Is Cross‐Listing a Commitment Mechanism?: The Choice of Destinations and Family Ownership

• Published date: 01 July 2015
• Author: Woojin Kim,Hyejin Cho,Jaiho Chung
• DOI: http://doi.org/10.1111/corg.12079
• Date: 01 July 2015

Is Cross-Listing a Commitment Mechanism?:

The Choice of Destinations and

Family Ownership

Jaiho Chung, Hyejin Cho, and Woojin Kim*

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This paper examines whether f‌irms choose destinations with stronger investor protection than

those provided in their respective home markets after controlling for both f‌irm-specif‌ic and destination-specif‌ic character-

istics that affect the choice of cross-listing destination.

Research Findings/Insights: Using data on cross-listing decisions of f‌irms from 28 home countries targeted toward nine

destinations for the 1994–2008 period, we f‌ind that f‌irms are more likely to cross-list in foreign markets that are less

protective of outside investors relative to the home country once we simultaneously control for relevant destination-specif‌ic

and f‌irm-specif‌ic characteristics. Such preference for weak protection is mostly driven by family f‌irms, but not observed

among non-family f‌irms.

Theoretical/Academic Implications: These results suggest that the widely accepted “bonding” hypothesis, which posits

that f‌irms which cross-list in order to voluntarily commit themselves to higher disclosure standards, should be interpreted

with caution. Rather, controlling families may choose to list in destinations with weaker protection to retain their private

benef‌its.

Practitioner/Policy Implications: The f‌indings imply that exchanges in countries with stronger investor protection may not

be attractive for potential foreign clientele, especially f‌irms controlled by families. To increase foreign listings in a given

exchange, regulators should consider not onlythe benef‌its of tight regulations such as “bonding,” but also their compliance

costs.

Keywords: Corporate Governance, International Cross-Listing, Cost of Capital, Bonding Hypothesis, Family Firms,

Alternative-Specif‌ic Conditional Logit Model

INTRODUCTION

As f‌irms become increasingly global in their product

market and investment strategies, cross-listing has

become one of the most extensively studied areas in inter-

national business and f‌inance (e.g., Pagano, Röell, &

Zechner, 2002; Saudagaran & Biddle, 1995; Siegel, 2009;

Stulz, 1999). Cross-listing has attracted considerable atten-

tion not only from academics but also from practitioners in

the midst of a heated controversy over a tightened regula-

tory environment in New York following the passage of the

Sarbanes-Oxley Act (SOX) in 2002, which allegedly has

made London more attractive as a cross-listing destination.

While lowering the cost of capital through diversifying

investments across countries has often been cited as the

primary motivation for a f‌irm to cross-list (e.g., Karolyi,

1998; Stulz, 1995), more recent research identif‌ies many

other important motives that drive a f‌irm’s cross-listing

decision (e.g., Karolyi, 2006; Pagano et al., 2002; Stulz, 1999).

One stream of research argues that f‌irms cross-list to

commit to transparent disclosure and strong governance

standards as a way to reduce information asymmetry and

agency problems. This implies that f‌irms tend to prefer des-

tinations that offer more stringent disclosure standards and

better investor protection than their home market (Coffee,

1999; Stulz, 1999). In contrast, another line of research con-

tends that f‌irms cross-list where disclosure requirements

and governance standards are less restrictive than those

in the home market because they want to avoid the cost

of complying with more stringent foreign accounting

*Address for correspondence: Woojin Kim, SNU Business School, Seoul National

University,Seoul 151-916, Korea. Tel: 2-880-5831; Fax: 2-880-5831; E-mail: woojinkim@

snu.ac.kr

Corporate Governance: An International Review,

© 2014 John Wiley & Sons Ltd

doi:10.1111/corg.12079

2015, 23(4): 307–330

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standards and the risk of shareholder lawsuits (Biddle &

Saudagaran, 1989; Fanto & Karmel, 1997; Saudagaran &

Biddle, 1995).1This paper focuses on these two contrasting

motives for cross-listing and examines whether a stronger

corporate governancesystem of the host country is a pulling

or pushing factor in determining f‌irms’ choice of cross-

listing destinations.

Corporate f‌inance scholars generally side with the

former view that f‌irms cross-list to voluntarily subject

themselves to more stringent disclosure or regulatory stan-

dards to credibly commit that they would not engage in (or

at least reduce the current level of) the extraction of private

benef‌its of control using corporate resources. This view is

often referred to as the “bonding” hypothesis (Coffee,

1999; Doidge, 2004; Doidge, Karolyi, & Stulz, 2004; Reese &

Weisbach, 2002).

Since private benef‌it consumption inherently ref‌lects

agency problems in corporations, (lack of) preference for

bonding would depend on ownership and control struc-

tures. For instance, Doidge, Karolyi, Lins, Miller, and Stulz

(2009a) f‌ind that when controlling blockholders retain large

voting rights, their f‌irms are less likely to be listed on a US

exchange for fear of exposing themselves to tighter monitor-

ing by regulatory authorities or outside investors. Since the

vastmajority of blockholders in non-US f‌irms are families, as

documented in the previous literature (e.g., Claessens,

Djankov, & Lang, 2000; Faccio & Lang, 2002; La Porta,

Lopez-de-Silanes, & Shleifer, 1999), this suggests that family

f‌irms may be reluctant to cross-list in the US.

