Corporate Governance Reforms and Cross-Listings: International Evidence*

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International Evidence *

CHIH-HSIEN LIAO, National Taiwan University ALBERT TSANG, The Hong Kong Polytechnic University

KUN TRACY WANG, Australian National University^† NATHAN ZHENGHANG ZHU, Australian National University

ABSTRACT

In this study, we examine whether a country’s implementation of major corporate governance reforms affectsfirms’ cross-listing activities. Cross-listing is important in overcoming international investment barriers and thus it is worth investigating whether enhanced corporate governance at the country level contributes to the integration of international capital markets. Using a difference- in-differences research design, we predict andfind that following the implementation of corporate governance reforms in their home countries,firms are more likely to engage in cross-listing activities and tend to cross-list in host countries with stronger investor protection and more developed markets than those in countries with no reforms in the same period. The results from country-level cross-sectional tests indicate that this effect is greater forfirms in home countries with weaker investor protection and less developed stock markets in the prereform period. The reforms also have a stronger effect onfirms subject to less analyst following and greater external finance dependence. Finally, wefind a stronger association between cross-listing activities and institutional ownership after the reforms. Taken together, this study increases understanding of the trade-off between cross-border capital supply and demand. Ourfinding suggests that country-level corporate governance plays an important role in facilitating the supply of cross-border capital, which in turn incentivizes firms to cross-list. Our study also offers policy implications for national stock exchanges and securities regulators by suggesting that countries without well-developed capital markets should strengthen their corporate governance to improvefirms’ ability to raise external financing and attract cross-border capital flows.

Keywords:corporate governance reform, cross-listing,ﬁrm value, legal environment, institutional ownership, investor protection

Réformes de la gouvernance d ’entreprise et inscription à plusieurs bourses : données à l ’échelle internationale

RESUME

Dans la présente étude, nous examinons si la mise en œuvre d’importantes réformes de la gouvernance d’entreprise dans un pays a un effet sur l’inscription à plusieurs bourses par les entreprises. L’inscription à plusieurs bourses est importante pour surmonter les obstacles aux investissements étrangers et, par conséquent, il vaut la peine de vériﬁer si une meilleure

* Accepted by Eddie Riedl. The authors thank Alan Webb (editor-in-chief), Eddie Riedl (editor), and two anonymous reviewers for their constructive comments and suggestions.

† Corresponding author.

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gouvernance d’entreprise à l’échelle du pays contribue à l’intégration des marchés de capitaux internationaux. À l’aide d’un modèle de recherche axé sur la différence dans les différences, nous prédisons et montrons qu’à la suite de la mise en œuvre de réformes de la gouvernance d’entreprise dans leur propre pays, les entreprises sont plus susceptibles de s’inscrire à plusieurs bourses et de cibler des pays offrant une meilleure protection aux investisseurs et des marchés plus développés, par rapport aux entreprises établies dans des pays n’ayant pas mené de réforme durant la même période. Les résultats d’analyses transversales à l’échelle du pays indiquent que cet effet est plus marqué pour les entreprises situées dans des pays où la protection des investisseurs était plus faible et les marchés moins développés durant la période précédant les réformes. Les réformes ont également un effet plus prononcé sur les entreprises sujettes à un suivi moins soutenu des analystes et affichant une plus grande dépendance à l’égard du financement extérieur. Enfin, nous mettons au jour une association plus importante entre les activités d’inscription à plusieurs bourses et la propriété institutionnelle après les réformes. Dans l’ensemble, la présente étude accroît la compréhension de l’équilibre entre l’offre et la demande de capitaux transfrontaliers. Nos résultats portent à croire que la gouvernance d’entreprise à l’échelle du pays joue un important rôle pour favoriser l’offre de capitaux transfrontaliers, ce qui à son tour encourage les entreprises à s’inscrire à plusieurs bourses. Notre étude a également des conséquences sur le plan des politiques pour les organismes de réglementation nationaux des marchés boursiers et des valeurs mobilières en laissant entendre que les pays où les marchés de capitaux sont peu développés devraient renforcer leur gouvernance d’entreprise pour accroître leur capacité à obtenir du financement externe et à attirer desflux internationaux de capitaux.

Mots-clés : réforme de la gouvernance d’entreprise, inscription à plusieurs bourses, valeur de l’entreprise, environnement juridique, propriété institutionnelle, protection des investisseurs

1. Introduction

Since the United Kingdom issued the Cadbury Report in 1992, many developed and emerging markets have launched corporate governance reforms to strengthen investor protection. These reforms are deliberate interventions in firms’ corporate governance practices by a country’s regulators (Kim and Lu 2013; Bae et al. 2020; Liao et al. 2021). The reforms typically focus on the characteristics of corporate boards, such as board independence and the separation of the chair and CEO positions (Dahya and McConnell 2007). A key assumption underlying this global trend is that improved corporate governance can strengthen the internationalfinancial system and facilitate cross-border capital flows.¹

Research suggests that the information environment, market segmentation, and differences in investor protection are barriers that prevent firms from acquiring capital from foreign investors (Alexander et al. 1987; Miller 1999). Studies suggest that cross-listing can signal a firm’s commitment to more stringent governance requirements, thereby allowingfirms to attract cross-border capital (e.g., Stulz 1999; Coffee 1999, 2002; Karolyi 2006). Therefore, cross-listing is important in overcoming international investment barriers and enabling firms to access foreign capital that is not available in segregated markets. Although the vast majority of studies that document the beneficial effects of cross-listing focus on the demand for cross-border capital (i.e., firms in countries with weak investor protection seeking financing from investors in countries with strong

1. As reflected in the 2009 Latin American Corporate Governance Roundtable, a major reason that countries enhance corporate governance mechanisms is to“contribute to a strengthened international financial system.” Similarly, the OECD (2011) suggests that as international capital markets become more integrated, it is important for countries to have credible corporate governance arrangements to facilitate cross-border capitalflows. The OECD (2015, 10) also states that“international flows of capital enable companies to access financing from a much larger pool of investors.

