The Long-Term Effects of Cross-Listing, Investor Recognition, and Ownership Structure on Valuation Michael R. King, Bank of Canada Dan Segal, Univ. of Toronto November 2006

“[C]ompanies listed in the U.S. … have found that a U.S. listing pays off in a higher profile, greater access to new capital, a wider shareholder base and more liquidity for their stock.” Financial Post April 6,1996  Karolyi (2004) ‘conventional wisdom’

Motivation How permanent are valuation gains?  How do they vary across time? How do effects vary cross-sectionally?  Firm characteristics (growth, ROA, leverage)  Ownership (widely-held, control 20%+,dual-class) Endogeneity issue  Matching methods (size, industry)  2SLS: 1 st – investor holdings, 2 nd – Tobin’s q  Before & after using only cross-listed firms

Findings Only transitory increase in valuation from cross- listing; disappears in 3 years Not explained by changing U.S. shareholder base  Outperform initially if attract larger number or % holdings of U.S. investors  No variation by ownership structure at high levels Widening of investor base & improved info environment are distinct effects  Dual-class benefit at low levels when others do not  Reduced info asymmetry (Jensen & Meckling 1976)

Overview Hypothesis development Data and methodology Univariate tests Importance of U.S. investors Cross-sectional variation by owner type Cross-listing – before and after

Merton (1987) investor recognition Investors only buy stocks they know about Shadow cost of incomplete information … …leads to higher expected excess returns Studies focus on change in investor base (q i ) or change in visibility (1) (2)

First hypothesis (H1) Foerster & Karolyi (1999) event studies (ARs)  Change in investor base primary; liquidity secondary Baker et al (2002), Lang et al (2003)  Increased analyst following & media following  Improved information environment Cross-country studies with industry controls  Few firm controls (size, capital raising, earnings growth)  Focus on point in time H1: Higher number or percentage hldgs by U.S. investors  higher Tobin’s q

Second hypothesis (H2) Permanent or transitory?  Foerster & Karolyi (1999) find pre-listing run-up & post- listing decline [-1,1] in ARs ; could be investor recognition or liquidity  Mittoo (2003) same pattern for Cdn firms [-1,3]; reject liquidity as longer horizon explanation  Sarkissian & Schill (2004) study ARs of firms listed in 1998 over [-10,10]; permanent gains are due to investor familiarity  Gozzi et al (2005) study Tobin’s q [-2,2]; focus on changing components, not investor base H2: Permanent gains if maintain wider investor base over time

Third hypothesis (H3) U.S. investors avoid closely-held foreign firms  Edison & Warnock (2004), Leuz, Lins & Warnock (2005), Ferreira & Matos (2006) Improvement in info environment is key  Lang et al (2004), Ammer et al (2005) Impact of concentrated ownership; separation of cash-flow vs. control  Morck et al (1988), Claessens et al (2002), Lins (2003), Lemmon & Lins (2003), Doidge et al (2006) H3: Firms with control 20%+ or dual-class have lower investor recognition than widely-held firms

Fourth hypothesis (H4) Increased valuations due to reduced info asymmetry; greater monitoring (bonding)  Coffee (1998, 2002), Stulz (1998), Reese & Weisbach (2002),  Firm-level effect vs. country-level effect (LLSV)  Doidge et al (2004) controlling shareholders weigh costs vs. private benefits  Doidge (2004) benefits should be larger when agency problems greatest e.g. firms with dual-class shares H4: Firms with control 20%+ or dual-class benefit more at low levels of investor holdings

Data and methodology 16 year panel : match Xlist with non-Xlist (size, industry); 2,802 obs; 683 firms Control for: time-zone, form of XLIST, legal effects Univariate tests; panel regressions with fixed effects; time variation in all dummies e.g. Xlist, owner type, control % Endogeneity: matching methods, before-after

Cross-listing & ownership structure Non-XLISTXLIST Blue = Widely Yellow = Dual Red = Control20%+

Table 2: Importance of U.S. investors

Table 2: Importance of U.S. investors (2) Split XLIST dummy into low vs. high based on median number of investors (INUM) or % investors (IHOL) Only firms in upper halves increase in valuation Firms that fail to widen investor base same as non-XLIST

Table 3: Time-series effects Interact INUM with year dummies relative to XLIST Only INUM year 0 & 1 significant; monotonic decline Similar but weaker for IHOL

Table 4: Ownership effects Control 20%+ valued similarly to widely-held firms Dual-class have lower valuations on average XLIST have higher valuations on average No significance from interaction terms

Table 5: Ownership & U.S. investors Only firms in INUMHI / IHOLHI increase in valuation Control 20%+ do worse at higher # or % Dual-class same at higher; do better at lower # or %

Cross-listing – before and after Address endogeneity using only cross-listed firms  120 firms cross-listed  Exclude IPOs/spin-offs or less than [-1,1]  69 firms, median 7 yrs (min 3 yrs, max 11 yrs)  Repeat analysis in Tables 2-5

Table 6: XLIST before - after Dual-class benefit more from cross-listing Clear time-series pattern; benefit mis-specified

Summary Widening of U.S. investor base & improved info environment are distinct effects Valuations peak in year 0 then fall monotonically at all levels of U.S. investor holdings and across all ownership structures U.S. investors less willing to invest in dual-class Dual-class benefit more even when they fail to widen their U.S. investor base Reduction in info asymmetry has separate impact on valuation for firms with greatest agency problems