Jaron H. Wilde and Dr. Erv Black and Peter Johnson, SOAIS
US Stock markets are stable, highly liquid, and wealthy. To benefit from the resources these markets potentially provide many domestic and foreign companies seek to be listed on a US stock exchange. All companies wishing to list must first register with the Securities and Exchange Commission (“SEC”), which regulates listed companies to protect investors and creditors. The SEC requires companies to produce financial statements that demonstrate their financial health and status. These financial statements must meet standards established in US GAAP (Generally Accepted Accounting Principles). Independent auditors audit the statements and attest whether they comply with GAAP.
Foreign companies that list on US exchanges incur substantial costs to reconcile their financial statements to US standards. After reconciliation, the companies must also pay auditing fees to independent auditors, who attest whether the statements are valid. Recent legislation relative to accounting regulation—such as the Sarbanes-Oxley Act of 2002—has only compounded the risk and cost associated with listing on a US exchange. Invariably, these companies expect to ga in substantial funding, recognition, or other benefits that justify these listing expenses. I hypothesized that foreign companies that chose to list on US stock exchanges not only established a highly liquid source of capital, but also created value for owners of their domestic stock, as measured in their domestic market stock price. If a foreign company had a better indication of the incremental value (if any) they would create by listing on a US exchange, it would be better prepared to determine whether its listing costs would be justified. My research is an attempt to demonstrate whether listing actually creates that incremental value.
To explore the issue, I used an event study methodology, which examined the value of the company prior to and after the company’s listing on the US market. To do this I needed to discover what companies are listed on both a foreign and US exchange; from among these I needed to pick my sample of companies from a common country, find out what day each listed on the US exchange, and then gather the company’s closing stock price data for each day in a five-day test window surrounding that list day. I also needed to gather information on market fluctuations for each of those days in the domestic market to be able to analyze how much of the individual firms’ changes were connected to market changes versus listing.
My mentors and I agreed that the New York Stock Exchange (“NYSE”) would be the most appropriate US exchange to use, being the largest and most recognized market in the world. The NYSE website provided files of all foreign firms listed as of a given year.1 I chose to use the 2001 file because when I began the research, the 2002 financial statement data would not be completely available. For my sample source I selected UK firms because (1) they share similar accounting standards and (2) the available data is in English and is more accessible than that of other foreign firms. The NYSE website provided the dates each firm listed on the exchange, its name, industry, and US symbol.
The closing stock price data in these firms’ domestic market—the London Stock Exchange (“LSE”)—was not available in any database, so I used the LSE website2 to discover each firm’s LSE symbol. I then compiled the closing stock price for each firm for each day of the five-day test window using Yahoo Finance3, a well-respected data source among academics.
Throughout the process I consistently screened the sample. Initially, I eliminated listings that were not of the same stock class (e.g. preferred instead of common); next I removed listings of all banks, as reporting standards can be different for banks than for traditional firms; finally, I removed all listings that dated back more than fifteen years because daily stock data was not available (within my given source) for such periods. The sample originally consisted of 53 firms; by the end, my screenings reduced the sample size to twenty- four.
For my control group, I used the FTSE 100 index. This index is comparable to our S&P 500 in that it represents general market movements in the LSE similar to how the S&P 500 represents general market movements in the NYSE. I collected the closing index price for every day for which I had closing price data for the individual firms.
I calculated the percent retur n of the individual stock prices in the LSE from two days before the list day to the list day and then calculated the total average percent return for all the listing firms’ stocks (the return from two days before the list date to the list date for each firm). Then I calculated the percent change of the FTSE 100 closing price for the respective days for which I had calculated the individual stock returns and computed the same total average return for the index. To isolate the amount of return associated with listing, I subtracted the total average percent return for the FTSE 100 from the total average percent return for the individual listing firms’ stocks. The difference was ~1.2 percent, which represents an additional return above the average LSE market return for the days the companies listed on the NYSE.
Management’s primary responsibility is to maximize shareholder wealth. From this research we infer that by listing on the NYSE, foreign companies not only establish a venue to raise capital for profitable projects, but also create incremental value for holders of domestic stock. At a 1.2 percent increase in one day, a firm with $100 MM in market capitalization (share price * number of shares outstanding) would create $1.2 MM in value for its holders of domestic stock.
After reviewing the results of this project, my mentors and I resolved to conduct further research into the issue. We aim to expand the sample size by also including listed Canadian firms; we need data on at least thirty firms—but intend to collect such data for fifty or more—to perform reliable statistical analysis. This research infers that there is a quantifiable benefit created on the actual list date—as measured by the firms’ domestic stock prices; however, we will also explore the effect that each company’s announcement to list has on domestic share returns (above returns from market fluctuations). We would expect any value created from listing to actually appear at the time of a company’s list announcement, if the market is efficient. This more comprehensive event study coupled with appropriate statistical analysis will help us better determine the incremental value (if any) foreign companies create by listing on US stock exchanges.
References
- http://www.nyse.com/international
- http://www.londonstockexchange.com/
- http://uk.finance.yahoo.com/