Vihang R. Errunza, Darius P. Miller, Market Segmentation and the Cost of Capital in International Equity Markets, The Journal of Financial and Quantitative Analysis, Vol. 35, No. 4 (Dec., 2000), pp. 577-600

This paper examines the shareholder wealth effects associated with global equity offerings made by foreign firms after their initial cross-listing in the United States. We document that the market reaction to seasoned global equity offerings is economically and statistically insignificant. However, it is 1.5% larger than the market reaction to offerings made on local exchanges only. In addition, we find that the adverse market reaction to local equity offerings is mitigated as more capital is raised globally. Our findings support the hypothesis that global capital raising is associated with significant benefits.

This paper exploits the staggered initiation of takeover laws across countries to examine whether the threat of takeover enhances managerial discipline. We show that following the passage of takeover laws, poorly performing firms experience more frequent takeovers; the propensity to replace poorly performing CEOs increases, especially in countries with weak investor protection; and directors of targeted firms are more likely to lose board seats following corporate-control events. Our findings suggest that the threat of takeover causes managerial discipline through the incentives that the market for corporate control provides to boards to monitor managers.

This article studies the ability of security-level contracts to substitute for poor country-level investor protections. Using a cross-country sample of restrictive covenants, we find that bond contacts are more likely to include covenants when creditor protection laws are weak. Further, the use of restrictive covenants in weak creditor protection countries is associated with a lower cost of debt. We also find that strong country-level shareholder rights are not necessarily harmful to bondholders. Overall, the findings suggest that issuers and investors can create international contracts that overcome some of the deficiencies of country-level investor protections and facilitate access to external finance.

This paper investigates the valuation effects of corporate international diversification by examining cross-border mergers and acquisitions of US acquirers over the period 1990–2000. We find that, on average, acquisitions of “fairly valued” foreign business units do not lead to value discounts. In contrast, unrelated cross-border acquisitions result in a significant diversification discount of about 24% after accounting for the valuation of foreign targets. Furthermore, significant wealth gains accrue to foreign target shareholders regardless of the type of acquisition. Overall, our results suggest that international diversification does not destroy value while industrial diversification leads to discounts even after controlling for the pre-acquisition value of the target.

This paper uses a sample of more than 2,500 firms from 27 countries to investigate the relation among ownership structure, analyst following, investor protection, and valuation. We find that analysts are less likely to follow firms with potential incentives to withhold or manipulate information, such as when the family/management group is the largest control rights blockholder. Furthermore, this relation is stronger for firms from low‐shareholder‐protection countries. Using valuation regressions that take into account potential endogeneity between analyst following and firm value, we find a positive valuation effect when analysts cover firms that have both potentially poor internal governance and weak country‐level external governance. Overall, our findings suggest that corporate governance plays an important role in analysts' willingness to follow firms and that increased analyst following is associated with higher valuations, particularly for firms likely to face governance problems.

ABSTRACT We examine the relation between auditor characteristics (quality and tenure) and the cost of debt financing. Consistent with the hypothesis that audit characteristics are important to the capital markets, we find that (1) auditor quality and tenure are negatively and significantly related to the cost of debt financing, (2) the relation between auditor characteristics and the cost of debt is most pronounced in firms with debt that is noninvestment grade, and (3) both the insurance and information role of audits are economically significant to the cost of debt. Overall, our results suggest that, through their dual roles of providing information and insurance, auditor quality and tenure matter to capital market participants.

ABSTRACT We study the economic consequences of a recent Securities and Exchange Commission securities regulation change that grants foreign firms trading on the U.S. over‐the‐counter (OTC) market an automatic exemption from the reporting requirements of the 1934 Securities Act. We document that the number of voluntary (sponsored) OTC cross‐listings did not increase following the regulation change, suggesting that it did not achieve its intended purpose of increasing voluntary OTC cross‐listings through a reduction in compliance costs. We do find that the design of the regulation allowed financial intermediaries to create an unprecedented number of involuntary (unsponsored) OTC ADRs: 1,700 unsponsored ADR programs for 920 firms were created for companies that had previously chosen not to cross‐list in the United States. Our difference‐in‐differences analysis based on a matched sample approach documents that foreign firms forced into the U.S. capital markets experience a significant decrease in firm value, and we further show that the decrease in firm value is related to an increase in U.S. litigation risk. We also find that depositary banks’ propensity to involuntarily cross‐list firms is positively related to banks’ expected fee revenue, and that banks chose firms that incur high costs when involuntarily cross‐listed. Our results provide evidence that securities regulation can be exploited for private gain and result in costly unintended consequences.

This paper investigates the relation between cross listing in the United States and the information environment of non‐U.S. firms. We find that firms that cross list on U.S. exchanges have greater analyst coverage and increased forecast accuracy than firms that are not cross listed. A time‐series analysis shows that a change in analyst coverage and forecast accuracy occurs around cross listing. We also document that firms that have more analyst coverage and higher forecast accuracy have higher valuations. Furthermore, the change in firm value around cross listing is correlated with changes in analyst following and forecast accuracy, suggesting that cross listing enhances firm value through its effect on the firm's information environment. Our findings support the hypothesis that cross‐listed firms have better information environments, which are associated with higher market valuations.