A common characteristic of studies examining the

bonding hypothesis is that they focus on the US market as

the main available cross-listing destination. This is presum-

ably due to the conjecture that US exchanges impose one of

the most stringent disclosure standards and thatthe US legal

environment provides minority shareholders with a high

level of investor protection from potential expropriations.

Yet, it is clear that the US is only one of the many possible

cross-listing destinations that f‌irms can choose from.

According to the World Federation of Exchanges (WFE),

foreign f‌irms listed on US exchanges as of 2008 accounted

for only 28 percent of all foreign listings in nine major

markets (Table A1), and among these nine destinations, the

US ranked only f‌ifth in terms of the percentage of foreign

f‌irms listed on a given exchange. Furthermore, many

non-US stock exchanges also attract a substantial number of

foreign cross-listings. For example, the average percentage

of foreign f‌irms listed on the Luxembourg stock exchange,

which is well known for its relatively weak disclosure

and regulatory standards, was approximately 82 percent

between 1995 and 2008. In fact,quite a few family-controlled

business groups in Korea, including Hyundai/Kia Motors

and LG Electronics, chose Luxembourg as a cross-listing

destination. Moreover, practitioners often argue that

London, which has served as the world’s f‌inancial center

before the rise of New York, may have regained its attrac-

tiveness ever since the passage of SOX in 2002.2

The fact that there are many cross-listing destinations

other than the US clearly suggests that excluding non-US

markets may result in biased empirical results or interpreta-

tions, especially with respect to the cross-listing decision of

family f‌irms. More specif‌ically, family f‌irms may not choose

to cross-list in the US as documented in Doidge et al.

(2009a), but this does not necessarily imply that family f‌irms

choose not to cross-list at all. They may well choose to cross-

list in other destinations, for example Luxembourg, which

provides relatively weak investor protection. As such, focus-

ing on US cross-listings may provide only an incomplete

picture and that a more comprehensive analysis incorpo-

rating a full list of all possible cross-listing destinations is

warranted.

There have been a few studies that explicitly consider

multiple cross-listing destinations (e.g., Pagano et al., 2002;

Sarkissian & Schill, 2004; Saudagaran & Biddle, 1995). These

studies focus on destination-specif‌ic characteristics such as

disclosure requirements or cultural, geographic, or eco-

nomic proximity as important cross-listing determinants.

Among these studies, Saudagaran and Biddle (1995) f‌ind

that cross-listing f‌irms prefer destinations with lower disclo-

sure standards, which is contrary to the implications of the

“bonding” hypothesis. However, this f‌inding is based on a

destination-by-destination empirical analysis (i.e., one logit

regression for each destination) and thus does not fully take

into account the impact of destination-specif‌ic factors that

can inf‌luence f‌irms’ choice of a specif‌ic host country over

other alternative markets when multiple cross-listing desti-

nations are available.

Our research builds on Saudagaran and Biddle (1995) and

asks whether the “bonding” hypothesis is still valid, espe-

cially for family f‌irms when we explicitly allow them to

choose from multiple cross-listing destinations. Using data

on cross-listing decisions and ownership structure of f‌irms

from 28 home countries targeted toward nine destinations

for the 1994–2008 period, we test whether f‌irms choose des-

tinations with stronger investor protection than those pro-

vided in their respective home markets after controlling for

both f‌irm-specif‌ic and destination-specif‌ic characteristics

that affect the choice of cross-listing destination.

We f‌irst document that the chosen cross-listing destina-

tions generally offer better investor protection than home

markets in both the univariate analysis and the multivariate

analysis that only controls for destination-specif‌ic character-

istics. Specif‌ically, host countries, on average, exhibit

more stringent anti-self-dealing regulations and disclo-

sure requirements than home countries. On the surface,

these results seem to provide support for the “bonding”

hypothesis.

However, once we explicitly control for f‌irm-specif‌ic char-

acteristics that could potentiallyaffect cross-listing decisions

in addition to the destination-specif‌ic characteristics, this

relationship reverses and we f‌ind that f‌irms are more likely

to choose destinations that are less protective of outside

investors relative to their respective home markets. When

we separate the sample into family f‌irms and non-family

f‌irms, such preference for a less protective destination is

only observed among family f‌irms, but not among non-

family f‌irms. This result stands in sharp contrast to the f‌ind-

ings of recent studies providing support for the “bonding”

hypothesis mostly based on cross-listings targeting the US.

That is, once controlling families are allowed to choose

destinations other than the US, they are likely to prefer

destinations that offer relatively poor investor protection.

Moreover, preference for non-US destinations is more

CORPORATE GOVERNANCE

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