Corporate Governance in the US and Global Settings 9781784412913, 9781784412920

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CORPORATE GOVERNANCE IN THE US AND GLOBAL SETTINGS

ADVANCES IN FINANCIAL ECONOMICS Series Editors: Kose John, Anil K. Makhija and Stephen P. Ferris Recent Volumes: Volume 6:

Advances in Financial Economics

Volume 7:

Innovations in Investments and Corporate Finance

Volume 8:

Coporate Government and Finance

Volume 9:

Corporate Governance

Volume 10: The Rise and Fall of Europe’s New Stock Markets Volume 11: Corporate Governance: A Global Perspective Volume 12: Issues in Corporate Governance and Finance Volume 13: Corporate Governance and Firm Performance Volume 14: International Corporate Governance Volume 15: Advances in Financial Economics Volume 16: Advances in Financial Economics

ADVANCES IN FINANCIAL ECONOMICS VOLUME 17

CORPORATE GOVERNANCE IN THE US AND GLOBAL SETTINGS EDITED BY

KOSE JOHN Charles William Gerstenberg Professor of Banking and Finance, New York University, NY, USA

ANIL K. MAKHIJA David A. Rismiller Professor of Finance, The Ohio State University, OH, USA

STEPHEN P. FERRIS J.H. Rogers Chair of Money, Credit and Banking Finance, University of Missouri, MO, USA

United Kingdom
North America
Japan India
Malaysia
China

Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2014 Copyright r 2014 Emerald Group Publishing Limited Reprints and permission service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. Any opinions expressed in the chapters are those of the authors. Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or implied, to their use. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-78441-292-0 ISSN: 1569-3732 (Series)

ISOQAR certified Management System, awarded to Emerald for adherence to Environmental standard ISO 14001:2004. Certificate Number 1985 ISO 14001

CONTENTS LIST OF CONTRIBUTORS

vii

CAPITAL STRUCTURE CHANGES AROUND CROSS-LISTINGS Min-Yu (Stella) Liao and Chris Tamm BRIDGING THE CULTURAL DIVIDE: THE ROLE OF FOREIGN DIRECTORS IN CROSS-BORDER MERGERS Yaqoub Alabdullah and Stephen P. Ferris THE IMPACT OF BOARD DIVERSITY ON CORPORATE PERFORMANCE: NEW EVIDENCE FROM SOUTHEAST EUROPE Filip Fidanoski, Kiril Simeonovski and Vesna Mateska ARE CEOS MYOPIC? A DYNAMIC MODEL OF THE ONGOING DEBATE Moren Levesque, Phillip Phan, Steven Raymar and Maya Waisman INTRODUCTION OF EQUITY-BASED COMPENSATION AND IMPACT ON FIRM POLICIES Ranjan D’Mello and Mercedes Miranda

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MERGERS AND TARGET TRANSPARENCY Iftekhar Hasan, Jarl G. Kallberg, Crocker H. Liu and Xian Sun INSTITUTIONAL INVESTORS’ TRADING BEHAVIOR IN MERGERS AND ACQUISITIONS Rasha Ashraf and Narayanan Jayaraman

CONTENTS

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229

LIST OF CONTRIBUTORS Yaqoub Alabdullah

College of Business Administration, Kuwait University, Kuwait City, Kuwait

Rasha Ashraf

Robinson College of Business, Georgia State University, Atlanta, GA, USA

Ranjan D’Mello

Department of Finance, Wayne State University, Detroit, MI, USA

Stephen P. Ferris

Trulaske College of Business, University of Missouri, Columbia, MO, USA

Filip Fidanoski

Ss.Cyril and Methodius University, Skopje, Republic of Macedonia

Iftekhar Hasan

Fordham University, New York, NY, USA; Bank of Finland, Helsinki, FI, Finland

Narayanan Jayaraman

Scheller College of Business, Georgia Institute of Technology, Atlanta, GA, USA

Jarl G. Kallberg

Carson College of Business, Washington State University, Pullman, WA, USA

Moren Levesque

Weatherhead School of Management, Case Western Reserve University, Cleveland, OH, USA

Min-Yu (Stella) Liao

College of Business, Illinois State University, Normal, IL, USA

Crocker H. Liu

School of Hotel Administration, Cornell University, Ithaca, NY, USA

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LIST OF CONTRIBUTORS

Vesna Mateska

Ss.Cyril and Methodius University, Skopje, Republic of Macedonia

Mercedes Miranda

Department of Accounting and Finance, University of Michigan-Dearborn, Dearborn, MI, USA

Phillip Phan

The Johns Hopkins Carey Business School, Johns Hopkins University, Baltimore, MD, USA

Steven Raymar

Fordham Schools of Business, Fordham University, New York, NY, USA

Kiril Simeonovski

Ss.Cyril and Methodius University, Skopje, Republic of Macedonia

Xian Sun

The Johns Hopkins Carey Business School, Johns Hopkins University, Baltimore, MD, USA

Chris Tamm

College of Business, Illinois State University, Normal, IL, USA

Maya Waisman

Fordham Schools of Business, Fordham University, New York, NY, USA

CAPITAL STRUCTURE CHANGES AROUND CROSS-LISTINGS Min-Yu (Stella) Liao and Chris Tamm ABSTRACT Purpose
We examine what changes, if any, firms are making to their capital structure around the time they cross-list because both of these affect a firm’s corporate governance. Cross-listing requires firms to follow SEC rules and regulations, which helps improve the firm governance. A firm’s capital structure, specifically the use of debt, is an effective way to mitigate the conflict between managers and shareholders by reducing the cash available to managers. We examine whether these governance mechanisms are complimentary or being used as substitutes by crosslisting firms. Methodology
We compare the capital structures of Level II and Level III cross-listing firms from both civil law and common law countries in the three years before and the three years after cross-listing. Findings
We show firms are significantly reducing their debt to equity ratio after the cross-listing. This reduction is shown for both Level II and Level III firms; however, it is primarily seen in civil law countries. Practical implications
The corporate governance improvement firms recognize by cross-listing is partially offset by the reduced use of debt

Corporate Governance in the US and Global Settings Advances in Financial Economics, Volume 17, 1
34 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1569-3732/doi:10.1108/S1569-373220140000017002

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after the cross-listing. These governance characteristics may be especially relevant for shareholders in Level III cross-listings because those firms are actually raising addition cash. Keywords: Cross-listing; capital structure; corporate governance

INTRODUCTION The purpose of this study is to determine the effect of cross-listing on the capital structure of a firm. The existing literature shows that cross-listing has a significant impact on the corporate governance of listed firms while literature also suggests that corporate governance is a determinant of a firm’s choice of its capital structure. We aim to merge these two literature strains and examine the changes to a firm’s capital structure around the cross-listing. Prior literature has shown that the primary reasons a firm chooses to cross-list are to raise additional capital and to increase the value of the firm by lowering the firm’s risk. When a firm cross-lists, it has the opportunity to issue new shares and raise additional equity by using a Level III American Depository Receipt (ADR), which is listed on a US exchange. Even if the firm chooses not to issue new shares, Level II ADRs are also listed on a US exchange. By listing on a US exchange, a firm agrees to numerous Securities and Exchange Commission (SEC) disclosure and filing requirements as well as to following all exchange rules. These cross-listing firms are improving their corporate governance and lowering the risks to bondholders and shareholders, which increases the value of the firm. Capital structure and corporate governance have long been discussed together in the finance literature. Much of the prior literature has focused on trying to explain how the observed capital structure is developed and what role, if any, capital structure has on the value of the firm. While initial literature indicated that capital structure was not important, more recent literature has shown this is not accurate outside of perfect markets. The literature has shown that an effective way to mitigate the inherent conflict between managers and shareholders is for firms to have a significant amount of debt. This debt requires cash interest payments, which restricts the ability of managers to waste cash by investing in negative net present value (NPV) projects. Since prior literature indicates that cross-listing and capital structure can be used as mechanisms to improve corporate governance, we examine

