VALUATION EFFECTS OF INTERNATIONAL LISTINGS Khalil M. Torabzadeh William J. Bertin Terry L. Zivney
This study examines the risk/return performance of a sample of U.S. firms which have their securities dually listed on the New York Stock Exchange and on either the London or Tokyo exchanges. The evidence indicates that stock prices generally react positively (though statistically insignificant) to the international listings. However, the findings reject the hypothesis that dual listing of a security on a foreign capital market is accompanied by a significant change in its risk behavior.
I. INTRODUCTION A significant number of U.S. corporations are now looking abroad to dual list their stocks on major foreign capital markets. The most attractive markets for U.S. stocks are Tokyo and London which are, along with the New York Stock Exchange, the most active exchanges in the world. The growing interest among U.S. firms in listings on foreign capital markets raises interesting questions. Is there any intrinsic value in foreign listings? If so, how and when is this value impounded in the stock prices of U.S. firms? This paper conducts an empirical analysis to provide insight into these fundamental questions. In particular, it examines the impact of international listings upon both the risk and return behavior of a sample of dually listed U.S. securities. The literature provides a set of theoretical foundations for a firm’s decision to list its stock on a foreign exchange. The most frequently mentioned reasons for listing a stock on a foreign exchange are improved liquidity and removal of the market segmentation effects. According to Stonehill and Dullum , an international listing will enhance the security’s liquidity by increasing the volume of Khalil M. Torabzadeh Associate Professor of Finance, Department of Finance, Radford University Radford, VA 24142; William J. Bertin Maclellan Centennial Professor of Finance and Insurance, Department of Accounting and Finance University of Tennessee at Chattanooga, Chattanooga, TN 37403; Terry L. Zivney Maxon Distinguished Professor of Finance and Insurance, Department of Finance, Ball State University, Muncie, IN 47306. Global Finance Journal, 3(2), 159-170 ISSN: 1044-0283
Copyright o 1992 by JAI Press, Inc. All rights of reproduction in any form reserved.
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trading and expanding the number of hours during the day in which the stock can be traded. Further, listing a security on a foreign exchange will increase the firm’s investor base and, thus, improve the firm’s ability to raise new capital without depressing current security prices. Alexander et al. [Z] also note that international listing creates multiple marketplaces in which the stock can be traded, causing market orders for the stock to be executed at a lower bid-ask spread. This overall increase in the stock’s liquidity, therefore, is expected to have a positive impact on its price. Another incentive for firms to list their stocks on international exchanges stems from the presence of a variety of barriers to international investment. These barriers include transaction costs, information costs, prohibition on foreign securities ownership, and other restrictions imposed by some governments. Depending on the nature and severity of these barriers, international capital markets become either completely or mildly segmented. The implications of capital market integration-segmentation are addressed by several researchers. For example, Stapleton and Subrahmanyam 1171 address the issue of market imperfection and assert that the effect of segmenting capital markets is to limit the diversification opportunities available to investors. They suggest three financial policies that firms can adopt to reduce the negative effects associated with capital market segmentation: (1) investing in foreign portfolio or direct investing by firms, (2) merging with foreign firms, and (3) dual listing of the firms’ securities on foreign exchanges. In their numerical analysis of the third policy, Stapleton and Subrahmanyam find that the price of an intemation~ly listed security is substantially higher upon the listing, causing the expected return to be lower, Alexander et al. [l] also arrive at the same conclusion in their closedform solution to the equilibrium asset-pricing problem arising from international listings. Errunza and Losq  derive a valuation model within the context of intemational capital markets. They investigate a type of imperfection in which a class of investors is prohibited from trading in a subset of securities as a result of portfolio inflow restrictions imposed by some governments. They illustrate a twocountry capital market in which the government of country two prevents country one investors from holding country two securities (ineligible-securities) and no trading restrictions are imposed on country one securities [eligible securities). Their model reveals that the presence of segmentation does not affect required returns on country one securities. However, a new equilibrium risk-return tradeoff will emerge for country two securities. In particular, country two securities will command a positive “super” risk premium. As their model implies, one effective countermeasure to dismantle this barrier and, therefore, to eliminate this “super” risk premium is to list securities of country two on country one exchanges (converting ineligible securities to eligible ones). Howe and Madura  report that international listing did not result in a change of risk measures. However, their conclusions must be tempered by the fact that they used quarerly returns to estimate risk which results in tests of low statistical power. We use daily data in the tests described later which should result in more powerful tests of risk changes. On the basis of these considerations, this present study suggests and tests the