If companies and countries are to reap the full beneﬁts of the global capital market, and if they are to attract long- term“patient” capital, corporate governance arrangements must be credible, well understood across borders and adhere to internationally accepted principles.”

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investor protection), a large body of research reports that cross-listedﬁrms often suffer from foreign investors’ “home bias” (Cooper and Kaplanis 1994; Kang and Stulz 1997; Coval and Moskowitz 1999; Lewis 1999; Dahlquist et al. 2003; Bradshaw et al. 2004; Leuz et al. 2009;

Schumacher 2018), which is a major barrier to the supply of cross-border capital. Therefore, it is important to understand which institutional features can ease the supply of cross-border capital by mitigating the home bias of foreign investors. Thus, this study contributes to the literature by examining how corporate governance reforms affect the trade-off between the demand for and supply of cross-border capital.

Although research investigates the role of corporate governance in the integration of international capital markets (e.g., La Porta et al. 1997, 1998, 2000, 2002; Charitou et al. 2007), most of the evidence is derived from cross-sectional correlations, making it difficult to establish causal inferences.²In this study, we exploit the exogenous shock of a change in corporate governance regime to examine how country-level changes in corporate governance influence international capital flows, which is yet to be examined. We treat the corporate governance reforms implemented in various countries over the past two decades as a quasi-experiment to examine how such reforms affectfirms’ international cross-listing activities, which represent a major channel for cross-border investment and portfolioflows (Karolyi 2006; Gagnon and Karolyi 2010).

The effects of country-level corporate governance reforms on firms’ cross-listing activities are not obvious ex ante because the decision to cross-list in foreign markets is determined by the associated benefits and costs. Improved corporate governance is likely to facilitate firms’ access to external capital in domestic markets, and thus fewer benefits are gained by bonding through cross-listing (Ashbaugh et al. 2004; Ashbaugh-Skaife et al. 2006; Zhu 2014).³This suggests that corporate governance reforms can lead to an inward shift in the demand curve by reducing the need to seekfinancing abroad, consequently reducing the incentive for cross-listing.

However, the improved corporate governance in a firm’s home country following reforms may also attract foreign investors to invest in the firm’s cross-listed securities. Although firms from countries with weak governance regimes are more likely to commit to bonding through cross-listing, foreign investors are generally reluctant to own cross-border securities, which is a major barrier to the supply of cross-border capital (Lundholm et al. 2014; Chen, Ng et al. 2015;

Brochet et al. 2016; Chen et al. 2019).⁴As such, foreignﬁrms often suffer from investors’ “home bias,” which is a tendency to underweight the securities of ﬁrms outside their home country (Cooper and Kaplanis 1994; Kang and Stulz 1997; Coval and Moskowitz 1999; Lewis 1999;

Dahlquist et al. 2003; Bradshaw et al. 2004; Leuz et al. 2009; Schumacher 2018). National corporate governance reforms can therefore lead to an outward shift in the supply curve by mitigating foreign investors’ home bias, increasing their willingness to lend capital to foreign ﬁrms and, in turn, encouraging moreﬁrms to cross-list.

We test these competing arguments using a comprehensive, hand-collected global cross- listing data set covering 57 home countries and 46 cross-listing host countries between 1993 and 2012. We use a difference-in-differences (DiD) design, which reduces the concern that any observed changes in cross-listing activities following the implementation of reforms are

2. Cross-sectional correlations represent an equilibrium outcome of the intersection between the demand for and supply of cross-border capital, so they cannot accurately identify the precise mechanisms behind individual demand and supply curves.

3. Consistent with the bonding argument, many studies show that compared with their domestic peers, cross-listed ﬁrms tend to have greater access to external capital (Lins et al. 2005), increased shareholder base and greater stock liquidity (Foerster and Karolyi 1999), a higher valuation premium (Doidge et al. 2004), and a better information environment (Fernandes and Ferreira 2008). See, for example, Karolyi (1998, 2006) for reviews of the literature on cross-listing.

4. Consistent with this view, some studiesfind that foreign firms from countries with weaker investor protection are associated with lowerfirm value (Leuz et al. 2003; Haw et al. 2004; Lang et al. 2006; Bhattacharya et al. 2007;

Aggarwal et al. 2008).

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attributable to other events or general trends. We compare changes in the treatment firms’ likelihood to cross-list, their level of cross-listing, and their venue choices between the prereform and postreform periods using various benchmark groups. We find that relative to firms in countries without reforms in the same period, firms in countries with corporate governance reforms are more likely to seek cross-listing and to cross-list in more countries after their home countries implement reforms.

In addition, we find that after a country implements corporate governance reforms, firms based in that country are more likely to cross-list in countries with stronger investor protection and more developed markets. Country-level cross-sectional tests further indicate that the reforms have a greater effect on cross-listing for firms in countries with weaker investor protection and less developed stock markets in the prereform period. Firm-level cross-sectional tests suggest that this effect is also greater for firms with less analyst following and higher external finance dependence.

Finally, we directly examine the extent to whichﬁrms’ cross-listing activities are associated with a higher level of institutional ownership and, in particular, foreign institutional ownership.

We predict that the implementation of major corporate governance reforms in a country limits the ability of controlling shareholders and/or insiders to expropriate minority shareholders, thus providing more incentives for foreign investors to invest in cross-border securities. This is supported by ourﬁnding of a stronger relation between foreign cross-listings and institutional ownership in the postreform period than in the prereform period.

Our study contributes to the literature in several ways. First, we contribute to research on the consequences of corporate governance reforms worldwide. Prior studiesfind that corporate governance reforms affect corporate decision making and firm value (Kim and Lu 2013; Fauver et al. 2017; Bae et al. 2020; Liao et al. 2021). We extend this line of research by providing further evidence that these reforms facilitate firms’ cross-listing activities. Thus, we identify the central role of corporate governance reforms in international capital flows and a channel through which such reforms potentially affectfirm value.

