Why Do Companies List Shares Abroad?: A Survey of the Evidence and Its Managerial Implications

The purpose of this monograph is to survey the academic literature on the economic implications of the corporate decision to list shares on an overseas stock exchange. My focus is on the valuation and liquidity effects of the listing decision, and the impact of listing on the company's global risk exposure and its cost of equity capital. The evidence shows:
(1) share prices reacts favorably to cross-border listings in the first month after listing;
(2) post-listing price performance up to one year is highly variable across companies depending on the home and listing market, its capitalization, capital-raising needs and other company-specific factors;
(3) post-listing trading volume increases on average, and, for many issues, home-market trading volume increases also;
(4) liquidity of trading in shares improves overall, but depends on the increase in total trading volume, the listing location and the scope of foreign ownership restrictions in the home market;
(5) domestic market risk is significantly reduced and is associated with only a small increase in global market risk and foreign exchange risk, which can result in a net reduction in the cost of equity capital of about 126 basis points;
(6) American Depositary Receipts represent an effective vehicle to diversify U.S.-based investment programs globally;
(7) stringent disclosure requirements are the most important impediment to cross-border listings.     

How Different Is the Efficiency of Public and Private Water Companies in Asia?

Several studies have compared the efficiency of publicly andprivately owned water utilities and reached conflicting conclusionson the impact of ownership on efficiency. This article providesfurther evidence by estimating a stochastic cost frontier fora sample of Asian and Pacific regional water companies. Theresults show that efficiency is not significantly differentin private companies than in public ones.     

How Does the Use of Credit Default Swaps Affect Firm Risk and Value? Evidence from US Life and Property/Casualty Insurance Companies

This study uses a unique credit default swap (CDS) transaction data set of insurers to examine the effects of CDS usage on the risk profile and firm value of US insurance companies for the period 2001‐2009. Applying a Heckman two‐stage model to adjust for the potential endogeneity of CDS usage with respect to firm risk and firm value, we find consistent evidence that the utilization of CDS for income generation purposes is associated with greater market risk, deterioration of financial performance, and lower firm value, for both Life and Property/Casualty insurers.     

Americanism and financial accounting theory – Part 3: Adam Smith,the rise and fall of socialism,and Irving Fisher's theory of accounting

A previous paper (Part 1) rejected the conventional wisdom that America was ‘born capitalist’ and the historians’ consensus that it had become capitalist by the early-19th century; another (Part 2) rejected Chandler's thesis that the ‘modern business enterprise’ brought a ‘new form of capitalism’ to America from the 1840s. The accounting evidence suggests that America began to make the transition to capitalism around 1900 in a period of intense conflict between ‘capital and labour’ generated by ‘big business’ from the 1880s, a process not completed until the 1920s. This paper (Part 3) examines the consequences for America's political ideology and financial accounting theory. America's exceptional transition, it argues, explains the history of its political ideology, and this history explains Irving Fisher's theory of accounting. Section A argues that America lagged behind Britain because it started from a society of simple commodity producers and semi-capitalists, which created an exceptional ideological problem for its ruling elite. Big business generated hostility from workers, farmers and small employers – expressed in labour movements, ‘populism’, socialism, and ‘progressivism’ – and created an ideological problem by contradicting the ‘independent producer’ ideology of workers and farmers, and the ‘individual liberalism’ of small manufacturers and merchants, both underwritten by Adam Smith's Wealth of Nations. The paper argues that Smith's theory of price articulates as semi-capitalist accounting, which explains his popularity in America until the appearance of big business in the 1880s. Socialism and progressivism became political forces in America from 1900 to around 1920. Progressivism produced ‘corporate liberalism’, the ideological counter to socialism that corporations could be made ‘socially responsible’ by government regulation and ‘publicity’ to ensure they earned only ‘fair’ returns, but this left two problems. First, socialists argued that no profit was ‘fair’, and second, fear of the ‘labour danger’ made American financial reports secretive and conservative. Section B argues that Irving Fisher responded to these problems with a theory of accounting, which he developed as a refutation of Marx and the American brand of socialism advocated by Eugene Debs, the threateningly successful presidential candidate of the Socialist Party of America. An important but neglected reason for socialism's abrupt collapse around 1920, it argues, was that the socialists lost the intellectual argument with the middle classes, and that Fisher's theory played an important role in this defeat. Fisher was a vigorous self-publicist, strongly influenced the teaching of economics and accounting in the universities and, the paper argues, changed the language of American accounting. Fisher claimed that accounting practice supported his theory of ‘capital’ and ‘income’, but the paper shows he did not understand double-entry bookkeeping or the accountants’ ‘cost theory of value’, and therefore divorced accounting from the reality of business transactions. As his theory underlies the FASB's framework, the paper concludes that Fisher's legacy to the world is a pathological theory of financial accounting.     

