The following table shows how average share prices jump (in percentage) after the announcement that the stocks will be cross-listed (see Miller, 2000). The price response should be interpreted as corrected for risk and market movements that happened on the same day:
All ADR Issues
Capital Raising
Non-Capital Raising
Why or why not?
Emerging Markets 1.5 0.9 2.8
Developed Markets 0.9 0.7 0.9
Total 1.2 0.8 1.4
Although these numbers appear small, it is important to realize that announcements of domestic equity issues, which by definition raise capital, lead to an average negative return response of 2% to 3%. The main reason is that capital-raising equity issues are viewed as a signal by the managers that the firm may be overvalued in the stock market.
Given what you learned in this chapter, answer the following:
a. Why is there a positive price response when a company's shares are cross-listed?
b. Why might the response for emerging-market firms be larger than for developed-market firms?
c. Without knowing that equity issues in a domestic context are associated with negative price responses, is the difference between capital-raising and non-capital-raising ADRs a surprise?