Second, this study contributes to cross-listing research by demonstrating that the institutional shock of corporate governance reform can facilitateﬁrms’ cross-listing activities by making foreign investors more willing to supply capital. A large body of research (e.g., Stulz 1999; Coffee 1999, 2002;

Karolyi 2006) documents that cross-listing can act as a bonding mechanism that signals a ﬁrm’s commitment to a more rigorous corporate governance system, thereby attracting cross-border capital.

However, these studies focus on the beneﬁts of cross-listing from the demand side of cross-border capital. It is less understood which national institutions can facilitate the supply of cross-border capital by mitigating foreign investors’ home bias, a major barrier to cross-border capital ﬂows documented in prior research (e.g., Cooper and Kaplanis 1994; Kang and Stulz 1997; Coval and Moskowitz 1999;

Lewis 1999; Dahlquist et al. 2003; Bradshaw et al. 2004; Sarkissian and Schill 2004; Leuz et al. 2009;

Schumacher 2018). Our finding that foreign investors are more willing to lend capital to cross-listed firms from home countries with improved governance implies that country-level corporate governance plays an important role in reducing the information and monitoring disadvantages of foreign investors, which in turn incentivizesfirms to cross-list.

Third, cross-border institutional investment has increased rapidly worldwide, leading to considerable research on the determinants and consequences of foreign institutional ownership, which represents an increasingly important segment of global capital markets (Tsang et al. 2019). By showing that corporate governance reforms can increasefirms’ attractiveness to foreign institutional investors, we identify improved corporate governance practices as an important determinant of firms’ foreign institutional ownership. We also offer policy implications for national stock exchanges and securities regulators. Our findings suggest that countries without well-developed capital markets should strengthen their corporate governance to improve firms’ ability to raise external financing and attract cross-border capitalflows.

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In the next section, we develop our hypotheses. We describe the research design and sample in sections 3 and 4, respectively. Sections 5 and 6 present the results of our main tests and additional analyses, respectively. Finally, section 7 concludes.

2. Hypothesis development

Effect of corporate governance reforms on the likelihood and level of cross-listing

A ﬁrm’s cross-listing decision is typically a trade-off between the potential beneﬁts and costs.

The benefits include overcoming international investment barriers that segregate investors (Alexander et al. 1987; Miller 1999) and taking advantage of a host country’s superior corporate governance system to enhance the confidence of current and potential investors (Stulz 1999; Cof- fee 1999, 2002). Cross-listing also entails significant costs, such as those associated with complying with stricter regulatory requirements and the reluctance of investors to hold foreign securities. Thus, the association between corporate governance reforms and firms’ cross-listing activities depends on how the reforms affect these perceived benefits and costs.

Exchange-specific regulatory restrictions on foreign ownership and capital mobility, together with differences in information sets between markets, can result in market segmentation and cre- ate barriers to theflow of international capital (Alexander et al. 1987). This creates an incentive forfirms to cross-list their securities in foreign markets, as cross-listing can transcend regulatory restrictions on foreign investment and mitigate the information costs faced by foreign investors (Miller 1999; Errunza and Miller 2000). A weaker corporate governance system in afirm’s home country is one of the primary reasons for listing abroad (Reese and Weisbach 2002; Doidge 2004;

Doidge et al. 2004). If afirm’s internal governance mechanisms (such as board independence) and/or its home country’s institutions (such as minority shareholder protections) do not adequately prevent managers from taking private benefits, outside investors will hesitate to provide capital, thus increasing the costs of externalfinancing (Shleifer and Vishny 1997; La Porta et al. 1999). In such circum- stances, managers may have incentives to “bond” themselves to indicate that they do not extract excessive private benefits, allowing them to secure access to external funds.

One way that managers can signal or bond, as various studies argue, is to cross-list theﬁrm’s equity on an exchange with stronger governance requirements (Stulz 1999; Coffee 1999, 2002;

Karolyi 2006; Piotroski and Srinivasan 2008). Cross-listing can therefore act as an effective bonding mechanism that signals afirm’s commitment to more rigorous corporate governance, potentially attracting more investment from both domestic and foreign investors. As corporate governance practices improve following reforms infirms’ home countries, firms can obtain more external capital from their home market, and the potential benefits of signaling/bonding by cross- listing may be reduced. Thus,firms’ incentives to signal their commitment to stronger corporate governance through cross-listing may be lower when the level of corporate governance rises in their home country.⁵

However, access to foreign capital generally comes at a price. The costs associated with cross-border listing activities can be non-trivial, and complying with specific regulatory and disclosure requirements in foreign stock markets represents a major cost.⁶ Piotroski and Srinivasan (2008)find that the Sarbanes-Oxley Act (SOX) can discourage foreign firms from listing on US exchanges, as some firms are less able to absorb the incremental compliance costs

5. Lending support to this view, research suggests that better corporate governance practices in a country reduceﬁrms’

externalﬁnancing costs (Ashbaugh et al. 2004) and attract more foreign capital to ﬁrms’ home countries (Gillan and Starks 2003).

6. Firms also face other signiﬁcant costs when cross-listing, such as the time and expense incurred in the registration of cross-listed securities, the costs of converting to a different set of accounting standards and disclosure requirements, and the costs associated with foreign regulatory compliance (Biddle and Saudagaran 1989, 1991). Other costs include listing application fees, underwriting fees, or professional fees (e.g., hiring lawyers and accountants) (Licht 2003).

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associated with SOX. Thus, as a ﬁrm’s corporate governance practices are strengthened by reforms in its home country, the costs of adhering to foreign governance standards are likely to be lower because of the greater convergence of corporate governance practices, making cross- listing a more viable and economical channel for acquiring foreign equity capital.