Capital Structure Changes around Cross-Listings

3

whether or not the two are related. The cross-listing decision rests solely with a firm’s management as there are no outside requirements forcing firms to cross-list in the United States. In addition, there is some literature that argues managers can decide the firm’s capital structure as they try to time the markets for debt and equity issuances (see, e.g., Baker & Wurgler, 2002). We examine whether managers are making changes to their capital structures around a firm’s cross-listing. Since cross-listing is known to improve corporate governance, we consider whether managers make other decisions that affect governance at the same time. For example, if crosslisting firms maintain their same debt levels (ratios) or increase their debt afterwards, this would serve to improve the overall governance of the firm because managers would be required to use more cash for debt servicing. In contrast, if a firm significantly decreases its debt levels (ratios) after cross-listing, the overall governance may not be substantially improved since the governance improvement created by the cross-listing may be offset by the decreased use of debt. In addition, the debt levels may be especially important to shareholders of Level III ADR firms because those firms have raised substantial amounts of new capital that managers then have access to. The remainder of the paper is organized as follows. The section “Literature Review” discusses related literature. The section “Data and Sample Construction” describes the data. The section “Results” provides the results and the section “Conclusion” concludes.

LITERATURE REVIEW Corporate Governance and Capital Structure The capital structure of firms has been extensively researched over the past 60 years. This research has built upon the work of Modigliani and Miller (1958) who showed that capital structure does not matter in perfect markets. Since their work, research has expanded to imperfect markets in an attempt to explain why various capital structures are observed. This newer research has focused on three primary theories: the tradeoff theory detailed by Miller (1977), the pecking order theory developed by Myers (1984) and Myers and Majluf (1984), and the agency theory developed by Jensen and Meckling (1976) and Jensen (1986).

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The tradeoff theory indicates that when managers determine the firm’s capital structure, they do so by balancing the tax deductibility of interest payments with increasing costs of financial distress and bankruptcy. Miller (1977) argues that firms have a target debt to equity ratio that they should be constantly moving toward. This theory has mixed support in the literature, with Graham (1996, 2000) finding that firm debt levels are related to tax rules, while Fama and French (1998) and Welch (2004) find no relation between capital structure, taxes, and stock returns. The pecking order theory developed by Myers and Majluf (1984) argues that firms have a specific method of financing projects. Firms first prefer to use internally generated cash when available. If more cash is needed than generated internally, the firm will then issue debt. Finally, once a firm cannot issue any more debt, it will then issue equity as a last resort due to the high cost of equity and the dilution to the current owners. This theory has mixed support in the literature, with paper such as Helwege and Liang (1996) showing that the more external financing a firm needs, the more debt it issues. In contrast, papers such as Fama and French (2005) find that equity issuances are very common for many firms even when debt may be available. The agency theory is based upon the inherent conflict between managers and shareholders present in widely owned firms. Jensen and Meckling (1976) argue that managers do not always adopt capital structures with the value-maximizing level of debt because managers do not capture the entire gain from these activities. Instead, managers may misuse or waste cash on private benefits. Jensen and Meckling argue that the agency problem can be mitigated by increasing the fraction of the firm financed by debt. When firms use significant amounts of debt, the managers’ share of the firm increases, and thus debt helps mitigate the conflict between managers and shareholders. Jensen (1986) also contends that debt requires the firm to pay interest in the form of cash, thereby constraining managers from diverting free cash to pursue personal perquisites at the expense of shareholders. As in Jensen (1986), Stulz (1990) provides a similar argument that debt prevents investment in value decreasing projects by reducing the free cash flow available to managers. In addition, Grossman and Hart (1982) argue that debt can create an incentive for managers to work harder, consume fewer perquisites, and make better investment decisions because bankruptcy is costly. In bankruptcy, managers frequently lose control of the firm and see their reputation diminished. These theories suggest that debt helps mitigate agency problems by constraining managers’ ability to improperly use free

Capital Structure Changes around Cross-Listings

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cash flow and by monitoring managers’ decisions. This belief implies that debt serves as a form of corporate governance and can be viewed as a substitute to other governance mechanisms. On the other hand, Harris and Raviv (1988) and Stulz (1988) show that managers may use more debt in order to reduce the possibility of takeover. Shleifer and Vishny (1986) argue that large outside investors help monitor managers to ensure management’s actions are in the best interest of all shareholders. In extreme cases, they argue that outside investors may obtain majority positions and oust the current, poorly performing managers. In this way, takeovers are viewed as a form of external governance and a disciplinary device. Thus, the defensive purpose of debt is motivated by managerial entrenchment. Characteristics of entrenchment indicate the absence of effective governance mechanisms, including monitoring by the board, the threat of dismissal, or takeover. This argument suggests that very high debt levels are associated with weak governance. Although this entrenchment theory is contrary to the agency theory, it is primarily relevant in firms with very high debt levels and not as relevant for firms with normal debt levels (see Berger, Ofek, & Yermack, 1997). More recently, Baker and Wurgler (2002) argue that the observed capital structure is not a specific target that the managers have been trying to meet, but instead is just the result of the past efforts to time the equity market. They argue that managers have significant leeway to determine an appropriate capital structure, which results in managers attempting to time the market. This market timing results in the firm issuing equity when the company is overvalued and issuing debt when the company is undervalued by the market.

Cross-Listing and Corporate Governance Cross-listing occurs when a firm lists its shares on both its domestic stock exchange as well as an international exchange. The four common types of cross-listings are Rule 144a private placements, Level I, Level II, and Level III ADRs. The primary differences in each type are how they are traded and the reporting and disclosure requirements. Rule 144a cross-listings are private placements where the shares are sold to qualified investors who may only trade with other qualified investors. In this type of cross-listing, the shares cannot be purchased by regular investors or traded on public markets.

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Level I ADRs are not traded on any of the US exchanges, but instead are traded in the over the counter (OTC) market. This level requires minimal reporting and disclosure by the SEC, which does not include filing either quarterly or annual reports or following Generally Accepted Accounting Principles (GAAP). Level II ADRs are listed on a US stock exchange. For a firm to issue Level II ADRs, it must file a registration statement before the program is initiated and then file the equivalent of an annual report using either International Financial Reporting Standards (IFRS) or GAAP standards each year. In addition to these SEC requirements, Level II ADRs must also meet all exchange requirements. Level III ADRs are the highest level ADR. In this level, the firms are actually issuing new shares to raise additional capital. The SEC requires the same base disclosure as Level II; however, firms must also disclose any material information provided in their home market to US investors. (See Karolyi (1998) for more information about the cross-listing process and reporting and disclosure requirements.) According to Miller (1999), firms cross-list for two primary reasons, to raise additional capital and/or to lower the firm’s risk. Firms that issue Level III ADRs raise new capital in the US market, which helps overcome the limits to capital the firms face in their home country. One way that firms can lower their risk is to improve their corporate governance. Since an improved governance structure lowers the risk outside shareholders face, the value of the firm will increase. Cross-listing provides a direct mechanism through which a firm can improve its corporate governance. As suggested by Coffee (1999, 2002) and Stulz (1999), firms bond themselves to stricter disclosure rules and legal environments by listing their equity on foreign exchanges, and consequently, reduce agency costs. Because foreign firms from weak legal regimes that cross-list on the US stock exchanges (Levels II and III ADRs) are required to comply with the US disclosure requirement, the bonding hypothesis of Coffee (1999, 2002) and Stulz (1999) implies that cross-listing improves a firm’s corporate governance through improved disclosure rules and stricter securities laws.1 This belief also suggests that cross-listing firms provide their shareholders with better protections. Several studies find evidence supporting the bonding hypothesis. For example, Reese and Weisbach (2002) find that firms issue more equity following their cross-listings. This result is consistent with the attractiveness of better governance and stronger shareholder protections. Additionally, Doidge (2004) finds that cross-listing firms exhibit significantly lower voting premiums, calculated as the ratio of the price of the voting right to the cash

