Uninvited U.S. Investors? Economic Consequences of Involuntary Cross-Listings

Peter Iliev, Darius P. Miller, Lukas Roth

Research output: Contribution to journalArticle

11 Scopus citations

Abstract

We study the economic consequences of a recent Securities and Exchange Commission securities regulation change that grants foreign firms trading on the U.S. over-the-counter (OTC) market an automatic exemption from the reporting requirements of the 1934 Securities Act. We document that the number of voluntary (sponsored) OTC cross-listings did not increase following the regulation change, suggesting that it did not achieve its intended purpose of increasing voluntary OTC cross-listings through a reduction in compliance costs. We do find that the design of the regulation allowed financial intermediaries to create an unprecedented number of involuntary (unsponsored) OTC ADRs: 1,700 unsponsored ADR programs for 920 firms were created for companies that had previously chosen not to cross-list in the United States. Our difference-in-differences analysis based on a matched sample approach documents that foreign firms forced into the U.S. capital markets experience a significant decrease in firm value, and we further show that the decrease in firm value is related to an increase in U.S. litigation risk. We also find that depositary banks' propensity to involuntarily cross-list firms is positively related to banks' expected fee revenue, and that banks chose firms that incur high costs when involuntarily cross-listed. Our results provide evidence that securities regulation can be exploited for private gain and result in costly unintended consequences.

Original languageEnglish (US)
Pages (from-to)473-519
Number of pages47
JournalJournal of Accounting Research
Volume52
Issue number2
DOIs
StatePublished - May 2014

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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