More importantly,firms often face other capital market barriers, in addition to expenses, when listing abroad. Listing equity on a foreign exchange does not necessarily attract foreign shareholders because many investors overweight their portfolios with domestic securities, known as the home bias phenomenon (French and Poterba 1991; Chan et al. 2009).⁷This view is supported by studies showing that international differences in corporate governance and disclosure requirements can heavily influence foreign investors’ investment decisions. For example, King and Segal (2003, 2008) find that cross-listed firms are not treated as equals to their host market peers, implying that foreign investors do not perceive that their minority rights will be protected if they supply capital to cross-listedfirms.⁸

Other studies suggest that firms in countries with poor corporate governance are less able to secure foreign investment because private control benefits and expropriation are major concerns (Ferreira and Matos 2008; Leuz et al. 2009; Bell et al. 2012; Das 2014). In addition, research suggests that better corporate governance is associated with greater firm transparency through enhanced disclosure practices (Xie et al. 2003; Armstrong et al. 2014; Chen et al. 2019; Tsang et al. 2019). Thus, improved governance standards in firms’ home countries may make cross- listed stocks from these countries more attractive to foreign investors due to lower levels of both information asymmetry and the risk of managerial expropriation. As the implementation of corporate governance reforms reduces the costs associated with cross-listing and creates a stronger incentive for foreign investors to own cross-border securities, we predict an increase in cross- listing activities after corporate governance reforms are implemented in afirm’s home country.

Based on this discussion, we state ourﬁrst hypothesis as follows:

H^YPOTHESIS 1 (H1). Following the implementation of corporate governance reforms in their home country,ﬁrms increase their foreign cross-listing activities compared with ﬁrms in countries without corporate governance reforms.

Effect of corporate governance reforms on cross-listing venue choices

Managers also consider the choice of cross-listing venue in their cross-listing decisions (Doidge et al. 2009). Thus, assessing whetherﬁrms’ cross-listing venue preferences change after corporate governance reforms in their home country is important. Previous studies suggest that ﬁrms typically cross-list in proximate countries to help overcome information asymmetry between them and foreign investors (Pagano et al. 2002; Sarkissian and Schill 2009; Hung et al. 2012; Chen, Ng et al. 2015).⁹ Following this argument, we predict that corporate governance reforms

7. Investors’ reluctance to invest in cross-border securities is due, at least in part, to an information disadvantage vis-à-vis their domestic counterparts (Chen et al. 2019; Tsang et al. 2019). This may be due to a lack of information about afirm, the inability to monitor a firm, or the lower quality or credibility of financial information from foreign firms (e.g., Brennan and Cao 1997; Kang and Stulz 1997; Ahearne et al. 2004; Bradshaw et al. 2004;

Choe et al. 2005).

8. The lower level of sentiment toward foreignﬁrms’ securities stems from various factors. For example, even in rela- tively well-developed securities markets, such as the United States, securities regulators often face greater frictions that can lead to reduced cross-border enforcement capacity regarding cross-listed foreignﬁrms (Siegel 2005; Lang et al. 2006; Licht et al. 2018). These frictions include legal barriers, information gaps, higher information acquisi- tion costs, and greater jurisdictional complexity.

9. For example, Sarkissian and Schill (2004) show that geographic, economic, cultural, and industrial proximity play an important role infirms’ cross-listing venue choices. Chen, Harford et al. (2015) and Chen, Ng et al. (2015)assess the influence of accounting proximity on cross-listing by examining the effect of the mandatory adoption of IFRS onfirms’ cross-listing activities. They find that firms are not only more likely to cross-list but are also more likely to do so in countries that adopt IFRS after the standards are adopted in their home country.

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potentially influence firms’ decisions to cross-list in countries where they expect the benefits from cross-listing to be greater.

We predict thatfirms are more likely to choose countries with stronger investor protection and more developed stock markets, where cross-listing can provide greater capital market benefits, as their cross-listing venues after reforms because the compliance and disclosure costs associated with cross-listing will be less of a concern. In addition, as institutional differences (i.e., the level of corporate governance) between afirm’s home and cross-listing host country are reduced, thefirm’s costs, such as those of additional compliance, will be minimized and its benefits, such as attractiveness to foreign investors, will be maximized (Sarkissian and Schill 2004; Aggarwal et al. 2008; Chen, Ng et al. 2015). Thus, we state our second hypothesis as follows:

H^YPOTHESIS 2 (H2). Following the implementation of corporate governance reforms in their home countries, ﬁrms are more likely to cross-list their securities in foreign countries with stronger investor protection and more developed stock markets.

Effect of corporate governance reforms on institutional ownership

The key assumption underlying the above hypotheses is thatfirms are likely to benefit more from cross-listing after corporate governance reforms. For example, we predict that firms may have stronger incentives to cross-list because they perceive a greater potential for foreign institutional investment in their securities after the reforms in their home countries. In other words, we suggest that following the implementation of reforms infirms’ home countries, the capital market benefits associated with cross-listing are greater, especially in host countries characterized by stronger investor protection and more developed stock markets. Thus, we directly address this assumption by proposing the following third hypothesis:

H^YPOTHESIS 3 (H3). Firms’ cross-listing activities in the post-corporate governance reform period are associated with more institutional investment than those in the pre-corporate governance reform period.

3. Research design

To investigate whether and how corporate governance reforms affectfirms’ cross-listing activities, we regard a country’s corporate governance reforms as an exogenous shock that affects both the demand for and supply of cross-border capital. These reforms represent“deliberate interventions in a country’s corporate governance tradition by the state, security and exchange commis- sion, or stock exchanges” (Kim and Lu 2013, 236). They are typically implemented through the publication of codified corporate governance guidelines or amendments to various aspects of corporate/securities laws, such as the structure of the board of directors, the appointment of external auditors, and the balance of power between managers and shareholders (Aguilera and Cuervo- Cazurra 2004). Many countries have implemented major corporate governance reforms in recent decades, which suggests that regulators worldwide recognize that reforms are crucial to strength- ening the internationalfinancial system and facilitating cross-border capital flows. In addition to their regulatory significance, these reforms also provide a unique quasi-natural experimental setting to understand their effects on the international capital market.