Capital Structure Changes around Cross-Listings

7

flow right, relative to firms that do not cross-list. Doidge contends that the right to control a corporation is valuable since it provides the agents in control with private benefits. When firms cross-list, managers are constrained and the consumption of private benefits decreases due to stricter governance. In addition, according to the bonding hypothesis, cross-listing firms trade at a premium relative to non-cross-listing firms because stricter governance regulations make expropriation by controlling shareholders more difficult and less likely. Empirical evidence of this value creation from bonding includes King and Segal (2003) who find that Canadian firms which cross-list in the United States enjoy higher valuations relative to firms listed exclusively in Canada, and Doidge, Karolyi, and Stulz (2004) report that firms cross-listed on a US exchange have higher Tobin’s q. Therefore, bonding serves as a motive for firms from countries with weak shareholder protection to improve their governance. Due to the weak governance in civil law countries, firms from these countries experience greater difficulty raising capital. LLSV (1998) find that both debt and equity are more accessible in common law countries because they offer greater shareholder protections. These protections result in more investors being willing to provide capital, and thus leads to a more developed capital market. In contrast, firms from civil law countries have weaker investor protections against expropriation, resulting in a less developed capital market and less access to external capital. In addition, the lack of investor protections in civil law countries leads to a more concentrated ownership and more bank-centered financial systems (La Porta, Lopez-deSilanes, & Shleifer, 1999). Therefore, firms from civil law countries are less able to issue equity and have greater indebtedness than common law countries (LLSV, 1997). This finding is consistent with our conjecture that firms with weaker investor protections use more debt as a substitute for other governance mechanisms.

DATA AND SAMPLE CONSTRUCTION We construct our sample by first creating a list of companies that cross-list onto a US exchange over the period 1987
2008. These firms are either American Depositary Receipts, or are securities directly listed on the New York Stock Exchange (NYSE) or NASDAQ. Consistent with the literature, such as Benos and Weisbach (2004) and Lel and Miller (2008), we

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MIN-YU (STELLA) LIAO AND CHRIS TAMM

obtain the list of ADR firms from Citibank, Bank of New York, J.P. Morgan, and Deutsche Bank. We only use Level II and Level III ADR firms because both Level II and Level III ADRs are listed on the US exchanges. In addition, since Level III ADRs can issue new equity, we can isolate the effects of cross-listing on the capital structure of ADR firms, and examine if the changes to the capital structure are driven by the improved governance or by the issuance of new equity. We then eliminate those firms which are missing from COMPUSTAT GLOBAL where we obtain the financial data for the firms. Consistent with the capital structure literature (see, e.g., Baker & Wurgler, 2002; Leary & Roberts, 2014; Rajan & Zingales, 1995), we exclude firms in the finance industry, where industry is defined using the first digit of the SIC code. We use the annual financial data of cross-listing firms over years −3 to +3 relative to an ADR listing. This yields a set of ADRs from 32 countries, representing 1,084 firm-year observations. Panel A of Table 1 details the sample distribution with the number of ADR firm-year observations by each country. The two countries with the most firm-year observations are Brazil and the United Kingdom with 16% and 12%, respectively. The average firm size is over $13 billion; however, this varies dramatically across country with firm size ranging from approximately $400 million in Israel to almost $72 billion in Italy. Across our sample, the average profit margin is 1%, with Australia having the highest profit margin and South Africa the lowest. ROA and ROE vary across country as well, and is, to some extent, correlated with profit margin. Australia has the lowest ROA (−22%) and ROE (−36%), while South Africa has the highest ROA (320%) and ROE (697%). We also show the financial characteristics across our sample by legal regime. On average, firms from common law countries are smaller in size, but more profitable in terms of their ROA and ROE. The profit margin is lower in common law countries; however, this is primarily a result of the poor performance of Australian companies. Panel B includes information about the characteristics by industry. The table shows that the ADRs are concentrated in two industries with almost 80% of the observations in the manufacturing and transportation and public utility industries. As expected, there is a substantial difference in size and performance across industries. The average firm size goes from about $1.5 billion in the services industry to almost $39 billion in the public administration industry. Panel A in Table 2 details the leverage ratios across all countries. The results show substantial variation across country, with the highest debt to

Sample Distribution and Financial Conditions.

Panel A: Country distribution and summary statistics Country

50 49 14 174 39 7 7 7 55 30 7 37 55 7 16 21 15 57 92 7 7 7 5 5 44 35 13 5 31

Total Equity

Total Assets

Sales

Profit Margin

PPE

ROA

ROE

$1,742.29 210.70 13,919.56 4,548.84 1,125.07 15,520.52 398.98 2,098.18 8799.96 6,369.67 2,215.40 1,941.80 1,303.85 1,871.65 615.22 133.16 16,115.81 16,228.72 2,627.58 7,731.59 293.05 1,427.35 2,374.91 1,416.07 1,120.32 6,690.09 8,583.25 1,157.18 7,291.47

$3,529.48 549.44 45,927.66 8,904.65 2,631.16 28,632.50 819.95 5,908.78 28,502.53 20,574.25 4,983.98 4,247.77 2,575.71 3,406.03 843.18 429.40 71,514.17 39,005.79 5,547.90 26,511.68 445.21 3,356.56 6,535.20 2,630.76 2,259.08 15,492.72 30,289.89 7,992.36 17,534.50

$1,893.97 413.88 23,720.76 3,005.13 2,142.72 15,851.18 348.22 6,333.55 17,271.35 20,581.43 3,866.98 1,861.49 1,741.03 1,075.18 334.83 491.04 35,487.39 28,327.95 3,321.27 29,022.94 197.22 839.04 2,775.09 632.58 1,453.80 8,908.15 10,983.39 7,393.70 11,276.52

−1.49 −5.80 0.07 0.07 0.06 0.23 0.36 na −0.01 −0.04 na 0.02 0.13 0.33 0.12 −0.08 0.01 0.03 0.11 0.07 0.21 0.18 0.12 −0.41 5.89 0.07 −0.04 na 0.09

0.67 0.32 0.28 0.49 0.45 0.42 0.63 0.19 0.30 0.17 0.44 0.45 0.29 0.56 0.24 0.23 0.34 0.33 0.45 0.59 0.45 0.74 0.68 0.62 0.72 0.66 0.39 0.19 0.15

−0.08 −0.22 0.03 0.04 0.05 0.13 0.15 na −0.01 −0.01 na 0.04 0.10 0.13 0.07 −0.12 0.00 0.02 0.04 0.09 0.10 0.04 0.06 −0.07 3.20 0.04 −0.01 na 0.05

−0.32 −0.36 0.11 0.14 0.12 0.22 0.33 na 0.01 −0.10 na 0.12 0.18 0.18 0.29 −0.20 −0.03 0.13 0.07 0.29 0.15 0.10 0.14 −0.14 6.97 0.09 −0.03 na 0.11

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Argentina Australia Belgium Brazil Chile Colombia Denmark Finland France Germany Greece Hong Kong India Indonesia Ireland Israel Italy Japan Mexico Norway Peru Philippines Portugal Singapore South Africa South Korea Spain Sweden Switzerland

Firm Years

Capital Structure Changes around Cross-Listings

Table 1.