Concavity of utility,concavity of welfare,and redistribution of income

The marginal social value of income redistribution is understood to depend on both the concavity of individuals’ utility functions and the concavity of the social welfare function. In the pertinent literatures, notably on optimal income taxation and on normative inequality measurement, it seems to be accepted that the role of these two sources of concavity is symmetric with regard to the social concern about inequality in the distribution of income. Direct examination of the question, however, reveals that this is not the case. Concavity of utility has a simple, direct effect on the marginal social value of redistribution, as might be expected, whereas concavity of the social welfare function has a more subtle influence, one that in some cases may not be very significant. The implications of this difference are examined for some standard forms of utility and welfare functions, including particular versions that appear in the optimal income taxation literature.     

Do Corporate Venture Capitalists Add Value to Start-Up Firms? Evidence from IPOs and Acquisitions of VC-Backed Companies

We present evidence that corporate venture capitalists (CVCs) add value to start-up companies only when the start-ups have a strategic fit with the parent corporations of CVCs. We find that CVCs provide a variety of services and support that suit the specific needs of start-ups operating in different industries. CVC-backed start-ups are able to obtain higher valuations at the IPO than non-CVC-backed ones, and the value added by CVCs concentrates in start-ups with a strategic overlap with CVC parents. Entrepreneurial companies with strategic CVC backing also receive higher takeover premiums when they become acquisition targets .     

Merchants and credit cards: Determinants,perceptions and current practices — A case of Malaysia

The credit card industry is made up of two business segments: the issuance of credit cards to consumers and the acquisition of merchants into the credit card payment scheme. Accepting credit card payments is an important business decision that involves cost, benefits and risk considerations. The paper discusses the merchants' personal and business characteristics and the perceptions of merchants towards the credit card payment system, both of which contribute significantly to merchants' acceptance of credit card payments. It is found that perceptions related to the social influence and performance expectancy constructs of the Unified Theory of Acceptance and Use of Technology play the most important role in a merchant's decision.     

Are U.S. Companies Really Holding That Much Cash—And If So,Why?

Non‐financial S&P 500 companies are now estimated to hold a total of $2.1 trillion of “cash,” a figure that is larger than the annual GDP of all but eight countries. In this report, J.P. Morgan's Corporate Finance Advisory team notes that while many observers have attributed the buildup to offshore cash growth alone, onshore cash levels are also up significantly. To be sure, the companies that have shown the greatest increases also tend to be highly successful, with strong cash flow and business performance. And the managers of such companies tend to prefer to retain much if not most of this cash to take advantage of investment opportunities and to maintain the flexibility to respond to the next economic downturn. Also adding to the cash build‐ups, the executives of large MNCs with significant overseas cash holdings typically try to avoid the higher tax bill triggered by repatriating funds to the U.S. Nevertheless, investors continue to expect growth and high returns on capital; and corporate distributions of capital in the form of dividends and stock buybacks can play an important role in encouraging companies to operate efficiently. While pursuing both of these goals—preservation of enough cash to weather downturns and invest in all positive‐NPV projects, and commitment to paying out excess capital—boards and senior decision makers should continuously reexamine their cash holdings and capital allocation policies to ensure they are appropriate not only for today's environment, but throughout the economic cycle.     

Does the Scope of the Sell‐Side Analyst Industry Matter? An Examination of Bias,Accuracy, and Information Content of Analyst Reports

We examine changes in the scope of the sell‐side analyst industry and whether these changes impact information dissemination and the quality of analysts’ reports. Our findings suggest that changes in the number of analysts covering an industry impact analyst competition and have significant spillover effects on other analysts’ forecast accuracy, bias, report informativeness, and effort. These spillover industry effects are incremental to the effects of firm level changes in analyst coverage. Overall, a more significant sell‐side analyst industry presence has positive externalities that can result in better functioning capital markets.     

Negligence,capture, and dependence: safety regulation of the design of India’s Prototype Fast Breeder Reactor

This article contributes a case study of regulation of the design of India’s Prototype Fast Breeder Reactor (PFBR). This reactor is the first of its kind in India, and perceived by the nuclear establishment as critical to its future ambitions. Because fast breeder reactors can experience explosive accidents called core disruptive accidents whose maximum severity is difficult to contain, it is difficult to assure the safety of the reactor’s design. Despite the regulatory agency’s apparent misgivings about the adequacy of the PFBR’s design, it eventually came to approve construction of the reactor. We argue that the approval process should be considered a case of regulatory failure, and examine three potential factors that contributed to this failure: institutional negligence, regulatory capture, and dependence on developers and proponents for esoteric knowledge. This case holds lessons for nuclear safety regulation and more generally in situations where specialized, highly technical, knowledge essential for ensuring safety is narrowly held.     