Although research has used other experimental settings to draw causal inferences about the determinants of cross-listing (e.g., Chen, Ng et al. 2015, who exploit mandatory IFRS adoption), the corporate governance reforms examined in this study represent a fundamental change in a national institution that can affect multiple dimensions of corporate governance (e.g., board independence, audit committees, and CEO and chair duality). Thus, corporate governance reforms presumably have more direct and profound effects on the international capital market, given the well-documented phenomenon that poor corporate governance hinders international capitalﬂows (La Porta et al. 1997, 1998, 2000, 2002). Our setting allows us to directly test the major

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assumption underlying corporate governance reforms worldwide, which is that an improved corporate governance system can strengthen the internationalﬁnancial system and ease cross-border capitalﬂows (OECD 2011, 2015).

To test our hypotheses, we estimate the following DiD model using ﬁrm-year panel data (country,ﬁrm, and year subscripts are omitted for parsimony):

CL_Firm=CL_Nmarket=CL_Venue_IP=CL_Venue_MD ¼ α þ β1PostTreatment

þ β2Relative Sizeþ β3ROAþ β4Sales Growthþ β5Leverageþ β6Interestþ β7Insider þ β8Accrualsþ β9Cashþ β10MTBþ β11CAPEXþ β12Analystþ β13Wrd_Competition þ β14Ind_Competitionþ β15HiTechþX

Year indicatorsþX

Industry indicators

þX

Country indicatorsþ error, ð1Þ

where CL_Firm is an indicator variable equal to one if afirm has at least one secondary security actively listed and traded in a foreign country in the year, and zero otherwise. CL_Nmarket is the number of foreign countries in which afirm’s securities are cross-listed in the year. We use these two measures to capturefirms’ cross-listing activities when testing H1. To investigate the change in cross-listing venue choices following corporate governance reforms (H2), we use CL_Venue_IP and CL_Venue_MD to measure whether a cross-listed firm chooses to cross-list in countries that potentially offer greater capital market benefits. CL_Venue_IP (CL_Venue_MD) is an indicator variable that equals one if at least one secondary security of afirm is actively listed and traded in a foreign country with stronger investor protection (capital market development) than its home country in a given year and zero otherwise.¹⁰ Post is an indicator variable that equals one if the sample year corresponds to a country’s major corporate governance reform in that or any following year and zero otherwise. Treatment is an indicator variable that equals one if afirm’s home country has adopted major corporate governance reforms and zero otherwise.

The full specification of equation (1) includes Post, Treatment, and PostTreatment. When estimating equation (1), Treatment always equals one for firms in reform countries and is therefore omitted from the regression because of the inclusion of country fixed effects. Post is also omitted because it is redundant in PostTreatment due to the staggered adoption of corporate governance reforms.¹¹ The interaction term PostTreatment is the key variable of interest and serves as the DiD estimator that captures incremental changes (from the prereform to postreform periods) in firms’ cross-listing likelihood, level, or venue choice for firms domiciled in reform countries relative to the corresponding changes in the control group. By regarding the staggered implementation of corporate governance reforms as an exogenous shock tofirms’ corporate governance environment, we address endogeneity concerns and can therefore draw causal inferences.

Following the literature (e.g., Biddle and Saudagaran 1991; Saudagaran and Biddle 1995;

Fuerst 1998; Coffee 1999, 2002; Ashbaugh 2001; Bhattacharya et al. 2003; Doidge 2004; Doidge et al. 2004; Lins et al. 2005; Foucault and Gehrig 2008), we identify a set of control variables that can affect firms’ cross-listing activities. The firm-level control variables are (i) Relative Size, defined as the market value of equity divided by the total capitalization of a firm’s domestic equity market, to control for the firm’s demand for capital in a country; (ii) ROA, to control for firm profitability; (iii) Sales Growth, defined as the annual change in net sales scaled by begin- ning total assets; (iv) Leverage, defined as the ratio of total liabilities to total assets; (v) Interest,

10. We focus on country-level investor protection and market development when testing the hypotheses due to their close association with a country’s corporate governance regime (La Porta et al. 2000; Defond and Hung 2004;

Defond et al. 2007; Doidge et al. 2007).

11. Post takes the value of one only for reform countries in the postreform period. Thus, Post and PostTreatment are the same in practice.

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defined as total interest divided by total sales; (vi) Insider, defined as the total number of closely held shares divided by the total shares outstanding, to account for afirm’s private benefits of control; (vii) Accruals, to control for the earnings opacity offirms; (viii) Cash, defined as the ratio of a firm’s cash and short-term investments to its total assets, to control for its external capital requirements; (ix) MTB, defined as the market-to-book ratio of equity, to control for a firm’s growth prospects; (x) CAPEX, capital expenditures; and (xi) Analyst, defined as the number of analysts following afirm, to control for its information environment.

The industry-level controls are (i) Ind_Competition, to control for industry competition in a country in a given year; (ii) HiTech, to control for afirm being in the high-tech industry based on SIC industry classifications; and (iii) Wrd_Competition, to control for industry competition at the global level in a given year, as more companies take their products to global markets. Finally, following international studies (e.g., Gibson 2003; Lel and Miller 2008; 2015), our estimation includes country, industry, and year fixed effects. Detailed definitions of the variables are pro- vided in Appendix 1.

