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Equity cross-listings in the U.S. and the price of debt

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Abstract

Using a large panel from 46 countries over 20 years, we find that non-U.S. firms issue corporate bonds more frequently and at lower offering yields following an equity cross-listing on a U.S. exchange. Firms issue more bonds through public offerings instead of private placements and in foreign markets rather than at home, in both cases at significantly lower yields. Moreover, the debt-related benefits are concentrated among firms domiciled in countries with less private benefits of control, efficient debt enforcement, and developed bond markets, suggesting that equity cross-listings cannot completely offset the impact of weak home country institutions. The results support the notion that the monitoring, transparency, and visibility benefits brought about by equity cross-listings on U.S. exchanges are valuable to bond investors.

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Notes

  1. Prior evidence suggests that firms cross-listing shares on a U.S. exchange raise equity capital more frequently (e.g., Reese and Weisbach 2002), obtain higher equity valuations (e.g., Foerster and Karolyi 1999; Doidge et al. 2004), reduce the cost of equity capital (e.g., Errunza and Miller 2000; Hail and Leuz 2009), improve liquidity (e.g., Baruch et al. 2007) and the information environment (e.g., Lang et al. 2003), and expand their investor base (e.g., Ammer et al. 2012; King and Segal 2009).

  2. We refer to a foreign firm’s U.S. cross-listed equity as “ADR,” regardless of whether it is an exchange-listed American Depositary Receipt (Level II or III), a direct listing (e.g., for Canadian firms), a globally or New York registered share, a share traded in the over-the-counter (OTC) markets (the OTC Bulletin Board and Pink Sheets), or a private placement under Rule 144A.

  3. Empirical work in the equity market provides support for both theories (e.g., Doidge et al. 2004; King and Segal 2009).

  4. In both cases, access to external (equity or debt) capital is a primary motivation for cross-listing. In line with this argument, Pagano et al. (2002) show that U.S. exchanges are attractive for (European) high-tech and export-oriented companies that use the equity cross-listing to fund their growth and foreign sales expansion.

  5. It is important to note that liquidity improvements in the bond market are closely related to changes in the quality of the information environment. Hence, it is difficult, if not impossible, to disentangle the liquidity hypothesis from the bonding and information hypothesis.

  6. Miller and Puthenpurackal (2002) and Miller and Reisel (2012) show that investors in Yankee bonds (i.e., bonds issued in the U.S. by foreign firms) require higher yield spreads and impose more restrictive debt covenants if the issuing firm is from a country with weak creditor rights protection.

  7. Leverage often increases after takeovers (Kim and McConnell 1977; Ghosh and Jain 2000). Higher leverage reduces the value of existing debt by increasing the probability and deadweight costs of a possible future bankruptcy and by reordering the priority of claims in the case of default (e.g., issuance of more senior debt).

  8. Consistent with bank lenders being better able to mitigate agency issues than public debt holders, Harvey et al. (2004) find that equity returns around the issuance of syndicated loans (but not public bonds) are positively associated with management’s separation of ownership and control and with the extent of assets in place that can be exploited by the management.

  9. We include Canadian firms in this group because they can directly list their shares on U.S. exchanges without using depository receipts and, at the same time, are exempted from certain U.S. reporting requirements under the Multi-Jurisdictional Disclosure System.

  10. In a related study, Boubakri et al. (2013) examine factors that influence the propensity of issuing debt (and equity) in the first year after a U.S. equity cross-listing. They exclusively focus on a sample of ADR firms and, hence, the insights are limited to the incremental changes in the propensity of issuing debt given the firm is already cross-listed. In contrast, we utilize a panel that includes all observations pre and post cross-listing as well as non-cross-listed firms. This design lets us speak directly to the incremental effects of cross-listing on the propensity of issuing debt (relative to the pre-period and the non-cross-listed firms).

  11. If ticker information or data like the International Securities Identification Number (ISIN) is not available, we base the matching on the issuing firm’s name, country of domicile, and 4-digit SIC code. This procedure does not allow us to identify debt and equity offerings by subsidiaries if they are incorporated under a different name, domiciled in a different country, or belong to a different industry than their parent company.

  12. The bias towards Japanese firms is already present in Thompson Deals and Mergent FISD, consistent with prior evidence suggesting that Japanese firms moved away from bank debt towards public debt financing in the 1990s (Hoshi et al. 1993).

  13. If credit ratings are missing (i.e., for about 75% of the sample), we compute Altman’s (1968) Z-score as (1.2*working capital + 1.4*retained earnings + 3.3*EBIT + 0.999*sales)/total assets + (0.6*market value of equity/book value of total liabilities), and use 2.675 as cutoff value to assign investment grade status. The two measures are significantly and positively correlated for the subsample with both available.

  14. Consistent with this argument, Andrade et al. (2014) find that SOX is associated with a significant decrease in the cost of debt, mainly due to an increase in corporate transparency.

  15. This yearly benefit could be enhanced by additional cost savings associated with future debt issuances at lower offering yields. At the same time, we acknowledge that debt offerings after U.S. equity cross-listings are not costless, but might involve additional compliance, administrative, and reputational costs. We do not provide evidence on these costs and, hence, cannot say whether the debt transactions are net beneficial.

  16. For the Loan Spread analysis, we pare down the propensity sample to syndicated loans with data available in Dealscan, require a minimum loan amount of US$ 10 million, and only retain the loan with the largest facility amount per year. The resulting sample comprises 5200 loan issues from 46 countries.

  17. The lack of data in Dealscan does not allow us to pursue these alternative channels empirically.

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Acknowledgements

We thank an anonymous referee, Anne Beatty, Phil Berger, Maria Correia, Günther Gebhardt, Wayne Guay, Bob Holthausen, Scott Liao, Russ Lundholm (editor), Oguzhan Ozbas, Doug Skinner, René Stulz, and workshop participants at the 2009 Global Issues in Accounting Conference, 2009 INTACCT international workshop in Porto, 2009 Verein für Socialpolitik Accounting Section meeting, 2009 Conference on Empirical Legal Studies, 2010 European Financial Management Association meeting, 2011 European Accounting Association meeting, University of Chicago, Erasmus University, Goethe University, INSEAD, New York University, Ohio State University, University of Pennsylvania, University of Rochester, Stanford University, and University of Texas at Austin for helpful comments. Ryan Ball gratefully acknowledges the financial support of the Ernst & Young Faculty Fellowship. Florin Vasvari gratefully acknowledges the financial support of the London Business School RAMD Fund.

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Authors and Affiliations

  1. Ross School of Business, University of Michigan, Ann Arbor, MI, USA

    Ryan T. Ball

  2. The Wharton School, University of Pennsylvania, Philadelphia, PA, USA

    Luzi Hail

  3. London Business School, London, UK

    Florin P. Vasvari

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Correspondence to Ryan T. Ball.

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Ball, R.T., Hail, L. & Vasvari, F.P. Equity cross-listings in the U.S. and the price of debt. Rev Account Stud 23, 385–421 (2018). https://doi.org/10.1007/s11142-017-9424-0

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