Accounting manipulations and political costs: Tooth & Co Ltd, 1910–1965

Positive accounting theory posits that political costs influence accounting choices by large firms. Most studies rely on cross‐sectional analyses of large samples using coarse data. We employ rich archival data to analyse the profit measurement and disclosure practices of Tooth & Co, a large Australian brewing company, from 1910 to 1965. This period provides considerable variation in scope and incentives to manipulate reported profit. Reporting discretion changed significantly from early voluntary disclosure through to the extensive scheduled disclosure requirements of the Companies Act 1961. Varying incentives include changes in excise duties levied on beer production, and dramatic company growth and market dominance resulting from takeovers of competitors and vertical integration. We examine the pattern of reported profit in relation to internal records and the pattern of accruals. We find that Tooth's profit‐smoothing practices and understatements were perceived by management as important in justifying dividend policy, while systematic understatements of reported profit were used to avoid potential political costs associated with high profitability and market dominance. The most significant relative increases in profit understatement are shown to occur where dividend policy and political cost motivations coincide.     

Risk‐Sharing or Risk‐Taking? Counterparty Risk,Incentives, and Margins

Derivatives activity, motivated by risk‐sharing, can breed risk‐taking. Bad news about the risk of an asset underlying a derivative increases protection sellers' expected liability and undermines their risk‐prevention incentives. This limits risk‐sharing, creates endogenous counterparty risk, and can lead to contagion from news about the hedged risk to the balance sheet of protection sellers. Margin calls after bad news can improve protection sellers' incentives and in turn enhance risk‐sharing. Central clearing can provide insurance against counterparty risk but must be designed to preserve risk‐prevention incentives.     

The impact of state ownership,formal institutions and resource seeking on acquirers’ returns of Chinese M&A

We examine the effects of state ownership, institutions and resource-seeking behavior on post-acquisition stock price returns of Chinese cross-border mergers and acquisitions over the period 1998–2008. Chinese acquiring firms experience negative returns ranging from 2.92 to 10.80 % in 12- and 60-month post-event periods, respectively. State ownership (SOE), interaction between R&D and SOE, formal institutional distance and acquirer size have a positive and significant impact on the long-term acquirer returns. However, the interaction between tangible resources and SOE and acquirer cash holdings appears to have a negative and significant impact on long-term returns. Overall, our results suggest that the state and institutions constitute important sources of long-term value creation for Chinese acquirers.     

Global financial crisis, extreme interdependences, and contagion effects: The role of economic structure?

The paper examines the extent of the current global crisis and the contagion effects it induces by conducting an empirical investigation of the extreme financial interdependences of some selected emerging markets with the US. Several copula functions that provide the necessary flexibility to capture the dynamic patterns of fat tail as well as linear and nonlinear interdependences are used to model the degree of cross-market linkages. Using daily return data from Brazil, Russia, India, China (BRIC) and the US, our empirical results show strong evidence of time-varying dependence between each of the BRIC markets and the US markets, but the dependency is stronger for commodity-price dependent markets than for finished-product export-oriented markets. We also observe high levels of dependence persistence for all market pairs during both bullish and bearish markets.     

Survey Under‐Coverage of Top Incomes and Estimation of Inequality: What is the Role of the UK's SPI Adjustment?

Survey under‐coverage of top incomes leads to bias in survey‐based estimates of overall income inequality. Using income tax record data in combination with survey data is a potential approach to address the problem; we consider here the UK's pioneering ‘SPI adjustment’ method that implements this idea. Since 1992, the principal income distribution series (reported annually in Households Below Average Income) has been based on household survey data in which the incomes of a small number of ‘very rich’ individuals are adjusted using information from ‘very rich’ individuals in personal income tax return data. We explain what the procedure involves, reveal the extent to which it addresses survey under‐coverage of top incomes and show how it affects estimates of overall income inequality. More generally, we assess whether the SPI adjustment is fit for purpose and consider whether variants of it could be employed by other countries.     

The impact of consolidation and safety-net support on Canadian,US and UK banks: 1893–1992

This study investigates bank consolidation and safety-net support provision in Canada, the UK and the US over a 100-year historical period, and the impact of these policy variables on bank capital and risk-taking choices. The study finds that consolidation and strengthened safety nets have largely supplanted the historical role of high bank capital levels in providing protection to risk-adverse depositors. Furthermore, despite strengthened safety-net guarantees, the study finds that bank asset-risk choices in the 1980s are comparable to those observed in the 1890s, while bank equity volatilities have shown approximately a 10-fold increase over this period. Finally, the study finds that bank capital ratios are as asset-risk sensitive in the 1980s as those in the 1890s, perhaps reflecting residual market discipline or regulatory moral-suasion effects.