Protection of minority shareholder interests, cross-listings in the United States, and subsequent equity offerings

This paper examines the hypothesis that non-US firms cross-list in the United States to increase protection of their minority shareholders. Cross-listing on the NYSE or Nasdaq subjects a non-US firm to a number of provisions of US securities law, and requires the firm to conform to US GAAP. It therefore increases the expected cost to managers of extracting private benefits, and commits the firm to protect minority shareholders’ interests. The expected relation between the quantity of cross-listings and shareholder protection in the home country is ambiguous, because managers will consider both expected private benefits and the public value of their shares. However, there are clear predictions about the relation between subsequent equity issues, shareholder protection, and cross-listings: (1) Equity issues increase following all cross-listings, regardless of shareholder protection. (2) The increase should be larger for cross-listings from countries with weak protection. (3) Equity issues following cross-listings in the US will tend to be in the US for firms We thank Jack Coffee, James Fanto, Jim Hsieh, Paul Irvine, Rafael La Porta, Saul Levmore, Amir Licht, Florencio Lopez-De-Silanes, Julio Lugo, Paul Meskiewicz, Darius Miller, Roberta Romano, Jordan Siegel, Vijay Singal, Rene Stulz, Elliott Weiss, Marc Zenner, Bill Schwert (the editor), Stephen Foerster (the referee), and seminar participants at Purdue, Texas, Tulane, Virginia Tech, the 2000 WFA Meetings, the 2000 European FMA Meetings, and the 2000 FMA Meetings for helpful comments. The NSF (Grant SBR-9616675) provided financial support. *Corresponding author. College of Commerce and Business, University of Illinois, Champaign, IL 61820, USA. E-mail address: [email protected] (M.S. Weisbach). 0304-405X/02/$ see front matterr 2002 Elsevier Science B.V. All rights reserved. PII: S 0 3 0 4 4 0 5 X ( 0 2 ) 0 0 1 5 1 4 from countries with strong protection and outside the US for firms from countries with weak protection. We find evidence consistent with each of these predictions. Overall, the desire to protect shareholder rights appears to be an important reason why some non-US firms cross-list in the United States. r 2002 Elsevier Science B.V. All rights reserved. JEL classification: G32; G38; K22