(Continued )

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Table 1. Panel A: Country distribution and summary statistics Country

Total Equity

Total Assets

Sales

Profit Margin

PPE

ROA

ROE

42 7 137 1,084

3,885.74 978.76 10,995.31

5,515.16 2,776.24 28,146.22

2,267.76 1,524.21 26,926.20

0.17 0.07 −0.23

0.58 0.48 0.37

0.07 0.03 0.07

0.11 0.10 0.16

4,741.63 5,040.98

13,375.62 16,491.59

8,508.44 10,380.29

0.01 1.59

0.43 0.17

0.14 0.59

0.31 1.29

4,688.89 14,638.78

11,877.35 33,620.19

10,703.26 44,368.94

−0.21 9.83

0.39 0.26

0.37 3.79

0.83 8.91

5,813.03 10,449.71

14,949.82 26,765.05

8,866.26 17,353.54

0.01 1.23

0.45 0.23

0.03 0.11

0.08 0.46

364

720

Panel B: Industry distribution and summary statistics SIC 10
17 20
39 40
49 50
59 70
89 91
99

Industry

Firm Years

Total Equity

Total Assets

Sales

Profit Margin

PPE

ROA

ROE

Mining and construction Manufacturing Transportation & public utilities Wholesale and retail trade Services Public administration Total Mean Std. Dev.

86 511 362 42 68 15 1,084

2,561.27 6,142.25 6,252.46 1,442.62 754.35 11,518.67

5,771.75 15,770.61 15,717.69 3,864.20 1,602.37 38,846.89

3,311.55 12,821.54 7,069.84 5,850.83 1,584.72 38,565.02

1.12 −0.37 −0.03 0.03 −0.01 0.09

0.53 0.35 0.56 0.49 0.16 0.28

0.64 0.22 0.03 0.04 0.03 0.04

0.70 0.63 0.08 0.10 0.08 0.11

4,778.60 4,042.28

13,595.59 13,759.45

11,533.92 13,792.45

0.14 0.51

0.40 0.16

0.17 0.24

0.28 0.30

na denotes “not available.” The table presents the sample distribution of ADR firm-year observations as well as the means of select financial characteristics. Total equity, total assets, and sales are in millions of US dollars. PPE is property, plant, and equipment divided by total assets. ROA is net income divided by total assets. ROE is net income divided by total equity.

MIN-YU (STELLA) LIAO AND CHRIS TAMM

Taiwan Turkey United Kingdom All countries Mean Std. Dev. Common law only Mean Std. Dev. Civil law only Mean Std. Dev.

Firm Years

Distribution of Debt Levels and Leverage.

Panel A: Leverage levels across countries Country

50 49 14 174 39 7 7 7 55 30 7 37 55 7 16 21 15 57 92 7 7 7 5 5 44

Debt/Equity

Long-Term Debt/ Equity

Short-Term Debt/ Equity

Mean

Median

Mean

Median

Mean

Median

0.464 0.311 1.419 1.114 0.628 0.085 1.081 0.918 3.542 0.264 0.672 0.336 0.270 0.384 0.953 −2.022 1.923 0.408 0.549 0.805 0.286 1.077 0.930 0.598 0.438

0.500 0.079 1.234 0.721 0.581 0.012 0.883 0.549 0.820 0.052 0.618 0.196 0.037 0.541 0.102 0.005 2.024 0.372 0.503 0.758 0.273 0.930 0.665 0.660 0.201

0.299 0.198 1.057 0.734 0.490 0.075 0.927 0.414 1.535 0.169 0.517 0.189 0.188 0.347 0.807 −1.979 1.284 0.280 0.421 0.715 0.175 0.931 0.504 0.503 0.320

0.327 0.031 0.988 0.451 0.479 0.004 0.805 0.282 0.559 0.002 0.474 0.097 0.011 0.498 0.051 0.002 0.842 0.257 0.411 0.679 0.105 0.803 0.479 0.577 0.163

0.165 0.113 0.361 0.379 0.138 0.010 0.153 0.504 2.006 0.094 0.154 0.146 0.081 0.036 0.145 −0.043 0.638 0.127 0.127 0.089 0.110 0.145 0.426 0.094 0.117

0.100 0.020 0.139 0.195 0.101 0.008 0.164 0.374 0.195 0.045 0.206 0.049 0.008 0.042 0.034 0.001 0.618 0.057 0.080 0.075 0.133 0.127 0.104 0.111 0.038

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Argentina Australia Belgium Brazil Chile Colombia Denmark Finland France Germany Greece Hong Kong India Indonesia Ireland Israel Italy Japan Mexico Norway Peru Philippines Portugal Singapore South Africa

Firm Years

Capital Structure Changes around Cross-Listings

Table 2.

(Continued )

12

Table 2. Panel A: Leverage levels across countries Country

Firm Years

Debt/Equity Mean

35 13 5 31 42 7 137 1,084

Median

Mean

Short-Term Debt/ Equity

Median

Mean

Median

0.753 1.914 0.983 2.234 0.465 1.572 0.582

0.738 1.432 1.059 0.487 0.404 1.601 0.430

0.538 1.357 0.559 1.496 0.359 1.153 0.416

0.546 1.099 0.592 0.210 0.325 1.262 0.281

0.214 0.556 0.423 0.738 0.106 0.419 0.165

0.144 0.210 0.405 0.278 0.066 0.298 0.087

0.810 0.880

0.608 0.477

0.531 0.614

0.428 0.336

0.279 0.368

0.141 0.134

0.326 2.359

0.220 0.224

0.201 2.210

0.115 0.196

0.124 0.345

0.049 0.038

1.062 5.721

0.618 0.468

0.667 2.323

0.433 0.325

0.395 3.625

0.139 0.140

364

720

Panel B: Leverage level across industries SIC

10
17 20
39

Industry

Mining and construction Manufacturing

Firm Years

86 511

Debt/Equity

Long-Term Debt/ Equity

Short-Term Debt/ Equity

Mean

Median

Mean

Median

Mean

Median

0.605 0.605

0.480 0.514

0.407 0.379

0.328 0.328

0.198 0.225

0.086 0.114

MIN-YU (STELLA) LIAO AND CHRIS TAMM

South Korea Spain Sweden Switzerland Taiwan Turkey United Kingdom All countries Mean Std. Dev. Common law only Mean Std. Dev. Civil law only Mean Std. Dev.

Long-Term Debt/ Equity

Transportation & public utilities Wholesale and retail trade Services Public administration Total Mean Std. Dev.

362 42 68 15 1,084

1.215 0.676 0.721 0.407

0.611 0.573 0.073 0.462

0.741 0.460 0.799 0.271

0.458 0.352 0.012 0.295

0.474 0.215 0.222 0.136

0.097 0.120 0.045 0.110

0.705 0.272

0.452 0.194

0.459 0.158

0.295 0.150

0.245 0.117

0.095 0.028

The table presents the distribution of leverage. The measures of leverage are debt/equity, long-term debt/equity, and short-term debt/equity. Panel A presents the mean and median values of leverage variables by country, while panel B presents the mean and median values of leverage variables by industry.

