deterring foreign issuers from listing securities and
raising capital in the United States(e.g.,Bloomenthal 1996;Cochrane 1994).
Recently,the International
Accounting Standards Committee(IASC)has suggested a
reform,which would allow up to 4,000 of the world’s largest companies to list in New
York,Toronto and Tokyo using international accounting standards(many exchanges,
such as London,already accept accounts prepared under the International Accounting
Standards).The committee of the world stock market regulators(IOSCO)will decide
about this reform during 1998.In this paper,I argue that the willingness to be exposed to
strict investor protection regulations,of which the accounting regulatory environment
constitutes only one component,may suffice as a means to credibly convey to investors,
managerial private information.
2
Specifically,I model managers’decision as to which international market to list their
firms’shares on.It is argued that managers of highly profitable firms may be able to
convey their private information regarding their firms’future prospects more effectively
in an environment which imposes a stricter regulatory regime related to investor
protection than in those environments where such a regime is looser.The additional
regulatory exposure that is borne by these managers is offset by higher stock prices for
their firms’shares.
The empirical literature discusses the case of an international listing,where a firm
listed on its own domestic stock exchange becomes listed on another major market.
3
One
line of that research focuses on foreign firms whose shares are listed in the U.S.(e.g.,
Fuerst,1998;Miller,1996;Foerster and Karolyi 1996).A general finding is that the2
announcement of U.S.listing is associated with a positive market reaction.Such results
are interpreted as supporting the theory that dual international listing dismantles part of
international market segmentation.That segmentation,in turn,is driven by various
barriers to international cash flow(e.g.,Cooper and Kaplanis 1995;Errunza and Losq
1985).An alternative interpretation is that dual-listing enhances shareholder base,which
leads to a higher stock price(see Merton 1987 for the theoretical argument).
However,given the globalizations of capital markets,and the fact that barriers to
international capital flows are being lowered in many countries,it is not clear that the
capital markets segmentation argument is the major reason for global listing.
Furthermore,given the fact that most institutional investors can invest across markets
(and certainly across the major ones),it is not clear what impacts a foreign firm’s decision
in deciding between the major capital markets,and in particular London and
NYSE/NASDAQ/AMEX.
The model presented here indicates that the announcement of a listing decision could
be accompanied by a positive market reaction—even when there is no market
segmentation or any difference between the markets with respect to liquidity or investor
base.
4
The U.S.regulatory environment is cited as deterring foreign issuers from listing
securities and raising capital in the United States(Bloomenthal 1996;Cochrane 1994)on
the basis of costs associated with several factors.First,foreign firms listing on U.S.
securities exchanges/NASDAQ must participate in the continuous disclosure system
under the Securities Exchange
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