Valuation Effects of International
following hypothesis: Listing a U.S. stock on the foreign capital market will result in an increase in its price and/or a decrease in its risk as measured in the domestic market, thereby resulting in the stock having a different equilibrium asset pricing structure. Three related empirical studies investigate the effects of international listing on the stock prices of the firms involved. Alexander et al. [l] analyze the behavior of stock returns for a sample of foreign firms listed on the U.S. securities exchanges. They observe three distinct patterns of stock returns around the listing date (t = 0). First, in the pre-listing period (months t = -24 to f = -2), they find significant positive abnormal returns, reflecting either selection bias and/or announcement effects such as liquidity and signaling effects. Second, in the post-listing period (months f = +l to f = +36), they find significant negative returns. Third, during the listing period (month f = -1 to f = 0), no significant abnormal returns are detected. Based on these observations, they conclude that international listing causes a decline in the expected return on the firm’s common stock. Howe and Kelm [S] specifically address the issue of international listing by examining a sample of U.S. securities dually listed on U.S. exchanges and on either Basel, Frankfurt, or Paris exchanges. Using the standard event-time methodology covering a period of f = -90 to f = +40 days relative to the listing day f = 0, they find significant negative abnormal returns over the event period studied. Their findings lead them to recommend that corporate managers who are concerned with the financial well-being of their shareholders should avoid listing their stocks on international exchanges although they acknowledge that their recommendation may be counter-intuitive. Reilly, Wright, and Wakasugi  analyze the impact of international listings on stock prices for a sample of U.S. NYSE listed securities that become dually listed on the Tokyo Stock Exchange. In contrast to Howe and Kelm [B], they find positive abnormal returns surrounding the listing day. Unfortunately, their analysis of abnormal returns does not go beyond day f = +l to provide stronger evidence on market segmentation hypothesis. They conclude, however, that their findings are consistent with a “mildly“ segmented market. Given the mixed evidence on the implications of international listings, the present study reexamines the issue by utilizing a series of return generating models suggested in the literature. In addition, this investigation considers the impact of overseas listing on the security’s risk with respect to several risk measures including systematic risk, unsystematic risk, and total risk. The remainder of this paper is organized as follows. The next section describes the sample and the statistical methods used to generate the risk and return measures. The following section reports the findings reached. Finally, summary and concluding remarks are presented.
DATA, AND METHODOLOGY
The sample consists of 92 U.S. firms (initially listed on the New York Stock Exchange, NYSE) which, for the first time, had their stocks dually listed on the
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international markets between 1980 and 1986. Of these 92 dual listings, 73 are on the London exchange and 19 on the Tokyo exchange. These two foreign exchanges are selected because (1) they are, along with the NYSE, the largest exchanges in the world, (2) they trade a relatively large number of U.S. securities, and (3) they are fairly representative of their regional capital markets (i.e., European and Far East). The names of U.S. firms, along with their listing dates, were obtained from the New York Stock Exchange’s Market Research Department. Three important dates are associated with a successful international listing: (1) the application date, (2) the approval date, and (3) the date of actual listing. Since the focus of this study is to detect the changes in the asset pricing structures once the stocks become dually listed, the “listing date” is selected as the critical event date as in Alexander et al. [l], Unlike domestic listing, the time between application and actual listing is quite short on international exchanges. According to Howe and Kelm [S], the typical time between application and actual listing in the case of international listing is only 19 trading days. Hence, to reduce any possible selection bias, a reasonably long pre-listing event period is selected (60 trading days) to capture any stock price movement associated with the application and approval announcements. Stock price movements around the listing date are analyzed using a residual analysis based on the simple market model suggested by Fama et al. : M
AAR, = $F
(Ri, - dj - iiR,k)
The number of securities in the portfolio; The daily rate of return for security j on day t, drawn from CRSP daily stock return tapes; The daily rate of return for the CRSP value weighted index; The ordinary least squares (OLS) estimates of the market model parameters which are calculated from t = -160 to t = -61 days, relative to the listing day, t = 0.
