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1、The Decision to List Abroad: The Case of ADRs and Foreign IPOs by Chinese CompaniesCinder (Xinde) Zhang The Belk College of BusinessUniversity of North Carolina at Charlotte9201 University City BoulevardCharlotte, NC 28223-0001 Phone: (704) 687-6725Email: xzhang13uncc.eduTao-Hsien Dolly King*Departm
2、ent of FinanceThe Belk College of BusinessUniversity of North Carolina at Charlotte9201 University City BoulevardCharlotte, NC 28223-0001Phone: 704-687-7652Fax: 704-687-6987Email: tking3uncc.edu*Corresponding author. We thank Richard Buttimer and Julapa Jagtiani for their useful comments and suggest
3、ions. We also thank the inputs by the seminar participants at the 2008 Midwest Finance Association Annual Meeting. We especially thank the valuable comments by three anonymous reviewers.The Decision to List Abroad: The Case of ADRs and Foreign IPOs by Chinese CompaniesAbstractThis paper examines the
4、 decision to list abroad by Chinese companies in the form of ADRs and foreign IPOs from 1993 to 2005. Our sample consists of 33 ADRs, 218 foreign IPOs, and a sample of 1,418 domestic listings. We find evidence to support that issuers are motivated to cross-list due to the legal and accounting standa
5、rds of the foreign markets, more stringent listing requirements and closer regulatory monitoring, significant demands for external capital due to rapid growth, an expanded shareholder base, and foreign expertise. The motives and firm factors differ by the type of issue (ADR versus foreign IPO) and b
6、y the market in which the foreign exchange is located (Hong Kong versus Singapore). Subsequent to the listing events, the issuers experience a significant drop in profitability, tangible assets ratio, and asset turnover. There is no significant change in capital expenditure. Stock returns after the
7、listing events are generally negative for ADR and foreign IPO stocks. More significantly, these stocks under-perform the market in the post-event window ranging from three days to three years.I. IntroductionThe globalization of capital markets has been on an accelerated path in the past twenty years
8、. According to the U.S. Treasury, cross-border capital flows between residents of the U.S. and other countries grew exponentially from less than 1% of U.S. GDP in 1980 to 30% in 2006. On one hand, we observe intense competition among major stock exchanges to obtain listings of foreign companies. On
9、the other hand, companies have the opportunities to benefit from a global shareholder base, greater liquidity of their issuance, and international reputation and prestige. The number of foreign companies with shares listed on exchanges outside their home countries has grown significantly since the e
10、arly 1990s. In particular, a significant number of firms from the emerging markets such as Asia and South America join this trend of cross-listings.In a recent study, Pagano, Roell and Zechner (2002) examine foreign listings by European and U.S. companies. They find that more European companies are
11、drawn to the U.S. to cross-list, while the cross-listing activity of U.S. companies on the European exchanges has declined. They compare European firms listed on other European exchanges and those listed in the U.S. and find significant differences in ex ante characteristics and ex post performances
12、. They argue that cross-listing in the U.S. seems to be driven by the need to finance rapid growth and expansion, mostly in the high-tech industry. On the other hand, the companies that cross-list in Europe has less foreign sales and average growth. To further support this argument, Doidge (2004) fi
13、nds that the non-U.S. firms that cross-list on U.S. exchanges have voting premiums that are 43% lower than non-U.S. firms that do not cross-list. His findings support the bonding hypothesis that cross-listing improves the protection afforded to minority investors and decreases the private benefits o
14、f control. Karolyi (2006) reviews the conventional wisdom that rationalizes why firms cross-list. Karolyi (1998) provides an extensive survey of the academic literature on the evidence and implications of the decisions to cross-list. He describes a significant slowdown in the international cross-lis
15、ting and trading activity in the past years. He further points to risk factors raised in recent studies that could help explain the new trend. Some of the factors discussed include corporate governance issues, information asymmetries, and liquidity issues when shares are traded in multiple markets.T
16、he literature on the decision to go public is also relevant to the decision to list abroad since firms can do an IPO on a foreign exchange, bypassing the domestic exchanges entirely. Mello and Parsons (1998) present a model of an optimal strategy for going public after incorporating the ownership st