Capital Structure Changes around Cross-Listings

40
49 50
59 70
89 91
99

13

14

MIN-YU (STELLA) LIAO AND CHRIS TAMM

equity ratio in France and the lowest in Israel. The table indicates approximately 66% of the debt is long-term and 33% is short-term; however, this also varies substantially across country. In addition, there is a significant difference between the common law and civil law countries. The debt to equity ratio in common law countries is 0.326, while it is over three times higher at 1.062 in civil law countries. This finding is consistent with prior literature indicating that common law countries have more developed equity markets, and that indebtedness is higher in civil law countries because they have bank-centered financial systems (LLSV, 1997). Panel B shows the leverage ratios across industry. As expected, the transportation and public utilities division has significantly higher debt to equity ratios, which is consistent with the higher fixed assets in this industry as shown in Panel B of Table 1. The debt to equity ratios for the other industries are relatively close, with public administration the lowest and service the highest. Table 3 details the summary statistics for all cross-listing firms. Almost two-thirds of the sample is comprised of Level II ADRs, while the remaining third are Level III ADRs. Since only Level III ADRs raise new capital, the average amount of capital raised is very low overall; however, the average for only the Level III ADRs is approximately $390 million. This average size represents approximately 10% of the pre-crosslisting total equity for Level III firms. While the average debt to equity ratio is 0.82, the range goes from zero to over 5.0. However, the range in the 75th percentile is only 0.90 indicating that the vast majority of firms do not appear to be overly leveraged. On average, 65% of the debt is long-term while 35% is short-term. Flannery (1986) and Diamond (1991) argue that firms use significant amounts of short-term debt as a way to signal positive future performance. Once the positive future performance occurs, the firms can obtain lower cost long-term debt that may not have been available based on the prior performance. This argument is consistent with Doidge et al. (2004) showing that firms with greater growth opportunities are more likely to cross-list. Since cross-listing results in greater disclosure and superior shareholder protections, controlling shareholders suffer reduced private benefits of control. Controlling shareholders will only cross-list when the benefits exceed the costs. This decision signals cross-listing firms’ positive future performance. In addition, Level II and Level III cross-listing firms are subject to SEC and exchange requirements in size and earnings and large continuing fees. Therefore, cross-listing firms are more likely to be larger and more profitable.

Variable LT_DEBT ST_DEBT TOTAL_DEBT NON_FIN_LIABILITY TOTAL_ASSETS TOTAL_EQUITY CAPITAL_RAISED LEVEL II LEVEL III PROFIT_MARGIN PPE DEBT/EQUITY LT_DEBT/TOL_EQT ST_DEBT/TOL_EQT LT_DEBT/TOL_AST ST_DEBT/TOL_AST NON_FIN/TOL_AST LT_DEBT/TOL_DEBT ST_DEBT/TOL_DEBT PREFERRED

Descriptive Statistics.

Firm Years

Mean

Std. Dev.

1%

25%

Median

75%

99%

1,076 1,076 1,076 1,071 1,076 1,071 1,084 1,084 1,084 756 1,081 1,076 1,076 1,076 1,081 1,081 1,076 1,015 1,015 1,084

2,539.53 977.32 3,516.85 4,813.68 13,919.00 5,438.32 145.03 0.63 0.37 −0.08 0.43 0.82 0.51 0.30 0.16 0.07 0.28 0.65 0.35 0.08

6,071.14 2,417.11 7,794.04 12,123.94 29,264.88 12,014.26 380.99 0.48 0.48 6.28 0.24 4.88 2.30 2.97 0.14 0.08 0.16 0.27 0.27 0.27

0.00 0.00 0.00 0.67 9.90 −9.03 0.00 0.00 0.00 −10.28 0.01 −1.88 −1.28 −0.03 0.00 0.00 0.02 0.00 0.00 0.00

47.36 18.20 109.54 148.44 931.06 399.11 0.00 0.00 0.00 0.02 0.21 0.14 0.06 0.03 0.05 0.02 0.17 0.50 0.15 0.00

505.32 188.07 747.27 860.73 3,441.63 1,418.79 0.00 1.00 0.00 0.08 0.43 0.51 0.35 0.10 0.16 0.05 0.27 0.72 0.28 0.00

2,046.84 667.15 2,882.79 2,946.89 11,422.56 4,901.34 86.8 1.00 1.00 0.16 0.62 0.90 0.65 0.25 0.25 0.09 0.36 0.85 0.50 0.00

35,925.80 12,410.76 42,672.38 53,355.10 15,1,754.50 62,884.96 2,047.70 1.00 1.00 0.64 0.89 5.43 3.99 2.19 0.53 0.38 0.77 1.00 1.00 1.00

Capital Structure Changes around Cross-Listings

Table 3.

The table presents summary statistics. Long-term debt, short-term debt, total debt, nonfinancial liabilities, total assets, total equity, and capital raised in millions of US dollars. Variable definitions are provided in the appendix.

15

16

MIN-YU (STELLA) LIAO AND CHRIS TAMM

In addition to considering the traditional debt and equity measures, we also examine the nonfinancial liabilities the cross-listing firms have. Welch (2011) argues that just examining debt and equity ratios can lead to incorrect conclusions because nonfinancial liabilities comprise a substantial portion of the total liabilities and equity of US firms. He finds that 61% of the firm’s assets are funded by liabilities, which are split evenly between financial and nonfinancial liabilities. We find on average that cross-listing firms use more nonfinancial liabilities than total debt, meaning that these firms are using suppliers as a significant source of financing. This finding is consistent with the limitations in raising debt and equity in some countries. For example, LLSV (1998) contend that civil law countries provide weaker protections to their shareholders and creditors than common law countries do. These legal differences result in a high ownership concentration and less developed capital markets in countries with weaker governance mechanisms, which constrains firms’ ability to raise external capital. We also examine the frequency of firms using preferred stock and find that it is only present in approximately 8% of the cross-listing firms. This finding is much lower than the 20%. Barclay and Smith (1995) find in a sample of US firms indicating that cross-listing firms are not relying on significant amounts of preferred stock to finance themselves.

RESULTS Table 4 details the capital structure of all firms before and after their crosslisting as well as the Level II and Level III ADRs separately. Panel A provides information for all firms, while Panels B and C provide information for firms in common law and civil law countries, respectively. For all firms, we do not find any significant changes in the total amount of debt, including the amounts of short- and long-term debt, total equity, and total assets; however, there are some significant changes in leverage ratios. The firms are substantially lowering their debt to equity ratios, which may be expected because some firms are issuing additional equity during the crosslisting. In addition, after cross-listing, the use of preferred stock decreases by almost 33%, indicating firms are replacing their preferred stock with other capital. The separation between the Level II and III ADRs details the differences between firms who are not issuing new equity and those that are. While the Level II firms are not issuing new equity, they still show a larger decrease

Variable

Capital Structure before and after Cross-Listing.

All Firms

Level II Firms

Level III Firms

After crosslisting

Before
after

Before crosslisting

After crosslisting

Before
after

Before crosslisting

After crosslisting

Before
after

LT_DEBT

$2,237.4

$2,707.9

$2,028.7

$2,660.2

$2,788.3

1,030.4

947.8

993.8

767.4

1,097.4

1,252.3

TOTAL_DEBT

3,267.8

$3,655.6

3,022.5

3,427.6

3,716.9

4,040.6

TOTAL_ASSET

12,598.3

14,654.9

13,399.9

15,862.0

11,130.5

12,616.3

TOTAL_EQUITY

4,681.0

5,856.5

5,068.7

6,400.3

3,982.5

4,940.4

0.161

0.165

0.157

0.166

0.169

0.164

0.077

0.065

0.071

0.062

0.089

0.069

0.289

0.274

0.299

0.291

0.269

0.246

0.629

0.653

0.606

0.651

0.674

0.656

0.393

0.348

0.325

0.343

0.112

0.084

0.066

0.034

1.448

0.508

$−631.5 (0.14) 226.4* (0.10) −405.1 (0.43) −2,462.1 (0.32) −1,331.6 (0.21) −0.009 (0.43) 0.009 (0.13) 0.007 (0.56) −0.044* (0.05) 0.044* (0.05) 0.028 (0.22) 0.940** (0.05)

$2,619.6

ST_DEBT

$−470.5 (0.22) 82.6 (0.59) −387.8 (0.43) −2,056.6 (0.26) −1,175.5 (0.12) −0.003 (0.64) 0.012*** (0.01) 0.014 (0.15) −0.023 (0.19) 0.023 (0.19) 0.030* (0.07) 0.717** (0.02)

0.979

0.660

$−168.7 (0.81) −154.9 (0.65) −323.7 (0.75) −1,485.8 (0.58) −957.9 (0.30) 0.005 (0.67) 0.020** (0.01) 0.023 (0.10) 0.018 (0.52) −0.018 (0.52) 0.031 (0.15) 0.319* (0.08)

Panel A: All firms

LT_DEBT/ TOL_AST ST_DEBT/ TOL_AST NON_FIN/ TOL_AST LT_DEBT/ TOL_DEBT ST_DEBT/ TOL_DEBT PREFERRED

0.370

0.346

0.096

0.065

DEBT/EQUITY

1.282

0.564

17

Before crosslisting

Capital Structure Changes around Cross-Listings

Table 4.

