Indirect bonding : governance spillover effects from cross-listing

Abstract

[ACCESS RESTRICTED TO THE UNIVERSITY OF MISSOURI AT AUTHOR'S REQUEST.] I propose that firms have incentives to respond to their rivals' cross-listings, thereby generating a spillover effect from the cross-listing. The existence of a spillover is an indirect effect of cross-listing and is largely ignored in the literature. More specifically, I test for the possibility of a governance spillover effect on non-cross listing rivals. Because cross-listing creates value for cross-listed firms and increases their attractiveness to investors who value transparency, cross-listing places non-listing rivals at a competitive disadvantage in the financial markets. To remain competitive, these non-cross listing rivals might decide to imitate the governance changes resulting from cross-listing. I use earnings management as my primary governance measure, and find that rivals from the same industry and country as the cross-listing firms exhibit imitative behavior by improving their governance in response to cross-listing. The improvement of governance is achieved through reduced earnings management. This response is immediate and is the strongest in the year of cross-listing. The response persists for at least four years, but at a decreasing rate. In addition, rivals with greater growth opportunities, lower market share, stronger past performance, and larger size exhibit greater improvements in governance. Rivals also react more positively to the listings of the most stringent Level III ADRs. The extent to which non-cross-listing rivals change their governance also depends on various country, industry and firm, characteristics.