Financing constraints and US cross‐listing

• DOI: http://doi.org/10.1002/cjas.1287
• Published date: 01 September 2014
• Date: 01 September 2014

Financing constraints and US cross-listing

Guy Charest

UQAM

Jean-Claude Cosset

HEC

Ahmed Marhfor*

UQAT

Bouchra M’Zali

UQAM

Abstract

This study investigates whether relaxation of f‌irms’f‌inancial

constraints is an important outcome of the US cross-listing

mechanism. We use the association between investment

spending and cash f‌low to test for the presence and impor-

tance of f‌irms’f‌inancing constraints. Consistent with the

bonding hypothesis, the results suggest that US exchange

and private placement cross-listings signif‌icantly alleviate

f‌irms’f‌inancing constraints. In addition, the f‌inancial bene-

f‌its associated with exchange listings are larger than those

associated with private listings, while on the other hand,

over-the-counter programs do not improve capital alloca-

tion. The study also shows that US exchange cross-listing

benef‌its have not been eroded by the enactment of the

Sarbanes-Oxley (SOX) Act in 2002. Copyright © 2014

ASAC. Published by John Wiley & Sons, Ltd.

Keywords: US cross-listing, bonding hypothesis, invest-

ment spending, f‌inancing constraints

Résumé

Cette étude examine dans quelle mesure l’allégement des

contraintes de f‌inancement est un corolaire important du

mécanisme d’inscriptions croisées à la cote américaine. La

relation entre les dépenses d’investissement et la marge brute

d’autof‌inancement est utilisée pour vérif‌ier la présente et

l’importance des contraintes de f‌inancement. Nos résultats

indiquent une réduction signif‌icative des contraintes de

f‌inancement pour les sociétés non américaines qui ont coté

leurs actions sur l’une des bourses américaines. Par ailleurs,

les bénéf‌ices f‌inanciers associés aux inscriptions à des

bourses américaines sont plus importants par rapport à ceux

générés par les programmes privés. Dans le même temps, les

programmes qui se négocient sur le marché hors cote

n’offrent pas de bénéf‌ice f‌inancier similaire aux bénéf‌ices

des programmes boursiers et privés. Nos résultats indiquent

aussi que la réductiondes contraintes de f‌inancement est plus

prononcée après l’adoption de la loi Sarbanes-Oxley.

Copyright © 2014 ASAC. Published by John Wiley & Sons, Ltd.

Mots-clés : inscriptions croisées, théorie du bonding,

dépenses d’investissement, contraintes de f‌inancement

We examine whether cross-listing by non-US f‌irms in

the United States alleviates f‌irms’f‌inancing constraints.

Researchers have offered several theories such as market

segmentation, investor recognition, and bonding to ex-

plain the benef‌its of a US cross-listing. Recent surveys

(e.g., Gagnon & Karolyi, forthcoming) have suggested that

it still matters and continues to impact trading activities, price

discovery, capital allocation, stock liquidity, and cost of

capital for many f‌irms around the world. To date, however,

there has been little evidence showing the consequences of

the cross-listing decision on corporate investment. Using a

statistical methodology developed by Fazzari, Hubbard, and

Petersen (1988), we build on two studies in the literature that

investigate the association between US cross-listings and

f‌irms’investments.

1

A recent paper by Foucault and Frésard (2012) exam-

ines the impact of US cross-listings on investment-to-price

sensitivity. The authors documented a signif‌icant increase

in the sensitivity of investment to stock prices for US

cross-listed f‌irms. According to Foucault and Frésard

(2012), this relation holds because US cross-listings increase

the precision of information conveyed by market prices to

managers. One should expect high investment-to-price sensi-

tivity when stock prices ref‌lect private information not avail-

able to company managers. In fact, this “new information”

may guide managers in making capital-allocation decisions

(managerial learning hypothesis). As a result, stock prices

may impact investment spending. On the other hand, an in-

crease in the sensitivityof investment to stock prices may also

be consistent with the “market misvaluation hypothesis,”be-

cause f‌irms invest more (less)when their stocks are overpriced

(underpriced). Further, this relation is especially strong for

equity-dependent and f‌inancially constrained f‌irms (Baker,

Stein, & Wurgler, 2003). Following this argument, and

*Please address correspondence to: Ahmed Marhfor, University of Quebec

in Abitibi-Témiscamingue (UQAT), 445 boul. de l′Université, Rouyn-

Noranda, Québec, J9X 5E4. Email: Ahmed.Marhfor@uqat.ca

Canadian Journal of Administrative Sciences

Revue canadienne des sciences de l’administration

31: 160–174 (2014)

Published online in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/CJAS.1287

Can J Adm Sci

31(3), 160–174 (2014)Copyright © 2014 ASAC. Published by John Wiley & Sons, Ltd. 160