Variable

LT_DEBT/ TOL_EQT ST_DEBT/ TOL_EQT

(Continued )

All Firms

18

Table 4.

Level II Firms

Level III Firms

Before crosslisting

After crosslisting

Before
after

Before crosslisting

After crosslisting

Before
after

Before crosslisting

After crosslisting

Before
after

0.754

0.381

0.801

0.327

0.470

0.183

0.647

0.180

0.473** (0.03) 0.467 (0.11)

0.668

0.528

0.373** (0.01) 0.344*** (0.01)

0.311

0.189

0.197 (0.17) 0.121** (0.02)

1,334.8

1,743.1

170.9

813.1

627.1

692.9

60.3

701.0

1,961.9

2,436.1

231.2

1,514.1

11,581.3

14,613.2

1,021.4

6,498.1

4,250.3

5,754.1

442.7

3,329.2

0.144

0.142

0.080

0.077

0.047

0.047

0.070

0.051

0.304

0.301

0.259

0.250

0.622

0.626

0.645

0.536

Panel B: Firms from common law countries 1,131.6

1,561.1

ST_DEBT

528.1

694.5

TOTAL_DEBT

1,659.7

2,255.6

TOTAL_ASSET

9,737.5

13,024.7

TOTAL_EQUITY

3,569.2

5,277.4

0.133

0.129

0.051

0.048

0.296

0.291

0.626

0.607

LT_DEBT/ TOL_AST ST_DEBT/ TOL_AST NON_FIN/ TOL_AST LT_DEBT/ TOL_DEBT

−429.5 (0.15) −166.4 (0.35) −595.9 (0.17) −3,287.2 (0.37) −1,708.2 (0.29) 0.003 (0.83) 0.003 (0.67) 0.004 (0.80) 0.018 (0.62)

−408.3 (0.25) −65.86 (0.74) −474.2 (0.36) −3,031.9 (0.50) −1,503.9 (0.45) 0.001 (0.94) 0.000 (0.98) 0.002 (0.91) −0.004 (0.92)

−642.2** (0.05) −640.7 (0.10) −1,282.9** (0.04) −5,476.7*** (0.00) −2,886.4*** (0.00) 0.003 (0.88) 0.019 (0.35) 0.008 (0.75) 0.108 (0.21)

MIN-YU (STELLA) LIAO AND CHRIS TAMM

LT_DEBT

0.373

0.392

0.150

0.105

DEBT/EQUITY

0.602

0.184

LT_DEBT/ TOL_EQT ST_DEBT/ TOL_EQT

0.459

0.069

0.142

0.115

−0.018 (0.62) 0.045 (0.20) 0.418 (0.11) 0.390 (0.11) 0.027 (0.47)

0.377

0.373

0.144

0.125

0.648

0.160

0.509

0.046

0.138

0.113

2,526.4

3,367.6

1,256.9

824.9

3,783.2

4,192.5

14,704.4

16,825.4

5,642.7

6,896.1

0.167

0.185

0.088

0.073

0.296

0.284

0.596

0.668

0.403

0.331

0.004 (0.92) 0.018 (0.65) 0.487 (0.13) 0.462 (0.12) 0.025 (0.58)

0.354

0.463

0.181

0.021

0.380

0.279

0.221

0.159

0.159

0.120

3,092.1

3,219.0

1,297.5

1,372.5

4,389.6

4,591.4

13,081.3

13,950.2

4,665.6

5,291.6

0.185

0.183

0.093

0.073

0.271

0.245

0.679

0.683

0.320

0.316

−0.108 (0.21) 0.160** (0.02) 0.100 (0.30) 0.061 (0.35) 0.039 (0.46)

Panel C: Firms from civil law countries LT_DEBT

2,775.4

3,298.8

ST_DEBT

1,274.7

1,078.3

TOTAL_DEBT

4,050.1

4,377.1

TOTAL_ASSET

13,990.0

15,495.0

TOTAL_EQUITY

5,211.0

6,153.7

0.175

0.184

0.090

0.073

0.285

0.266

0.631

0.675

0.368

0.324

−841.2 (0.23) 432.0** (0.02) −409.3 (0.61) −2,121.1 (0.43) −1,253.4 (0.28) −0.017 (0.15) 0.014* (0.06) 0.011 (0.43) −0.072*** (0.01) 0.072*** (0.01)

−126.8 (0.88) −74.9 (0.85) −201.8 (0.86) −868.8 (0.78) −626.0 (0.57) 0.002 (0.84) 0.019** (0.03) 0.026 (0.10) −0.003 (0.90) 0.003 (0.90)

19

LT_DEBT/ TOL_AST ST_DEBT/ TOL_AST NON_FIN/ TOL_AST LT_DEBT/ TOL_DEBT ST_DEBT/ TOL_DEBT

−523.4 (0.34) 196.4 (0.35) −327.0 (0.64) −1,505.0 (0.47) −942.7 (0.24) −0.008 (0.34) 0.016*** (0.00) 0.019 (0.08) −0.043** (0.02) 0.043** (0.02)

Capital Structure Changes around Cross-Listings

ST_DEBT/ TOL_DEBT PREFERRED

Variable

(Continued )

All Firms

20

Table 4.

Level II Firms

Level III Firms

After crosslisting

Before
after

Before crosslisting

After crosslisting

Before
after

Before crosslisting

After crosslisting

Before
after

PREFERRED

0.069

0.045

0.089

0.052

0.037

1.606

0.760

2.014

0.774

1.091

0.744

LT_DEBT/ TOL_EQT ST_DEBT/ TOL_EQT

0.894

0.541

1.007

0.542

0.751

0.539

0.712

0.219

1.007

0.231

0.037 (0.15) 1.239 (0.11) 0.464 (0.12) 0.775 (0.13)

0.043

DEBT/EQUITY

0.023 (0.17) 0.846* (0.06) 0.353* (0.05) 0.492* (0.08)

0.339

0.204

0.006 (0.78) 0.346 (0.11) 0.212 (0.21) 0.134** (0.03)

The table presents the univariate analysis of the capital structure of ADR firms before and after their cross-listings. Capital structure is measured by various leverage ratios. Long-term debt, short-term debt, total debt, total assets, and total equity in millions of US dollars. Panel A presents results using all sample firms. Panel B presents results of firms from common law countries only and Panel C presents results of firms from civil law countries only. Variable definitions are provided in the appendix. p-values are provided in parentheses. *, **, *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively.

