#06-19
Cost of Capital Effects and Changes in Growth Expectations
around U.S. Cross-Listings
Luzi Hail and Christian Leuz, July 2008
Abstract:This paper examines whether cross-listing in the U.S. reduces foreign firms’ cost of capital. While
prior studies document that U.S. cross-listings are associated with substantial increases in firm
value, the sources of these valuation effects are not well understood. We estimate cost of capital
effects implied by market prices and analyst forecasts, which allows us to explicitly account for
changes in growth expectations around cross-listings. We find strong evidence that firms with
cross-listings on U.S. exchanges experience a significant decrease in their cost of capital between
70 to 120 basis points. These effects are sustained and still present in recent years and after the
passage of the Sarbanes-Oxley Act. Consistent with the bonding hypothesis, we find smaller cost of
capital reductions for firms that cross-list in the over-the-counter market and for exchange-listed
firms from countries with stronger home-country institutions. For exchange-traded cross-listings,
the reduction in cost of capital accounts for more than half of the increase in value around crosslistings,
whereas for the other types of cross-listings the valuation effects are primarily attributable
to contemporaneous revisions in growth expectations.
Keywords: Corporate Governance, Cross-listing, Bonding hypothesis, Cost of equity, Disclosure, Law and finance, International finance
JEL classifications : G14, G15, G38, G30, K22, M41