17、ructure. Puri (1999) develops a model for analyzing the role of commercial banks as underwriters in the going public process. Chemmanur and Fulghieri (1999) develop a model on the timing of going public by analyzing the tradeoff between minimizing the duplication in information collection by outside
18、 investors and avoiding the risk premium demanded by venture capital firms. Subrahmanyam and Titman (1999) explore the choice between public and private financing and its relation with stock market efficiency. They argue that the advantage of going public is significant when the cost of information
19、is low and when the market is large and efficient. Gomes (2000) addresses the agency problem between controlling and minority shareholders and its relation to the going public decision. Finally, Ang and Brau (2002) link firm transparency to the costs of going public. The effects of going public for
20、companies in various countries have been explored extensively. For example, see Wang, Xu and Zhu (2004) the effects of going public for Chinese companies, Goergen, Khurshed and Mudambi (2006) for UK firms, and Alvarez and Gonzalez (2005) for Spanish firms.In this paper, we explore the decision to li
21、st abroad based on a unique sample of American Depository Receipts (ADRs) and foreign initial public offerings (IPOs) by Chinese companies. These ADRs are listed on the U.S. exchanges and backed by Chinese shares. The foreign IPOs are listed on major markets including Hong Kong, Singapore, U.S., and
22、 U.K. The explosive economic growth in China leads to a strong presence of Chinese firms on the global platform. Chinese market is one of the most dynamic markets of the world; however, there remain many aspects about this market that are under-researched. In addition, due to its significant economi
23、c growth, Chinese firms have been aggressive in seeking capital via foreign listings. It is important to examine how firms from this emerging economy make decisions to list abroad and the post performance of these issuers. In particular, we examine 251 Chinese companies that list abroad in various m
24、arkets from 1993 to 2005. Out of the 251 firms, 33 firms choose to issue ADRs on a foreign exchange (mainly in the U.S.) and 218 firms issue IPOs on exchanges outside of China. The control sample contains 1,418 firms of domestically listed companies during the same period.We first study the motives
25、to list abroad by examining the ex ante predictors of listing abroad stemming from various hypotheses. Similar to Pagano, Roell, and Zechner (2002), we explore possible motives for listing abroad. Each motive suggests a set of firm characteristics that can be linked to a higher probability of a fore
26、ign listing. To test these hypotheses about motives, we examine these characteristics using the multivariate Probit framework and a sample consisting of ADR, foreign IPO firms, and their domestic counterparts. We examine ADRs and foreign IPOs separately as they are different issues. Our results for
27、the ADR sample are generally consistent with the hypotheses about the motives to list abroad. We find that firms with better profitability and a larger firm size are more likely to list an ADR, supporting the hypothesis that more stringent listing requirements and closer monitoring by regulatory age
28、ncies motivate top performers with a larger size to list abroad. Significant demands for external financing suggest that a high growth firm is more likely to cross-list in the ADR market, which is confirmed by our result. Our findings suggest that issuers with a lower financial leverage are more lik
29、ely to issue an ADR, which is contrary to the prediction of the demand for external capital hypothesis that these issuers are motivated to list abroad due to an exhausted debt capacity. Since we observe that most of the Chinese firms have low leverage ratios due to limited sources of borrowing, we a
30、rgue that the limited cross-sectional variation in leverage and/or the uniqueness of low financial leverage (so the issuers still have plenty of debt capacity) support our finding on financial leverage. The results indicate that high risk firms are more likely to list an ADR, which is consistent wit
31、h the hypothesis that an expanded shareholder base leads to risk sharing for investors. We find that high tech firms are significantly more likely to issue and ADR, which strongly supports the hypothesis that foreign expertise is what the issuers seek in ADR listings. Finally, we find evidence suppo
32、rting the listing costs hypothesis that larger firms, which are more likely to bear the listing costs, are more likely to issue an ADR.The findings of the foreign IPO issuers suggest much weaker results compared to those of the ADR issuers. In particular, we find weak evidence for the prediction tha
33、t issuers with better profitability and a larger size should issue a foreign IPO. We also find weak support for the prediction that a high growth firm is more likely to list a foreign IPO. We find no evidence that issuers with higher financial leverage are more likely to issue a foreign IPO. Due to
