Essays on corporate cross-listing decisions : a thesis submitted in fulfillment of the requirements for the degree of Doctor of Philosophy in Finance, Massey University, Auckland, New Zealand
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Date
2020
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Massey University
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Abstract
The decision to cross-list and the associated outcomes on corporate structure, strategies, and decisions is well-advanced. The reported outcomes range from access to foreign capital, broader analyst coverage, better information environment, improved liquidity, better corporate governance, and enhanced revenue. Such outcomes are said to motivate the cross-listing decision and are significantly associated with corporate and market characteristics. However, studies on how dynamics in corporate and market characteristics interact to drive cross-listing decisions are limited. Again, studies on the subsequent impact of cross-listing on other corporate decisions and strategies are lacking. This thesis expands the existing literature by providing three essays on how dynamics in firm and market characteristics influence cross-listing decisions. It also shows how the associated outcomes of cross-listing impact ensuing corporate decisions and strategies.
The first study focuses on the dividend smoothing strategies of foreign firms. It examines how commitment to full disclosure through cross-listing in the US influence dividend smoothing behavior. While questions on the determinants and channels of dividend smoothing are not new, how cross-listing impacts these determinants and channels have not yet been studied. The study is based on the premise that cross-listing in the US signals commitment to full disclosure. Also, it is typically associated with improved transparency and increased investor and analyst coverage: reducing information asymmetry and agency conflicts. Again, it is widely argued that the levels of information asymmetry and agency cost significantly influence dividend smoothing practices, while investment and debt are among the primary channels for dividend smoothing practices. We, therefore, examine how commitment to full disclosure and improved transparency due to cross-listing impacts the dividend smoothing strategies of foreign firms. We adopt two well-established approaches: Lintner’s partial adjustment model, and a variance decomposition approach to study the dividend policies of firms after cross-listing.
The results show increased dividend smoothing after cross-listing with significant sectoral variations in dividend smoothing strategies. We also document that firms from developing economies exhibit a lower increase in dividend smoothing after cross-listing compared to firms from developed economies. Adopting a variance decomposition approach, we find evidence of essential differences in the use of debt and investment channels before and after cross-listing to smooth net income shocks. Overall, our findings suggest that managers of cross-listed firms are motivated to ensure minimal fluctuations to dividends due to the information content of dividend payment. The results also indicate that firms use financing decisions to keep dividends smooth.
The second study focuses on how market characteristics interact with firm characteristics to influence cross-listing decisions and the choice of the host market. The study examines how the specialization in the output of the local and host markets impacts cross-listing decisions and the selection of the host market in the presence of other firm-level characteristics. This study builds on the existing macroeconomic literature that maintains that economies are specialized in their output, suggesting potential high competition for funding, among other forms of competition. Given this basis, we propose two arguments. One, specialization in national output could encourage firms to seek funds from other foreign markets through cross-listing. Two, specialization in national output could make the local market attractive to international firms.
We implement a gravity model on a sample of 1779 firms from OECD countries for 20 years and find that specialization in output in the local and host markets significantly influences the decision to cross-list and the choice of the host market. Using firm and industry-level data, we report that firms from countries that are specialized in specific industries undertake more cross-listing compared to firms from markets that are not. Interestingly, we document that firms from specialized markets cross-list to markets that are less specialized in the same industry. While the findings suggest that firms seek diversification of funding opportunities in the cross-listing decision and the choice of the host market, they also indicate the weakening of the gravity restrictions in line with recent studies.
The role of market characteristics in influencing corporate decisions and strategies is conventional. However, recent studies document a growing influence of policy uncertainty on corporate decisions. The third essay builds on this premise and examines how economic policy uncertainty (EPU) in the local and global markets impacts corporate cross-listing decisions. It employs firm- and country-level motivated by the availability of the EPU data. The examination commences with the implementation of an initial Granger Causality test. The study then adopts two contemporary approaches; a Quantile on Quantile Regression approach, and a Wavelet Coherence approach to allow a comprehensive understanding of the relationship.
The results show that local and global EPU influence the cross-listing decisions of firms, with a more substantial influence on firms from smaller domestic markets. The empirical evidence suggests that firms from smaller local markets pursue more cross-listing in the face of high local EPU and reduce or avoid cross-listing during periods of high global EPU. The Quantile on Quantile Regression approach and the Wavelet Coherence approach document important dynamics between EPU and cross-listing decisions at different frequencies and periods, with a stronger relationship reported at higher frequencies of EPU. In addition to contributing to the existing literature, our findings suggest that policy transparency could have important implications for current and future corporate decisions.
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Securities, Listing, Corporations, Foreign, Finance, Decision making