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:
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 capitalraising and non-capital raising ADRs a surprise? Why or why not?
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