The daily AARs are summed over the event period to obtain cumulative abnormal returns (CAR). Both AAR and CARS are tested using the t-test. The following regression model tests for possible shifts in the market-related risk measures (alpha and beta) for each security: Rjt = aj + aiD, + bjRmt + bjD,X,,
In regression (2), D,takes a value of 0 in the pre-listing period (from t = -160 to t = -61) and a value of 1 in the post-listing period (from t = +61 to t = +160). The statistics ai and bi are tested jointly and separately to determine whether they are significantly different from zero using the F-test and the t-test, respectively. An international listing increases the number of trading hours each day for a
Valuation Effects of International
security and thus may affect its variance. Therefore, this paper tests for significant changes in various security-specific risk measures. The possibility of a variance shift due to increased trading hours has domestic implications as well, given the expansion of trading hours for the U.S. exchanges and the debate regarding its impact on security price volatility. \
III. THE RESULTS Overall Findings Table 1 reports the average abnormal returns (AAR) and the cumulative abnormal returns (CAR) for a sample of NYSE-listed securities which become dually listed on either the London or the Tokyo exchanges. As Table 1 shows, the pre-listing period (from t = - 60 to t = - 1) generates an insignificant CAR of +1.66 percent followed by an abnormal return of +0.12 percent on the listing day (t = 0). This positive stock performance in the prelisting period may reflect favorable market reaction to the firm’s intention to list its stock overseas. The positive CAR in the pre-listing period observed here is consistent with the findings of Alexander et al. [l] and Reilly et al.  and inconsistent with those of Howe and Kelm [S]. According to Alexander et al. [l], this price run-up in the pre-listing period may stem from various sources including liquidity and signaling effects. Unfortunately, the lack of public announcements regarding the application and approval dates prevents listing studies from conducting a separate and unbiased test to measure the extent of these effects. According to Brown and Warner  and as noted by Alexander et al. [l], a problem of this nature weakens the power of the t-test. Given that our research is also faced with the same dilemma, the insignificant pre-listing CAR we observed in this study may be attributed to such a problem. Table 2 reports the CARS and associated t-statistics for the overall sample and subsamples for selected windows. Similar to the domestic listing studies (Van Horne , Goulet , Ying et al. , and Sanger and McConnell ), this study finds a negative pattern of stock returns immediately after the listing date. The CAR for the total sample starts drifting downward beginning with day t = +l and it loses 1.12 percent of its value by day t = +4. This negative return is significant at the .Ol level (tCAm4 = -3.098). However, this period of negative stock performance is relatively short compared to the four to eight-week period documented for domestic listings. McConnell and Sanger [ll], in their study of domestic listings, propose and test several possible explanations for this anomalous price behavior. Among others, they assert that the negative returns following listing could be due to biases in the initial trading price that is recorded after a stock becomes listed. The market maker may initially inflate the asking price as a protective mechanism until the equilibrium trading range of the stock is determined. The negative returns immediately following listing are, therefore, the result of market-maker adjustment in bringing the price to its normal range.
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Table 1 AVERAGE ABNORMAL RETURNS (AAR) AND CUMULATIVE ABNORMAL RETURNS (CAR) FOR 92 DUALLY LISTED U.S. SECURITIES ON THE NEW YORK AND EITHER LONDON OR TOKYO EXCHANGES
Day -60 -50 -40 -30 -20 -10 -5 -4 -3 -2 -1 0 1 2 3 4 5 10 20 30 40 50 60
0.09 -0.02 -0.49 0.13 0.11 0.10 0.67 -0.22 0.09 0.12 0.10 0.12 -0.36 -0.32 -0.17 -0.27 0.23 0.32 -0.19 0.16 -0.26 0.20 0.40
0.498 -0.091 -2.256* 0.603 0.048 0.530 3.040** -1.471 0.293 0.540 0.508 0.481 -1.497 -1.900 -1.337 -1.463 1.292 1.986 -0.102 0.812 -1.443 1.617 2.352*
0.09 1.11 0.43 0.41 0.65 1.15 1.57 1.35 1.44 1.56 1.66 1.78 1.42 1.10 0.93 0.66 0.89 1.05 1.83 2.51 2.64 3.29 4.59
at the .05 level. at the .Ol level.
