Does the cross-listing premium that Canadian firms gain also reflect their own default probabilities

Abstract

Cross-listing has been a popular strategy for business expansion and seems always to be followed by appreciation in firm value. Previous theories explain the existence of this stock premium either due to risk reduction, by committing and then providing better protection to minority shareholders and by improving information environment and media coverage, or due to growth opportunities, by raising capital for potential growth projects and by reducing the cost of capital among a larger investor base. This paper aims to connect stock premium with one of the firms’ aptitude, called default probability, and testing whether this relationship is statistically significant in several regression models. 47 Canadian firms from 10 major sectors and 38 industries are selected, which announced officially their cross-listing activities in NYSE or NASDAQ during 1982 to 2002. The financial data are collected from Datastream to measure firm specific factors and cross-sectional models are applied to capture the sector specific factors. It is reasonable to conclude that pre-listing premium and firm size account mostly for the post-listing premium, while default probability also exerts its explanatory power.