MIN-YU (STELLA) LIAO AND CHRIS TAMM

Before crosslisting

Capital Structure Changes around Cross-Listings

21

in their leverage ratio than the Level III firms. These Level II firms also show a significant decrease in the amount of short-term debt, which leads to a higher percentage of long-term debt. The Level III firms do not experience a significant change in the amount of either short- or long-term debt after the cross listing, which indicates that the change in the leverage ratio for these firms is related to the new equity issued. Panel B details the capital structure for common law firms before and after cross-listing. Overall, there are no significant changes to the variables for all firms, although there are some substantial differences before and after cross-listing in the Level III firms. These firms are issuing additional equity during the cross-listing, which explains the increases in total assets and total equity. However, they are also dramatically increasing their total debt by issuing more short- and long-term debt. In addition, there is an almost 90% decrease in the presence of preferred stock after cross-listing for Level III firms. Taken together, these changes indicate that common law firms which raise new equity during the cross-listing take advantage of the ability to significantly change how the firm is capitalized. Panel C details the capital structure changes for civil law countries before and after cross-listing. In contrast to the common law countries, there are significant changes to the capital structures for all firms based in civil law countries and not just the Level III firms. The Level II firms show a significant decrease in the amount of short-term debt without a corresponding decrease in total debt. This finding indicates that the Level II firms are relying significantly more on long-term debt after the cross-listing. In contrast, the Level III firms do not experience a significant change in overall leverage ratios; however, they still do rely on less short-term debt after cross-listings. This increased reliance on long-term debt supports Stohs and Mauer (1996) who argue that larger and less risky firms are more likely to use long-term debt. Since the cross-listing firms have improved their governance and become less risky, they now have the ability to use significantly more long-term debt in their capital structure. In addition, this may be seen specifically in the civil law countries because they offer weaker legal protections for investors. Since the gap between their governance and the regulations imposed by the SEC and exchanges is so large when cross-listing, the civil law firms experience a greater improvement in corporate governance than firms cross-listing from common law countries. Table 5 compares the capital structure between Level II and Level III ADRs across the entire time period as well as before and after the cross-listings. Similar to Table 4, Panel A includes all firms while

Capital Structure Comparison between Level II and Level III ADRs.

Variables

All Years

Pre-Cross-Listing

22

Table 5.

Post-Cross-Listing

Level II firms

Level III firms

Level III
Level II

Level II firms

Level III firms

Level III
Level II

Level II firms

Level III firms

Level III
Level II

LT_DEBT

2,430.0

2,729.9

2,028.7

2,619.6

2,788.3

850.0

1,198.7

993.8

1,097.4

767.4

1,252.3

TOTAL_DEBT

3,279.9

3,928.6

3,022.5

3,716.9

3,427.6

4,040.6

TOTAL_ASSET

14,964.4

12,102.1

13,399.9

11,130.5

15,862.0

12,616.3

TOTAL_EQUITY

5,919.1

4,608.9

5,068.7

3,982.5

6,400.3

4,940.4

0.163

0.165

0.157

0.169

0.166

0.164

0.065

0.076

0.071

0.089

0.062

0.069

0.294

0.254

0.299

0.269

0.291

0.246

0.634

0.662

0.606

0.674

0.651

0.656

0.365

0.337

0.393

0.325

0.348

0.343

0.094

0.045

0.112

0.066

0.084

0.034

0.844

0.768

1.448

0.979

590.9 (0.29) 103.5 (0.69) 694.4 (0.35) −2,269.5 (0.40) −1,086.2 (0.30) 0.011 (0.40) 0.018** (0.04) −0.029 (0.12) 0.068** (0.03) −0.068** (0.03) −0.046 (0.14) −0.469 (0.57)

2,660.2

ST_DEBT

300.0 (0.43) 348.7** (0.02) 648.7 (0.18) −2,862.3 (0.12) −1,310.2* (0.08) 0.002 (0.78) 0.011** (0.02) 0.040*** (0.00) 0.027 (0.11) −0.027 (0.11) −0.049*** (0.00) −0.075 (0.80)

0.508

0.660

128.2 (0.80) 484.9** (0.01) 613.0 (0.34) −3,245.7 (0.18) −1,459.9 (0.15) −0.0027 (0.80) 0.007 (0.17) −0.046*** (0.00) 0.005 (0.78) −0.005 (0.78) −0.049** (0.01) 0.152 (0.28)

Panel A: All firms

DEBT/EQUITY

MIN-YU (STELLA) LIAO AND CHRIS TAMM

LT_DEBT/ TOL_AST ST_DEBT/ TOL_AST NON_FIN/ TOL_AST LT_DEBT/ TOL_DEBT ST_DEBT/ TOL_DEBT PREFERRED

0.497

0.538

0.347

0.230

0.040 (0.77) −0.116 (0.53)

0.801

0.668

0.647

0.311

1,334.8

170.9

627.1

60.3

1,961.9

231.2

11,581.3

1,021.4

4,250.3

442.7

0.144

0.080

0.047

0.070

0.304

0.259

0.622

0.645

0.377

0.354

0.144

0.181

0.648

0.380

0.509

0.221

0.327

0.470

0.180

0.189

−1,163.9** (0.02) −566.8 (0.14) −1,730.7** (0.03) −10,559.9 (0.10) −3,807.6 (0.16) −0.063* (0.07) 0.023 (0.16) 0.045 (0.37) 0.022 (0.79) −0.022 (0.79) 0.037 (0.65) −0.267 (0.40) −0.288 (0.28)

1,743.1

813.1

692.9

701.0

2,436.1

1,514.1

14,613.0

6,498.1

5,754.1

3,329.2

0.142

0.077

0.047

0.051

0.301

0.250

0.626

0.536

0.373

0.463

0.125

0.021

0.160

0.279

0.046

0.159

0.143 (0.26) 0.008 (0.73)

Panel B: Firms from common law countries LT_DEBT

1,598.2

605.4

ST_DEBT

669.6

493.7

TOTAL_DEBT

2,267.8

1,099.1

TOTAL_ASSET

13,537.0

4,726.2

TOTAL_EQUITY

5,228.6

2,395.3

0.143

0.078

0.047

0.057

0.302

0.253

0.625

0.566

LT_DEBT/ TOL_AST ST_DEBT/ TOL_AST NON_FIN/ TOL_AST LT_DEBT/ TOL_DEBT ST_DEBT/ TOL_DEBT PREFERRED

0.374

0.433

0.132

0.072

DEBT/EQUITY

0.329

0.311

LT_DEBT/ TOL_EQT

0.207

0.178

−992.9*** (0.00) −175.8 (0.42) −1,168.7** (0.03) −8,810.8* (0.05) −2,833.3 (0.15) −0.064*** (0.00) 0.009 (0.31) −0.049** (0.04) −0.058 (0.19) 0.058 (0.19) −0.059 (0.17) −0.018 (0.95) −0.028 (0.92)

−930.0* (0.06) 8.0 (0.97) −921.9 (0.18) −8,115.1 (0.17) −2425.0 (0.35) −0.065** (0.02) 0.003 (0.74) −0.051* (0.05) −0.089* (0.08) 0.089* (0.08) −0.104** (0.03) 0.119 (0.789) 0.112 (0.78)

23

−0.132 (0.69) −0.336 (0.53)

Capital Structure Changes around Cross-Listings

LT_DEBT/ TOL_EQT ST_DEBT/ TOL_EQT

Variables

ST_DEBT/ TOL_EQT

(Continued )

All Years

24

Table 5.