We obtain theﬁrm- and industry-level variables from the Worldscope database except for Ana- lyst, which we obtain from I/B/E/S and replace missing analyst coverage with zero. Data for the country-level variables are collected from the World Bank. Following prior research (e.g., Chen, Ng et al. 2015), in our main regression analyses, we use a logit regression when the dependent variable is an indicator variable; that is, CL_Firm, CL_Venue_IP, and CL_Venue_MD, and a Poisson regression when the count variable CL_Nmarket is the dependent variable. We also use alternative regression models for our robustness checks (discussed in section 5). Standard errors are clustered by year andﬁrm to account for possible cross-sectional and serial correlations.¹²

4. Sample and data Sample selection

To construct the data set of global cross-listing, we collect data related to foreign equity listings for all of thefirms from the Capital IQ Compustat database from 1993 through 2017. The earliest and latest years in which corporate governance reforms were implemented in a country are 1998 and 2007, respectively, so we start the sample period in 1993 (i.e.,five years before the first year with major reforms) and end it in 2012 (i.e.,five years after the last year with major reforms) to provide a balanced comparison between the prereform and postreform periods. Ending the sample period in 2012 also avoids overly skewing the sample with a prolonged postreform period in which most observations are in the postperiod, reducing the effects of any confounding events.

Our inference (untabulated) remains unchanged if we use data up to 2017 to examine our research questions.

We start sample construction with all publicly tradedfirms and exclude those that are trusts or investment funds and those without primary identifiers. For firms with secondary securities listed in foreign exchanges, we identify all of their publicly traded tickers and stock exchanges on which each ticker is listed. Afirm-year is defined as cross-listed if the firm has at least one secondary security listed and traded in a country other than its primary listing country.¹³We further remove securities listed OTC because they are generally subject to much less stringent disclosure and governance requirements than those of the major stock exchanges. Finally, we exclude countries with less than 100 observations. The final sample consists of 281,294 firm-years from 57 countries/regions, of which 11,708 are cross-listedfirms (269,586 are non-cross-listed).

12. Alternatively, we repeat all of the tests by clustering standard errors at year and home country, and the untabulated results are qualitatively unchanged.

13. Following other studies (Chen, Harford et al. 2015; Chen, Ng et al. 2015; Chen et al. 2019), we define a firm’s home country as that of its primary stock exchange listing. Defining a firm’s home country as the country where it is headquartered does not change our results.

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Next, we collect information on major corporate governance reforms around the world from Fauver et al. (2017). We identify a total of 41 countries that implemented major corporate governance reforms during our sample period.¹⁴Most reforms cover three key components: board independence, audit committee and auditor independence, and separation of the chair and CEO positions. Some countries implemented more than one reform during the period, and thus we conduct robustness tests using the earliest corporate governance reform (i.e., theﬁrst reform) for those countries as an alternative reform year when examining the effect of reforms on cross-listing activities. Appendix 2 provides detailed information on the years, key components, and types of reforms in each country.

To compare the cross-listing activities offirms in reform countries with those in nonreform countries, we use the 16 countries that did not implement major corporate governance reforms during the sample period as the benchmark, following prior research on the impact of exogenous shocks on corporate decisions (e.g., Lel and Miller 2015). A potential concern of including nonreform countries in the control group is that the results may be biased if these countries experienced other unobservable regulatory changes in the same period that potentially affected their cross-listing activities. However, we contend that any potential biases are more likely to impedefinding a significant effect of corporate governance reforms on cross-listing activities. Nevertheless, to mitigate this concern, we also follow Fauver et al. (2017) and perform all of the analyses onfirms from reform countries only.

Panel A of Table 1 presents the sample distribution and average cross-listing activities by country. USfirms constitute the highest percentage of the sample (20.77%), followed by Japanese (9.17%) and UK (8.85%) firms. Ireland has the highest percentage of cross-listed firms (29%), and Vietnam the lowest (0.19%). Panel B reports the sample distribution by year. The number offirms in the sample increases from 5,443 (1.94%) in 1993 to 20,636 (7.34%) in 2012. This increase indicates the need for a constant sample analysis, which we conduct as part of the additional robustness tests. We also observe steady increases in the likelihood of cross-listing (CL_Firm), the average number of cross- listed markets (CL_NMarket), and the propensity to cross-list in countries with stronger investor protection (CL_Venue_IP) and better capital market development (CL_Venue_MD). Panel C of Table 1 summarizes the sample distribution by industry. The extractive industry has the highest percentage of cross-listed firms (7.8%), followed by the transportation industry. The insurance/real estate industry has the lowest percentage (0.9%).

Summary statistics

Panel A of Table 2 presents descriptive statistics of the variables used in the main analyses. To reduce the effect of outliers, we winsorize all of the continuous variables at the top and bottom one percentiles. Similar to other studies (e.g., Chen, Ng et al. 2015), 4.2% of thefirms in the sample cross-list their securities in a foreign country. Among cross-listingfirms, the average number of cross-listed markets is 1.052, suggesting that the majority of cross-listingfirms worldwide only cross-list on one foreign stock exchange. Approximately half of thefirms are cross-listed in countries with stronger investor protection and more developed capital markets than those of their home countries.

Table 3 presents the Pearson correlation coefficients of the main variables. The postreform indicator, Post, is positively and significantly correlated with all of the variables that measure firms’ cross- listing activities, including CL_Firm (0.052), CL_Nmarket (0.048), CL_Venue_IP (0.055), and CL_Venue_MD (0.388). Thesefindings provide preliminary support for the hypotheses that following the implementation of major governance reforms in a country, firms are more likely to cross-list, cross-list in more foreign countries, and choose countries with better developed institutions as their cross-listing venues. These measures are also significantly correlated with many of the control variables, including Relative Size, ROA, MTB, CAPEX, Wrd_Competition, and Ind_Competition, indicat- ing that controlling for these variables in multivariate analyses is important.

14. Of the 41 reform countries, the Philippines has noﬁrms cross-listed in other countries during the sample period, and therefore it is dropped from the sample.

