as a part of gaining an understanding on the extent of work that has already been done on the topic of cross-listing and its impact on stock returns. Moreover, literature review was also essential for understanding the statistical methodologies and approaches that I can apply in this paper for testing my hypothesis. Cross listing has been a topic of immense interest among researchers for a long time. There has been lot of developments as well as debate in the cross-listing literature on its different aspects such as motivation for companies to cross-list, whether cross-listing creates value, its impact on risk and return, its financial and economic impacts so on and so forth.

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Brown and Warner (1980, 1985) and Mackinlay (1997) discuss different models and methods used in event study to assess the impact of a certain event from stock price reactions or volatility surrounding the event. I have mainly followed and conducted my empirical analysis on the basis of those papers. Majority researches in the existing literature are based US exchanges. As a result, those findings cannot be used as a proxy for cross-listings on non US exchanges. Drawing conclusion about listings based on the findings from US exchanges only will not give us a comprehensive understanding about the dynamics of cross-listing and its impact on stock returns. There are researches in the literature which show different outcomes of cross-listing for different exchanges. Existing literature has ample evidence of both positive and negative abnormal stock returns around the cross-listing announcement and actual listing dates. Yu-Shan, Chung and Chiang (2008) have shown that Asian firms neither demonstrate any listing effect nor their risk profiles report any significant changes as a result of cross listing on US exchanges. However, they reported significant negative abnormal returns. The impact of cross-listing on different foreign exchanges by US companies and its impact on stock return was examined by Howe and Kelm (1987) whereby it was concluded that cumulative average returns become substantially negative before the listing date and remain negative subsequently. A study by Foerster & Karolyi (1999) on American Depository Receipts (ADR) and ordinary listings in the US reveals abnormal return of 1% around the listing week. Peter Roosenboom and Mathijs A. van Dijk (2009) compare the stock price reaction to cross-listing on eight major US and non-US exchanges. They find that abnormal returns around the cross-listing announcement day is the highest for listings at US exchanges (NYSE and NASDAQ), followed by UK and then by European listings while for Tokyo listings it is insignificant. They concluded that home market stock price reaction is also dependent on the cross-listing destination market. Naliniprava and Manish (2010) investigates the impact of cross listing of ADRs on the Indian stock market for the period June 2004 to July 2009 with the listing date as the event date. Their result indicates a significant negative abnormal local market return on the ADR listing day whereby they concluded that ADR listings have no substantial benefit impact to the local shareholders. Jayaraman, Shastri and Tandon (1993) examine the listing of 95 non-US firms on US exchanges. They find positive abnormal returns on the listing date, followed by negative but insignificant post listing returns. Serra (1999) studies the impact of cross-listing in the US and in the UK on stock price. The study finds that for companies from emerging markets listing in the UK has the same valuation effects as listing in the US. However, for companies from mature markets, the stock price impact is limited to NYSE listings.

From the literature review, I have developed understanding regarding the methodologies and models required to develop and test the following hypothesis for abnormal returns:

Null hypothesis, H0: Cross-listing on LSE has no abnormal effects on stock returns, Ait = 0
Alternative hypothesis, H1: Cross-listing on LSE has abnormal effects on stock returns, Ait ≠ 0
Where, Ait refers to abnormal return.

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