Pre-Cross-Listing

Post-Cross-Listing

Level II firms

Level III firms

Level III
Level II

Level II firms

Level III firms

Level III
Level II

Level II firms

Level III firms

Level III
Level II

0.122

0.132

0.010 (0.82)

0.138

0.159

0.021 (0.75)

0.113

0.120

0.006 (0.91)

119.6 (0.82) 360.7* (0.08) 480.3 (0.47) −2,391.4 (0.23) −1,360.0* (0.08) 0.005 (0.55) 0.001 (0.80) −0.034*** (0.00) 0.040** (0.03) −0.040** (0.03) −0.026 (0.11)

2,526.4

3,092.1

3,367.6

3,219.0

1,256.9

1,297.5

824.9

1,372.5

3,783.2

4,389.6

4,192.5

4,591.4

14,704.4

13,081.3

16,825.4

13,950.2

5,642.7

4,665.6

6,896.1

5,291.6

0.167

0.185

0.185

0.183

0.088

0.093

0.073

0.073

0.296

0.271

0.284

0.245

0.596

0.679

0.668

0.683

0.403

0.320

0.331

0.316

0.089

0.043

565.7 (0.46) 40.6 (0.90) 606.4 (0.55) −1,623.0 (0.58) −977.1 (0.38) 0.018 (0.22) 0.004 (0.66) −0.024 (0.24) 0.083** (0.01) −0.083** (0.01) −0.045 (0.15)

0.052

0.037

−148.7 (0.83) 547.6** (0.03) 398.9 (0.65) −2,875.3 (0.28) −1,604.4 (0.12) −0.002 (0.84) 0.000 (0.99) −0.039*** (0.00) 0.014 (0.51) −0.014 (0.51) −0.014 (0.44)

Panel C: Firms from civil law countries 3,054.9

3,174.5

ST_DEBT

985.5

1,346.2

TOTAL_DEBT

4,040.4

4,520.6

TOTAL_ASSET

16,036.8

13,645.4

TOTAL_EQUITY

6,432.1

5,072.1

0.178

0.184

0.079

0.080

0.288

0.254

0.641

0.681

0.358

0.318

0.066

0.039

LT_DEBT/ TOL_AST ST_DEBT/ TOL_AST NON_FIN/ TOL_AST LT_DEBT/ TOL_DEBT ST_DEBT/ TOL_DEBT PREFERRED

MIN-YU (STELLA) LIAO AND CHRIS TAMM

LT_DEBT

1.228

0.864

LT_DEBT/ TOL_EQT ST_DEBT/ TOL_EQT

0.712

0.613

0.515

0.251

−0.363 (0.39) −0.099 (0.56) −0.263 (0.33)

2.014

1.091

1.007

0.751

1.007

0.339

−0.923 (0.43) −0.255 (0.58) −0.667 (0.38)

0.774

0.744

0.542

0.539

0.231

0.204

−0.030 (0.74) −0.003 (0.96) −0.027 (0.36)

The table presents the univariate analysis of capital structure of firms cross-listed via Level II or Level III ADR programs. Capital structure is measured by various leverage ratios. Long-term debt, short-term debt, total debt, total assets, and total equity in millions of US dollars. Panel A presents results from all sample firms. Panel B presents results of firms from common law countries only and Panel C presents the results of firms from civil law countries only. Variable definitions are provided in the appendix. p-values are provided in parentheses. *, **, *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively.

Capital Structure Changes around Cross-Listings

DEBT/EQUITY

25

26

MIN-YU (STELLA) LIAO AND CHRIS TAMM

Panels B and C include firms from common law and civil law countries, respectively. In addition to the significant differences across all years, there are significant differences between the Level II and Level III firms both before and after the cross-listings. Overall, the Level II firms tend to finance their assets more with equity, nonfinancial liabilities, and preferred stock, while the Level III firms tend to use more short-term debt. However, many of these differences are driven by either the period before or the period after the cross-listing. For example, the increased use of short-term debt by Level III firms is found exclusively after the crosslisting occurs. This finding supports the idea that those firms raising additional capital during the cross-listing may also be able to raise additional short-term debt. In addition, the overall differences in nonfinancial liabilities and preferred stock between Level II and Level III ADRs are found only after the cross-listings occur. This result is consistent with the Level III firms using the cross-listing to become more reliant on equity and less reliant on other forms of financing. Consistent with the idea that firms are intentionally managing their debt to equity ratios around crosslistings, there is no difference between the Level II and Level III companies. Since the Level III firms are actually issuing new equity, absent any other changes, there should be a difference in the debt to equity ratio between Level II and Level III firms. Panel B details the results for firms in common law countries. The Level II firms are much larger than the Level III firms and have significantly higher total debt levels, which is primarily a result of more long-term debt. In addition, the Level II firms also rely more on nonfinancial liabilities to finance their assets. While these findings hold for the entire period, there are some differences between Levels II and III in the subperiods. Level II firms had higher levels of long-term debt in each of the subperiods; however, the total debt numbers are not significantly different after the crosslistings. Before the cross-listings there is no significant difference in the use of preferred stock, while after the cross-listings, Level III firms are significantly reducing the use of preferred stock. This finding is consistent with the fact that Level III ADRs are raising additional money which can then be used to redeem or eliminate the preferred stock. Panel C compares the Level II and III firms from civil law countries. Over the entire sample time, the Level II firms have less short-term debt, but that short-term debt represents a higher percentage of total debt than the Level III firms. However, this observation is only apparent in the pre-cross-listing time period. Once the firms have cross-listed, there is no difference in the percentages of short- and long-term debt used.

Capital Structure Changes around Cross-Listings

27

Throughout the entire sample period, the Level II firms use significantly more nonfinancial liabilities to finance their assets. This finding is only significant after the cross-listings occur. Unlike the common law countries, there is no difference in the presence of preferred stock between Level II and III firms in any of the time periods. We expect to observe this result because we find that preferred stock is much more prevalent in common law countries than civil law countries. Since it is not very relevant in civil law countries to begin with, it is unlikely to significantly change around cross-listings. Panel A in Table 6 presents a multivariate analysis using several different capital structure characteristics as dependent variables. Model 1 uses the debt to equity ratio as the dependent variable. We find that firms decrease their debt to equity ratio over the (−3, +3) six-year window around their cross-listing. The coefficient of dtpast3, a dummy variable representing the year three years before the cross-listing, is significantly positive, while the coefficient of dt3, a dummy variable representing the year three years after the cross-listing, is significantly negative. This result shows that cross-listing firms change their capital structure around the time of their cross-listing, and they rely less on debt over time. We also find that Level II ADRs experience a lower debt to equity ratio, which is consistent with Boubakri, Cosset, and Samet (2010), who find that Level III firms are more indebted firms. We also control the amount of capital raised since this will affect a firm’s total equity. We examine various leverage ratios in Models 2
8. In Model 2, we use total debt to total assets as the dependent variable. Similar to the results in Model 1, we find that cross-listing firms reduce their debt ratio around their cross-listing. We also find that firms with more PPE have higher debt ratios, which is primarily due to the use of long-term debt. This result is consistent with the use of maturity matching for assets and liabilities proposed by Myers (1977). The remaining models show qualitatively similar results, with firms reducing their debt ratio over time around their crosslistings. These findings are consistent with our conjecture that debt serves as a substitute to governance. When firms cross-list, their governance is improved due to the compliance with the US regulations and their use of debt is decreased. Panel B in Table 6 presents a similar analysis, excluding the countries with only one or two ADRs in our sample. This analysis ensures that our sample is not biased toward those countries with only a few observations. We exclude the following countries: Colombia, Denmark, Finland, Greece, Indonesia, Norway, Peru, Philippines, Portugal, Singapore, Sweden, and

Model 1 DEBT/ EQUITY

Multivariate Analysis.

28

Table 6. Model 2 TOL_DEBT/ TOL_AST

Model 3 LT_DEBT/ TOL_AST

Model 4 ST_DEBT/ TOL_AST

Model 5 LT_DEBT/ TOL_DEBT

Model 6 ST_DEBT/ TOL_DEBT

Model 7 LT_DEBT/ TOL_EQT

Model 8 ST_DEBT/ TOL_EQT

5.676*** (0.00) 0.829*** (0.00) 0.572*** (0.00) 0.316*** (0.00) −0.243*** (0.00) −0.501*** (0.00) −0.764*** (0.00) −0.007 (0.43) −0.000 (0.81) 0.226*** (0.00) −0.000** (0.03) −1.092*** (0.00) 0.82