The Market Reaction to Cross‐border Listings: Evidence from AH Listed Firms

• Published date: 01 November 2022
• Author: John Fan Zhang
• Date: 01 November 2022
• DOI: http://doi.org/10.1111/cwe.12451

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 183–218, Vol. 30, No. 6, 2022 183

*John Fan Zhang, Assistant Professor, School of Business, Macau University of Science and Technology,

China. Email: fanzhang@must.edu.mo.

The Market Reaction to Cross-border Listings:

Evidence from AH Listed Firms

John Fan Zhang*

Abstract

This study examines the abnormal returns of Chinese fi rms dual-listed on the Chinese

mainland (A-share) and Hong Kong SAR (H-share) stock markets. The results show that

abnormal returns are more signifi cant for the existing H-share fi rms cross-listing back

as (H-to-A cross-listings) than for those that are the other way around (A-to-H cross-

listings). Further, the A-share market is more responsive to announcements, whereas

the H-share market is more responsive to actual listings. The analysis of the underlying

mechanisms reveals that the abnormal returns of A-to-H cross-listings are associated

with improved information. In contrast, the abnormal returns of H-to-A cross-listings

are related to an increase in valuation. Signifi cant abnormal returns for H-to-A cross-

listings are driven mainly by reduced systematic risks and are more pronounced in

the post-1997 period. Overall, these results suggest that investors generally respond

positively to AH dual listings of Chinese fi rms.

Keywords: abnormal return, China, corporate strategy, cross-listing, emerging stock

market

JEL codes: F30, F39, G14, G15, O16

I. Introduction

The literature has documented that cross-listings on developed markets are an important

way to benefi t emerging market fi rms. Earlier studies, such as Alexander et al. (1987,

1988) and Errunza and Losq (1985), reported that cross-listings can be benefi cial when

there are investment barriers (e.g., regulatory constraints and a lack of information)

between the two markets, even if cross-listings may be costly. As empirical evidence,

these studies showed general positive abnormal returns associated with cross-listings.

Subsequent studies found that cross-listing benefits mainly flow to emerging market

firms. For example, Foerster and Karolyi (1999) and Miller (1999) investigated

abnormal returns for non-US fi rms cross-listed on the US stock exchanges. The former

John Fan Zhang / 183–218, Vol. 30, No. 6, 2022

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

184

found a negative post-cross-listing abnormal return, whereas the latter showed a positive

abnormal return. One noteworthy diff erence between the two studies is that the sample

firms covered in Foerster and Karolyi (1999) are from developed markets, whereas

Miller (1999) includes a large proportion of fi rms from emerging markets. This indicates

that the valuation change around cross-listings may be associated with the origination

of cross-listed fi rms. In other words, cross-listings between a developed market and an

emerging market are expected to benefi t emerging market fi rms more than those cross-

listing between developed markets. So far, however, the research on cross-listings from

a developed market to an emerging market is uncommon and has received limited

attention.

Theoretically, the reason for a firm to list on a stock exchange is to raise capital

through equity offerings, and it should not matter where it lists as long as the firm

can obtain the capital that it needs. Nonetheless, an already listed firm conducting

cross-listing to another stock exchange may have to comply with cumbersome legal

requirements, may incur substantial expense, and may need a great deal of time to

prepare for information disclosures. Further, the fi rm must submit compliance reports

to diff erent exchanges based on diff erent regulations. Thus, it can be costly if the cross-

listing merely serves the purpose of fundraising, particularly if the firm is already

traded in a developed market and is cross-listing to an emerging market. It is therefore

important to investigate whether and how cross border-listings between developed and

emerging markets can generate benefi ts.

To tackle the above research question, this paper focuses on firms listed on the

Chinese mainland (A-share) and Hong Kong SAR (H-share) stock exchanges. Dual-

liste d Chinese firms (AH listed firms) are an excellent platform for studying cross-

listing because they not only include the fi rms that are listed fi rst on the H-share stock

exchange and then cross-list back to the A-share market but also include firms that

are listed fi rst on the A-share stock market as and then cross-list on the H-share stock

market. In other words, at the time of dual listings, AH listed fi rms are already listed on

another market. This enables market reactions to cross-listings in both directions to be

observed. In particular, both the A-share and H-share markets have suffi cient liquidity,

which provides an ideal and reasonable way to measure abnormal returns and thus

eff ectively evaluate the market impact of cross-listings.

With a sample of AH listed fi rms throughout the period from 1991 to 2018, the result

show an asymmetrical pattern for returns of cross-listings from the developed market

to the emerging market (H-to-A cross-listings) versus cross-listings from the emerging

market to the developed market (A-to-H cross-listings). Specifi cally, abnormal returns

around the announcement day are stronger for H-to-A cross-listings than for A-to-H

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Market Reaction to Cross-border Listings 185

cross-listings, although both are significantly positive. The asymmetrical pattern of

abnormal returns is the unique finding of the paper in comparison with other general

effects of AH cross-listings. Further, the results show that positive abnormal returns

are the most significant for A-to-H cross-listings 2 days before the announcement.

As for H-to-A cross-listings, the positive abnormal returns are more significant in the

post-announcement period (in addition to the significantly positive returns around the

announcement day). These results demonstrate that positive returns appear for both A-to-H

cross-listings and H-to-A cross-listings. In other words, investors from both sides of the

markets respond positively to the announcement of AH cross-listings.

To measure the robustness of the results, this paper also investigates abnormal

returns using the actual cross-listing day as the event. The results show that the positive

abnormal returns still existed and thus confirm the benefit of cross-listings. The two

sub-samples of firms – H-to-A cross-listings and A-to-H cross-listings – are again

investigated separately. For the former, the daily return became insignifi cant (although it

was positive on most trading days). In contrast, the positive abnormal returns remained

significant for firms with H-to-A cross-listings. These results indicate that investors

responded even more strongly to the actual cross-listing for H-to-A cross-listings. These

results therefore suggest that the eff ect of H-to-A cross-listings dominated the overall

positive returns of AH cross-listings.

Next, this paper seeks to explain the positive abnormal return of cross-listed

Chinese firms. Documented factors, including operating performance, information

environment, trading liquidity, firm valuation, size, and political influences, are

considered to achieve this. The result shows that the improvement in the information

environment drives positive abnormal returns for A-to-H cross-listings. This result is

consistent with the argument that cross-listings from emerging and developed markets

benefit from the improved information environment. Further, the increase in the

valuation causes positive abnormal returns for H-to-A cross-listings. This is in line with

the argument that emerging stock markets are prone to over-valuation when they are

subject to capital control and lack a short-selling mechanism (Karolyi and Stulz, 2003;

Baker and Wurgler, 2007). A subsequent question would be why the Hong Kong market

responded to this overvaluation positively. The additional tests reveal that the systematic

risk, measured by beta, decreased from 1.01 before the cross-listing to 0.87 after the

cross-listing. The diff erences are statistically signifi cant. In addition, the evidence also

suggests that there is an increase in alpha, representing that AH dual-listing indeed

brings a higher short-term return to investors.

Further tests reveal that the main result is robust to alternative benchmarks and

estimation windows. As far as the institutional changes are concerned, the results show