34、the fact that the leverage ratio of the foreign IPO companies is extremely low, we argue that the motive of an exhausted debt capacity leading to listing abroad is not applicable in this case. We find weak evidence that high-risk firms are more likely to list a foreign IPO. Finally, the results on h
35、igh tech dummy indicate that foreign expertise may not be what the issuers look for when they issue a foreign IPO.A further analysis of the foreign IPOs suggests that the motives for firms to list a foreign IPO differ by market. The issuers of Hong Kong IPOs are generally similar to the ADR issuers:
36、 large, low-leverage, profitable, high growth, and high-tech firms. Therefore, the motives for issuers to list an ADR or a Hong King IPO are somewhat similar. In other words, we find similar support for the same set of hypothesis about the motives to list abroad for ADR and Hong Kong IPO issuers, bu
37、t the evidence is much weaker for the Hong Kong IPOs. On the other hand, issuers of Singapore IPOs are small, high-leverage, of superior profitability, high growth, and non-high-tech. Due to lower listing requirements on size, Singapore exchange appeals to small issuers. Our results support the hypo
38、thesis that more stringent listing requirements and monitoring lead to better performing companies to list abroad. We also find strong evidence for the hypothesis that significant demands for external capital motivate higher-levered and high growth firms to list abroad. We find no evidence to suppor
39、t the hypotheses on expanded shareholder base (high risk firms) and listing costs (large firms). Finally, we examine the post-issue operating and stock price performance of the firms that list abroad. For operating performance, Chinese issuers that choose to issue abroad do not fare well in operatin
40、g performance after the listings. These issuers generally experience lower profitability, a drop in tangible assets ratio, and deteriorating asset turnover. Firms do not seem to enjoy better sales growth or spend greater amounts in capital expenditure than their industry median and peers. Interestin
41、gly, these issuers have a drop in leverage ratio after listing abroad. As to financial performance, our findings on post-issue stock prices indicate negative returns over the short and long run for issuers that list abroad. These stocks significantly under-perform the market over the event windows r
42、anging from 3 days to 3 years after issuance.Our study makes important contributions to the literature. First, we compare the sample of issuers that list abroad with those that list on domestic exchanges from the largest emerging market of the world. The key factors and conditions of the Chinese eco
43、nomy are far from stable, whereas those of the E-9 countries and US are at steady state. As far as we know, this is the first comprehensive study of the listing behavior of Chinese firms. Sun and Tong (2003) and Wang, Xu, and Zhu (2004) study the going public process and success of Chinese state-own
44、ed enterprises (SOEs). The focus of these two studies is on the publicly listed Chinese shares on Chinas two domestic exchanges. We, on the other hand, focus on Chinese shares listed on exchanges outside of China in the form of ADR or IPO. Second, as Chine goes through the rapid evolution of financi
45、al markets, it is an ideal market for research. The unique characteristics of Chinese companies such as eastern culture, corporate governance structure, and explosive growth allow us to examine the listing decisions after incorporating the new risk factors summarized in Karolyi (2006) and factors un
46、ique to Chinese companies. Lastly, we broaden the scope of the existing literature on cross-listing and IPOs. By examining the listing decisions of Chinese firms, we are able to provide an important piece of evidence in the decision to cross-list in the form of ADRs and the decision to do an IPO on
47、a foreign exchange. In particular, one is no longer limited to exploring the benefits of foreign firms listing on the U.S. exchanges; instead, we examine the decision to list abroad for firms from a given country (China in this case) in two possible forms (ADR or IPO) and the shares are issued on ma
48、jor exchanges around the world.The paper is structured as follows. Section II discusses the background on listing behavior of Chinese companies. Section III discusses the sample data and descriptive statistics. Section IV presents the examination of the motives for Chinese firms to list abroad in th
49、e form of ADRs and foreign IPOs. Section V presents the empirical analysis of the ex post performance of the ADR and foreign IPO firms. Section VI concludes.II. Background on the Listing Behavior of Chinese FirmsIn 2006, twenty Chinese companies made the Fortune 500 list. Ten out of these twenty companies are listed abroad in the form of ADR or foreign IPO, reflecting the recen
