Why do cross-listed firms voluntarily adopt Regulation Fair Disclosure? Michael Crawley University of Texas at Austin Bin Ke Pennsylvania State University Yong Yu University of Texas at Austin

Research questions 1. Why do cross-listed firms voluntarily adopt REG FD that they are explicitly exempt from? 2. What are the market consequences of the voluntary adoption to the adopters?

Regulation FD REG FD (effective 10/23/00) prohibits management from sharing material nonpublic information with selected investors. REG FD was one of the most controversial rules passed by SEC, generating nearly 6000 comment letters and resulting in a rare split-vote decision. Proposed rule (12/15/99): foreign firms were included. Final rule (08/10/00): foreign firms were explicitly exempted. A 2004 Bank of New York survey of 143 large cross-listed firms reported that 54% of the firms voluntarily adopted REG FD.

Summary of main findings 40% of the 181 active cross-listed firms who responded to our survey state they have voluntarily adopted REG FD as part of their formal disclosure policy. Cross-listed firms voluntarily adopted REG FD in response to externalities from U.S. firms’ forced adoption of REG FD: –U.S. (esp. retail) investors would have a reduced demand for cross-listed firms that do not follow REG FD (denoted investor demand effect) –U.S. firms’ forced disclosure under REG FD would create an information spillover effect on cross-listed firms, resulting in the unraveling of cross-listed firms’ private information (denoted information spillover effect). However, cross-listed firms that are expected to suffer from increased disclosure transparency are less likely to follow REG FD. Relative to non-adopters, adopters have a decrease in bid-ask spread and an increase in share turnover.

Sample Initial sample: all ADR firms listed on NYSE / AMEX / NASDAQ between 1/1/2000 and 12/31/2005 : –552 ADR firms (422 active and 130 inactive) –Exclude Canadian firms Survey on REG FD adoption: –four rounds of s –Phone calls to US offices and headquarters in home country 189 usable answers from 203 respondents (8 from inactive firms and 181 from active firms). 43% response rate for active firms. Final sample: 178 active ADR firms (3 firms lost due to further data requirements)

Determinant of FD adoption Proxies for the externalities –Investor demand – institutional ownership (-) –Information spillover – foreign sales (+) Control variables –Investment opportunities – sales growth (+) –External financing – the difference between actual growth and the sustainable growth with retained earnings and debt financing (+) –Managerial agency costs CONTROL1: managers have the largest voting rights and their voting rights exceed cash flows rights (-) CONTROL2: managers have the largest voting rights and their voting rights are equal to cash flow rights –Information asymmetry – analyst following (-) and total assets (-) –Proprietary costs – industry Herfindahl index (-) and industry profitability persistence (-) –Financial disclosure complexity – high-tech industry (-), standard deviation of scaled net sales (-), intangible assets (-)

Table 1: Descriptive statistics Mean (median) [STD] Variable name (1) Respondents who adopted REG FD (N=70) (2) Responders who did not adopt REG FD (N=108) Ranksum test’s two- tailed p value INSTITUTIONOWN0.383 (0.233) [0.385] (0.460) [0.360] FOREIGNSALE0.469 (0.524) [0.353] (0.239) [0.326] INVEST_OPP0.618 (0.211) [1.545] (0.078) [0.351] <0.001 EXTERNAL_FIN0.723 (0.093) [2.650] (-0.047) [0.387] ASSETS65, (5, ) [163, ] 29, (4, ) [75, ] ANALYST3.743 (1.000) [5.129] (2.000) [3.064] CONTROL (0.000) [0.234] (0.000) [0.475] <0.001 CONTROL (0.000) [0.413] (0.000) [0.406] 0.890

Table 1 (cont’d) Variable name (1) Respondents who adopted REG FD (N=70) (2) Responders who did not adopt REG FD (N=108) Ranksum test’s two- tailed p value SUBSTITUTION1.168 (1.132) [0.150] (1.141) [0.159] MKTSIZE160, (12, ) [317, ] 66, (8, ) [184, ] ENTRYCOST5, ( ) [10, ] 6, (1, ) [12, ] HIGH_TECH0.357 (0.000) [0.483] (0.000) [0.456] STD_REV0.284 (0.190) [0.281] (0.156) [0.197] INTANGIBLE0.090 (0.016) [0.166] (0.013) [0.125] 0.910

Table 2: LOGIT model of REG FD adoption determinants (1) All adopters vs. non- adopters INSTITUTIONOWN ** (0.562) FOREIGNSALE+2.544*** (0.916) Observations178 Pseudo R Likelihood ratio χ Model p-value<0.001

Table 3, Panel A: The effect of REG FD adoption (level regression) (1)(2)(3) The dependent variable = LN(SPREAD)LN(TURNOVER)LN(VOLATILITY) Regression coefficient (standard error) ADOPT-0.937***1.375***0.173 (0.258)(0.421)(0.239) LN(MARKETCAP)-0.141***0.110** (0.029)(0.048)(0.027) LN(TURNOVER)-0.155*** (0.046) LN(VOLATILITY) *** (0.085)(0.135) FREEFLOAT (0.203)(0.338)(0.192) BETA0.221** (0.091) Constant-3.783***-4.691***-3.812*** (0.469)(0.699)(0.319) Inverse Mills ratio (0.179)(0.300)(0.170) Observations167

Table 4, Panel A: Effect of REG FD adoption (change analysis) Non-adopters (N=63) Adopters (N=36) Two-tailed ranksum test p value on the difference in difference ΔSPREAD (-0.037) [0.827] Signed rank test P= (-0.601) [1.192] Signed rank test P= ΔTURNOVER (-0.086) [1.443] Signed rank test P= (0.519) [1.016] Signed rank test P= ΔVOLATILITY (0.003) [0.740) Signed rank test P= (-0.165) [0.819] Signed rank test P= Mean (median) [STD]