They rule out this possibility mainly due to the observed persistent decline in returns over an excessively long post-listing period (from four to eight weeks). Their explanation, however, might be applicable to the international listings in which the negative returns persist only for four trading days following the listing date. Shortly thereafter, the CAR resumes its positive trend and reaches +4.59 percent by day t = t-60. The returns are generally positive in the post-listing period. The CAR from t = t-31 to t = +60 is +2.08 percent, which is significant at the .05 level (t,,,,,,,, = 2.088). The period from t = +5 to t = +60 is also associated with a significant CAR of +3.93 percent (tCAR5,60= 2.603). This positive stock performance in the
Valuation Effects of International Listings
Table 2 SIGNIFICANCE TESTS OF CUMULATIVE ABNORMAL RETURNS (CAR) FOR DUALLY LISTED U.S. SECURITIES ON THE NEW YORK AND LONDON/TOKYO EXCHANGES Total Sample, n = 92
London Listings, n = 73
Tokyo Listings, n = 19
1.50 0.24 -1.32 2.00 1.58 3.58 3.98
0.563 0.567 -3.077”” 2.103* 1.633 2.214* 0.781
2.17 0.21 -0.87 0.96 4.00 5.64 6.94
1.015 -0.275 -1.880 1.099 2.606* 2.315” 1.450
Event Windows CAR
(days) t =
t=-1 t = t = t = t = t =
0.60 to t = tot=0 +1 to t = +10 to t = +31 to t = +5 to t = -60 to t =
-1 +4a +30 +60 +6Ob +60
1.66 0.22 -1.12 1.78 2.08 3.93 4.59
0.700 0.699 -3.098*+ 1.855 2.088” 2.603’ 1.055
Notes: a. For Tokyo listings, the CAR is from t = 0 to t = +3. b. For Tokyo listings, the CAR is from t = +4 to t = +60. *Significant at the .05 level. “*Significant at the .Ol level.
post-listing period may reflect a change in the asset pricing structure after the security is dually listed. As mentioned previously, one of the sources of this change may stem from the removal of some of the barriers to international portfolio investment. Therefore, the findings support the notion that international listing is an effective strategy to dismantle the negative effects of international capital market segmentation. Interestingly, the significant positive CAR observed for the period from t = +31 to t = +60 indicates that the effect of international listing may not be instantaneous and it may require a period of time to manifest itself. Alternatively, the benchmark model of ‘normal’ returns may be incorrect. To test whether the findings are robust, this study applies other market model alternatives suggested in the literature. In particular, it uses the methods suggested by Scholes and Williams  and Dimson  on the assumption that differences in the trading times among the exchanges studied may affect the correlations between the securities returns and the market returns. Another version of the market model uses the equally weighted CRSP index instead of the value weighted CRSP index. In addition, the abnormal returns are regenerated using two estimation periods, from t = -160 to t = -60 and t = +61 to +160. Finally, this paper applies the t-tests on standardized abnormal returns as in Jaffe [lo] and Brown and Warner . In all cases, the outcomes are essentially the same.
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Listings By Exchange To detect whether the effect of international listing varies across exchanges, the abnormal returns are analyzed for each subsample with respect to the exchange on which the stocks are listed. As reported in Table 2, the listings on the London exchange generate a CAR of +1.50 percent from t = -60 to t = -1 and the listings on the Tokyo exchange produce a CAR of +2.17 percent over the same period. However, none of these returns is significantly different from zero. Interestingly, the same pattern of CAR is observed for each of the subsamples. The CAR first shows a positive trend in the pre-listing period, then makes a downward adjustment immediately following the listing date, and thereafter drifts upward. The downward adjustment for the London listings occur in the period from t = +1 to t = +4 and for the Tokyo listings from t = 0 to t = +3. The CAR for the London subsample (from t = +l to t = +4) is -1.32 percent, which is significant at the .Ol level (tCAR1,4 = -3.077). However, the downward adjustment for the Tokyo subsample is associated with an insignificant CAR of -0.87 percent @CAR&3 = - 1.880). Significant positive abnormal returns are observed following this brief downward adjustment period. The CAR for the London subsample (from t = +5 to t = +60) is ‘r3.58 percent and for the Tokyo subsa.mple (from t = +4 to t = +60) is t-5.64 percent. Both of these returns are significant at the .05 level.
