Computing and Information Systems - Theses
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ItemThe impact of cross-listing on the cost of equity capital: the case of American Depository Receipts (ADRs) and Global Depository Receipts (GDRs)( 2011)The study contributes to the cross-listing literature and investigates the impact of cross-listing via American Depository Receipts (ADRs) or Global Depository Receipts (GDRs) on the cost of equity capital through an examination of two research questions. The first question examines whether cross-listing results in differential changes in the cost of capital for ADRs versus GDRs and, if so, the potential explanations for the differential impact of the two cross-listing mechanisms on the cost of capital. The second question examines the sources of changes in information risk—public (accounting) disclosure and analysts‘ forecasts—and the extent to which changes in these sources, individually or jointly, affect the cost of equity capital in the post-listing period. The study covers a global sample of firms that were cross-listed as ADRs on the NYSE, NASDAQ and AMEX or as GDRs on the London Stock Exchange. Using the implied cost of capital models that are based on the [1] realized accounting earnings (O‘Hanlon and Steele 2000) and [2] analysts‘ predictions (Easton et al. 2002) and realized returns asset-pricing models (Fama and French 1993), the study documents the cost of capital decline for ADRs and GDRs. This result holds across both methodological approaches to estimating the cost of capital. There is no evidence that the magnitude of changes in the cost of capital varies as a function of the quality of disclosed information, despite differential disclosure requirements for ADRs versus GDRs. The study documents improvement in the information environment around cross-listing, as proxied by analysts‘ following, which is more pronounced for GDRs. The results in regards to the impact of the changes in the two elements of the information environment—public (accounting) disclosure and analysts‘ forecasts (following and accuracy)—on the cost of equity capital are sensitive to the choice of methodology and are mixed. The overall conclusion is that for cross-listed firms there is no overlap in the information content of the two elements of the information environment and that they are complementary to each other. The study enhances our understanding of why firms choose to cross-list as ADRs or GDRs, provides insights into the impact of information risk on the cost of capital and has practical implications for exchanges that consider accommodating depository receipts programs, such as Dubai, Singapore, and Hong Kong.