Stock price informativeness, cross-listings and investment decisions

T. FOUCAULT, T. Gehrig

Journal of Financial Economics

April 2008, vol. 88, n°1, pp.146-168

Departments: Finance, GREGHEC (CNRS)

We show that a cross-listing allows a firm to make better investment decisions because it enhances stock price informativeness. This theory of cross-listings yields several predictions. In particular, it implies that the sensitivity of investment to stock prices should be larger for cross-listed firms. Moreover, the increase in value generated by a cross-listing (the 'cross-listing premium') should be positively related to the size of growth opportunities and negatively related to the quality of managerial information. We also analyze the effects of the geography of ownership (the distribution of holdings between foreign and domestic investors) on the cross-listing premium. In particular, we show that the sensitivity of the cross-listing premium to the size of growth opportunities increases when holdings (resp. market shares) become more evenly distributed between foreign and domestic investors (resp. markets). Last, we show that concentration of trading in the home market ('flow-back') can indeed increase the cross-listing premium for some firmsKeywords : Cross-listings, cross-listings premium, price informativeness, investment decisions, flow-back, ownership.