Risk Assessment Table 3 presents the significant changes in the alpha and beta coefficients from the pre-listing period (f = - 160 to t = -61) to the post-listing period (t = +61 to t = +160). Changes are estimated using equation (2). The joint analysis uses the F-test and the separate analysis uses the t-test. In Table 3, the level of significance for the reported number of increases and decreases is 5 percent or better. Although 21 securities, out of the total 92 securities, experience increases in alpha and beta, Panel A of Table 3 reveals that only three cases are significant. The alphas and betas decrease for 18 securities, and they are significant for four cases. No consistent increases and decreases in both alphas and betas are observed for the remaining 53 securities. Furthermore, no evidence of concentration of changes in alphas and betas is found for either of the exchanges. Those securities with increases and decreases in alphas and betas are almost proportionately distributed across the exchanges, possibly reflecting a random walk behavior (see Sunder  and Ohlson and Rosenberg ). The same observations are also made with respect to changes in either alphas or betas considered separately. The statistics in Panel B of Table 3 indicate that only a few cases show significant increases or decreases in either alphas or betas. Similar results are obtained when the analysis is replicated using the alternative methodologies suggested by Scholes and Williams  and Dimson . In addition, regression (2) is run without allowing the intercept term to change. The results indicate that the slope of the regression line is not different between the pre-and post-listing periods. Consistent with the study of domestic listings by McConnell and San-
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Table 3 SUMMARY STATISTICS OF SIGNIFICANT CHANGES IN ALPHA AND BETA COEFFICIENTS FOR DUALLY LISTED SECURITIES ON THE NEW YORK AND ON LONDON/TOKYO EXCHANGES Rjt = ai + u;D,
+ b;D, R,,
Significant Increases+ No.
Total Sample London Subsample Tokyo Subsample
3 2 1
Panel A: Joint Test0 3.26 2.74 5.26 Panel B: Separate
Total Sample: Alpha Beta London Subsample: Alpha Beta Tokyo Subsample: Alpha Beta
4 3 1
4.35 4.11 5.26
92 73 19
Notes: a. The test statistic is the F-test. b. The test statistic is the t-test. *Significant at the .05 level or better.
ger [ll], these findings reject the hypothesis that dual listing of a U.S. security on a foreign capital market is accompanied by significant changes in its marketrelated risk behavior. To gain further insight into the risk performance of the sample securities, the paper calculates several other risk measures. The findings are shown in Table 4. Again, the test periods are “t = -160 to t = -61” and “t = +61 to t = +160.” The summary statistics in Table 4 along with the above findings indicate that the event of international listing of a U.S. security does not have any significant effect on either its systematic risk or on its total risk. In addition to the various tests mentioned herein, this study also uses sign and Wilcoxon signed rank tests. The applications of these tests consistently show that although the systematic risk of the securities decline after international listings, the effects are not statistically significant.
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Table 4 PRE- AND POST-LISTING RISK MEASURES FOR DUALLY LISTED U.S. SECURITIES ON THE NEW YORK AND LONDON/TOKYO EXCHANGE!+ Total Sample, n = 92 Risk [email protected]
OLS Alphac Portfolio Alphad OLS Betac Portfolio Betad Standard Deviation (Total Risk) Residual Variance (Unsystematic Risk) R-Squared
London Listings, ~2= 73
Tokyo Listings, n = 19
0.0182 0.0233 1.1002 1.0736 1.9462
0.0093 0.0152 1.0067 0.9811 1.9508
0.0229 0.0241 1.1132 1.0587 2.0071
0.041 0.0180 0.9972 0.9119 1.9882
0.0142 0.0203 1.0502 1.1308 1.7121
-0.0091 -0.0044 1.0432 0.9564 1.8070
Notes: a. Pre-listing period is from t = -160 to t = -61 and post-listing period is from t = +61 to t = +160. b. Except for the betas, the other measures are in percentage. c. Pooled, cross-section, time series derived from the single-factor market model. d. Equally weighted average of individual securities’ alphas and betas.
This study examines the risk/return performance of a sample of U.S. securities which become dually listed on the London or Tokyo exchanges. This study is motivated by a number of articles which suggest that dual listings of securities on the international exchanges is one of the effective strategies adopted by firms to undo the barriers of international capital markets. Using a single-factor market model as the benchmark, the results reveal that the effect of listing on returns is generally positive. The results are verified when alternative event study methodologies are applied. In particular, three observations are made with respect to the cumulative abnormal returns (CAR). First, the CAR for the overall sample as well as for the subsamples begins with an upward movement prior to the listing; second, it makes a downward adjustment for a short period of time immediately after the listing day; and third, it shifts upward again and becomes significantly positive by the end of the event period. This study also assesses the impact of international listings on various risk-related
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measures including market parameters (alpha and beta), total risk, and unsystematic risk. Using a variety of alternative risk measure methodologies, no evidence of shifts is observed in a security’s risk after the listing. The systematic risk tends to decline after the listing but the reduction is not significant. The findings of this study are consistent with the notion that the international capital market is mildly segmented. The positive returns observed here suggest that dually listing a firm’s securities on a foreign exchange tends to not only enhance the security’s liquidity and exposure but also serves as an effective financial policy in reducing the negative effects of international capital market segmentation.
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