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TABLE 1

Sample distribution Panel A:By country

N % CL_Firm CL_Nmarket CL_Venue_IP CL_Venue_MD

(1) (2) (3) (4) (5) (6)

Country Full sample

Full sample

CL sample

1 Argentina^a 807 0.287 0.133 1 0.869 0.897

2 Australia^a 12,576 4.471 0.027 1.030 0.861 0.393

3 Austria^a 1,075 0.382 0.103 1 0.829 0.856

4 Belgium^a 1,360 0.483 0.101 1.072 0.942 0.942

5 Bermuda 304 0.108 0.066 1 0.250 0.350

6 Brazil^a 2,770 0.985 0.027 1 1 0.653

7 Bulgaria 1,293 0.460 0.003 1 0 1

8 Canada^a 11,662 4.146 0.062 1.033 0.016 0.206

9 Chile^a 1,727 0.614 0.064 1.145 1 0.291

10 China^a 7,141 2.539 0.030 1.009 0.498 0.553

11 Colombia^a 414 0.147 0.017 1 0.714 0.714

12 Croatia 566 0.201 0.007 1 1 0

13 Czech Republic^a 209 0.074 0.086 1 1 1

14 Denmark^a 1,809 0.643 0.060 1 0.843 0.889

15 Egypt^a 703 0.250 0.074 1 1 0.769

16 Finland^a 1,620 0.576 0.175 1.011 0.760 0.618

17 France^a 8,342 2.966 0.100 1.041 0.857 0.798

18 Germany^a 7,764 2.760 0.090 1.047 0.956 0.923

19 Greece^a 1,439 0.512 0.083 1 1 0.600

20 Hong Kong^a 10,024 3.564 0.024 1.038 0.047 0.114

21 Hungary^a 344 0.122 0.055 1 1 1

22 India^a 15,332 5.451 0.066 1.041 0.244 0.674

23 Indonesia^a 3,669 1.304 0.011 1 0.436 0.615

24 Ireland 1,022 0.363 0.290 1 0.145 0.206

25 Israel^a 2,760 0.981 0.081 1 0.013 0.202

26 Italy^a 3,057 1.087 0.168 1.031 0.638 0.852

27 Jamaica 115 0.041 0.157 1 1 0

28 Japan^a 25,785 9.167 0.019 1.065 0.498 0.283

29 Luxembourg 318 0.113 0.176 1.179 0.982 0.304

30 Malaysia^a 9,368 3.330 0.006 1 0 0.034

31 Mexico^a 780 0.277 0.159 1.008 0.847 0.468

32 Morocco 295 0.105 0.031 1 1 0

33 The Netherlands^a 2,580 0.917 0.103 1.132 0.914 0.489

34 New Zealand 913 0.325 0.108 1 0 0.606

35 Nigeria 287 0.102 0.024 1 1 1

36 Norway^a 1,630 0.579 0.121 1.010 0.778 0.753

37 Pakistan^a 1,791 0.637 0.015 1 0.444 0.444

38 Peru^a 713 0.253 0.008 1 1 1

39 Poland^a 1,300 0.462 0.025 1 1 0.594

40 Portugal^a 641 0.228 0.220 1 0.667 0.872

41 Qatar 149 0.053 0.034 1 1 0

(The table is continued on the next page.)

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TABLE 1 (continued) Panel A:By country

(1) (2) (3) (4) (5) (6)

Country Full sample

Full sample

CL sample

42 Russia 2,347 0.834 0.071 1.150 0.910 0.850

43 Singapore^a 5,973 2.123 0.013 1 0 0.247

44 South Africa 2,469 0.878 0.077 1 0.037 0.215

45 South Korea^a 13,125 4.666 0.018 1.030 0.515 0.743

46 Spain^a 1,955 0.695 0.136 1.068 0.823 0.762

47 Sri Lanka 1,096 0.390 0.016 1 0 0

48 Sweden^a 2,521 0.896 0.127 1.063 1 0.634

49 Switzerland^a 2,768 0.984 0.114 1.127 1 0

50 Taiwan 7,988 2.840 0.069 1.036 0.366 0

51 Thailand^a 4,945 1.758 0.012 1 0.328 0.525

52 Tunisia 238 0.085 0.013 1 0 1

53 Turkey^a 2,676 0.951 0.010 1 0.481 1

54 UAE 233 0.083 0.056 1 1 0.769

55 UK^a 24,905 8.854 0.022 1.059 0.059 0.297

56 US^a 58,421 20.769 0.018 1.152 0.015 0.112

57 Vietnam 3,180 1.130 0.002 1 0.333 1

Overall 281,294 100 0.042 1.052 0.503 0.486

Panel B:By year

(1) (2) (3) (4) (5) (6)

Year

Full sample

CL sample

1 1993 5,443 1.935 0.014 1.208 0.364 0.091

2 1994 5,905 2.099 0.016 1.168 0.400 0.242

3 1995 7,061 2.510 0.016 1.134 0.384 0.241

4 1996 8,490 3.018 0.015 1.115 0.385 0.246

5 1997 9,082 3.229 0.016 1.097 0.424 0.278

6 1998 9,389 3.338 0.018 1.096 0.395 0.289

7 1999 10,123 3.599 0.022 1.089 0.347 0.290

8 2000 10,954 3.894 0.025 1.093 0.344 0.316

9 2001 12,662 4.501 0.025 1.087 0.377 0.328

10 2002 13,786 4.901 0.026 1.088 0.387 0.321

11 2003 14,587 5.186 0.028 1.076 0.369 0.337

12 2004 15,109 5.371 0.029 1.058 0.360 0.327

13 2005 16,095 5.722 0.031 1.065 0.367 0.344

14 2006 18,491 6.574 0.035 1.063 0.450 0.446

15 2007 19,976 7.101 0.048 1.041 0.580 0.578

16 2008 20,517 7.294 0.057 1.034 0.602 0.597

17 2009 20,797 7.393 0.060 1.035 0.590 0.574

18 2010 21,184 7.531 0.066 1.035 0.565 0.566

19 2011 21,007 7.468 0.072 1.035 0.526 0.546

(The table is continued on the next page.)

