Why are Foreign Firms Listed in the U.S. Worth More?
June 6, 2002
By analyzing factors largely overlooked, a study offers a perspective on the question why foreign firms listed in the U.S. are worth more.
Listing a foreign firm's shares on U.S. stock exchanges is widely perceived as beneficial (cheaper cost of capital, increased shareholder base, greater liquidity, enhanced prestige). And indeed, foreign firms listed in the United States have a significantly higher valuation than ones that aren't, so there is a listing premium.
An additional benefit is that the greater investor protections and more effective regulation of corporate governance in the United States gives investors greater assurance that the controlling shareholders and management won't legally milk a company for their own benefit.
Based on 1997 data on companies with assets of at least $100 million, researchers built a database of nearly 5,000 firms from 40 countries. Of these firms, 714 were cross-listed in the United States. Compared with foreign firms that aren't listed:
- Firms have high growth opportunities because the controlling shareholders have incentives to limit extraction of private benefits from their control, and since more of the cash flows of these firms accrue to investors, their growth opportunities are valued more highly.
- A U.S. listing opens up broader capital markets and helps convince outsiders that their controlling shareholders' consumption of private benefits from control is limited.
- The increased valuation of growth opportunities for these firms is even greater if they are located in countries with poorer protection rights, where controlling shareholders could expropriate more.
- A run-up in the stock's price customarily precedes a U.S. listing, which is consistent with firms acquiring growth opportunities and with controlling shareholders committing to imposing fewer costs on minority shareholders before the listing.
Source: Matt Nesvisky, "Why Are Foreign Firms Listed In The U.S. Worth More?" NBER Digest, February 2002; based on Craig Doidge, G. Andrew Karolyi, and René Stulz, "Why Are Foreign Firms Listed in the U.S. Worth More?" NBER Working Paper No. 8538, National Bureau of Economic Research.
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