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TABLE 1 (continued) Panel B:By year

(1) (2) (3) (4) (5) (6)

Year

Full sample

CL sample

20 2012 20,636 7.336 0.075 1.034 0.522 0.535

Overall 281,294 100 0.042 1.052 0.503 0.486

Panel C:By industry

(1) (2) (3) (4) (5) (6)

Industry

Full sample

CL sample

CL sample 1 Mining/

construction

26,037 9.256 0.050 1.042 0.340 0.427

2 Food 13,475 4.790 0.045 1.071 0.451 0.426

3 Textiles/print/

publ.

18,273 6.496 0.024 1.009 0.404 0.600

4 Chemicals 11,790 4.191 0.045 1.194 0.449 0.350

5 Pharmaceuticals 10,114 3.596 0.053 1.085 0.415 0.474

6 Extractive 10,249 3.644 0.078 1.081 0.561 0.502

7 Manf: rubber/

glass/etc.

11,006 3.913 0.035 1.026 0.541 0.562

8 Manf: metal 13,031 4.633 0.040 1.044 0.535 0.610

9 Manf:

machinery

10,824 3.848 0.035 1.071 0.640 0.550

10 Manf: electrical eqpt

11,788 4.191 0.049 1.050 0.536 0.452

11 Manf: transport eqpt

7,713 2.742 0.054 1.031 0.510 0.569

12 Manf:

instruments

8,910 3.168 0.030 1.022 0.539 0.421

13 Retail: misc. 2,341 0.832 0.023 1 0.630 0.704

14 Computers 30,994 11.018 0.043 1.032 0.419 0.315

15 Transportation 18,572 6.602 0.071 1.069 0.651 0.599

16 Utilities 9,108 3.238 0.055 1.036 0.706 0.683

17 Retail:

wholesale

12,920 4.593 0.021 1 0.483 0.365

18 Retail: misc. 12,496 4.442 0.032 1 0.467 0.455

19 Retail:

restaurant

2,427 0.863 0.013 1 0.500 0.500

20 Financial 3,310 1.177 0.026 1.080 0.506 0.586

21 Insurance/real estate

6,442 2.290 0.009 1.070 0.596 0.702

22 Services 25,878 9.200 0.025 1.023 0.565 0.504

23 Others 3,596 1.278 0.057 1 0.364 0.471

Overall 281,294 100 0.042 1.052 0.503 0.486

Notes:^aindicates countries that implemented corporate governance reforms in the sample period. All variables are deﬁned in Appendix 1.

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5. Empirical analysis

Tests of H1: Reforms and the likelihood and level of cross-listing

Table 4 reports the regression results for H1. In the first two columns, the dependent variable is the likelihood that firms will cross-list (CL_Firm). Column (1) presents the results of the logit regression. The estimated coefficient of PostTreatment is consistently positive and significant, supporting the prediction that reforms positively affect the likelihood that firms will cross-list. In terms of economic significance, the coefficient of 0.798 on PostTreatment indicates that the odds ratio of firms cross-listing in the postreform period relative to the prereform period is 2.2 times higher than the change in the cross-listing odds ratio forfirms from nonreform countries. In column (2) we use a linear probability model with only the observations from reform countries and control for firm fixed effects.¹⁵ The coefficient on PostTreatment is consistently positive and significant. These results again suggest that firms are more likely to cross-list following the implementation of corporate governance reforms in their home country.

In columns (3) and (4), the dependent variable is aﬁrm’s level of cross-listing as measured by the number of foreign countries where its securities are cross-listed in a given year (CL_Nmarket).

As CL_Nmarket is a count variable ranging from zero to eight (i.e., the maximum number of countries where a ﬁrm in the sample is cross-listed in a given year), we estimate the model using a Poisson regression. Column (3) reports the results for the full sample, and column (4) reports the TABLE 2

Summary statistics

Variable N Mean SD 25% 50% 75%

CL_Firm 281,294 0.042 0.200 0 0 0

CL_Nmarket (CL_Sample) 11,708 1.052 0.281 1 1 1

CL_Venue_IP (CL_Sample) 11,708 0.503 0.500 0 1 1

CL_Venue_MD (CL_Sample) 11,708 0.486 0.500 0 0 1

Treatment 281,294 0.919 0.273 1 1 1

Post 281,294 0.686 0.464 0 1 1

Relative Size 281,294 0.065 0.253 0.001 0.003 0.018

ROA 281,294 0.111 0.790 0.026 0.030 0.080

Sales Growth 281,294 0.118 0.393 0.031 0.050 0.199

Leverage 281,294 0.593 0.770 0.311 0.502 0.672

Interest 281,294 0.047 0.084 0.003 0.020 0.050

Insider 281,294 0.359 0.279 0.077 0.354 0.589

Accruals 281,294 0.012 1.334 0.087 0.005 0.073

Cash 281,294 0.173 0.197 0.038 0.103 0.230

MTB 281,294 2.172 4.488 0.715 1.374 2.577

CAPEX 281,294 0.058 0.071 0.014 0.036 0.074

Analyst 281,294 0.226 0.642 0 0 0

Wrd_Competition 281,294 0.365 0.304 0.525 0.257 0.122

Ind_Competition 281,294 0.208 0.085 0.272 0.198 0.147

HiTech 281,294 0.177 0.381 0 0 0

Notes: This table provides the summary statistics for the key variables used in the regression analyses. All variables are deﬁned in Appendix 1.

15. Firmfixed effects cannot be easily included in a nonlinear probit or logit model due to the incidental parameter problem, but they can be included in linear models. Thus, in our analyses using the observations from reform countries, we follow prior studies and use the linear probability model with firm fixed effects (e.g., Guo and Masulis 2015; Klasa et al. 2018). The constant in the linear probability model is a random constant.