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University of Amsterdam, Amsterdam Business School
Master in International Finance
Master Thesis
Cross-listing and Delisting Decisions: Evidence from
Chinese Firms in the U.S
September, 2013
Supervisor: Rafael Matta Student: Yanwen Gui
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Abstract
Many theories and researches emphasize varies advantages of cross listing on foreign markets, such as reduce market segmentation, reduce cost of capital and improve governance. While some studies suggests increase market integration and high compliance cost caused decline of foreign companies to seek cross delisted in the U.S. This study will provide descriptive statistics on Chinese firms’ perspectives on cross listing in U.S. during 2007 to 2012. Over this period 144 Chinese firms are currently active in U.S. equity market and 38 companies cross delisted due to merger and acquisitions, involuntary or voluntary reasons. It examines varies factors that motivate Chinese companies to cross list and delist in the U.S., and suggests growth opportunities and firm valuation is the key drivers of Chinese management decision. One challenge for the Chinese firms to generate cross list benefit is to effectively utilize leverage to create value. This is not supported by underdeveloped domestic financial market. Unexpectedly, liquidity is not a consideration to Chinese companies, while prices development is a more important factor that decides whether they are able to attract U.S. investors and further justify continued cross listing.
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Table of Content
1 Introduction ... 4
2 Literature review ... 6
2.1 Theory review ... 6
2.1.1 Market segmentation Theory ... 6
2.1.2 Liquidity Theory ... 6
2.1.3 Bonding Hypothesis ... 7
2.1.4 Competitive hypothesis ... 7
2.2 Empirical literature review ... 8
3 Listing and delisting requirements on major U.S. exchanges ... 11
3.1 The new rule 12h-6 ... 11
3.1.1 Quantitative and financial criteria ... 11
3.1.2 Qualitative Criteria for Listing ... 13
4 Hypothesis and Measurements ... 14
4.1 Main research question: ... 14
4.2 Measurement variables ... 14
4.2.1 Tobin’s ɋ ... 14
4.2.2 Return on Asset & Return on Equity ... 15
4.2.3 Market to Book Ratio... 16
4.2.4 Earnings per Share Ratio ... 16
4.2.5 Adjusted Trading Volume ... 16
4.3 Methodology and Data ... 17
4.3.1 Methodology and Model Specification ... 17
4.3.2 Data ... 18
5 Empirical results and discussion... 19
5.1 Comparison by sector ... 19
5.2 Descriptive Statistics on independent variables ... 21
5.3 Cross Delist Decision and Firm Valuation Empirical Results ... 22
5.3.1 Result on all samples ... 22
5.3.2 Closer look at Delist sample ... 25
6 Conclusion ... 26
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1 Introduction
Since early 1990s, increasing companies from the emerging market chose to cross-list in foreign exchanges. After reform capital market in 2001, and reform exchange rate in 2005, increasing Chinese firms also joined this trend of cross listings. By 2008, over 800 Chinese firms listed in several major stock exchanges around the world. In particular of U.S. exchange, 88 Chinese companies listed on NYSE and NASDAQ through IPOs during the period of 2007 through 2012. Meanwhile, there are also increasing number of relatively smaller Chinese companies gained listings by reverse mergers, which is to buy company that was already traded on a U.S.
Chinese companies consider cross list in the U.S will come with a certain benefits; Firstly, it is considered to be cheap to raise capital. Secondly, it will help to create a liquid market outside China for Chinese shareholders. However, some considered recognition and prestige for the company is actually the important reason for going public in the U.S. The recognition and prestige of especially banks and local government officials is extremely important for a small Chinese company, this is due to the fact that business success in China is largely based on networking and GuanXi, status and prestige, especially for young companies.
However since 2011, there has been a wave of delisting from U.S. market by Chinese firm, These Chinese firms are now seeking future privatization opportunities or find new investors domestically and elsewhere. By the end of 2011, about 65% of US-listed Chinese companies saw average daily transaction volumes fall to less than 100,000 shares.
This pheromone has attracted great interest in financial literature to examine the motivation of cross listing decisions. Financially, due to market segmentation, firms can expect to gain lower cost of capital because their shares are more accessible by foreign investors and cross listing in more liquid equity market increase liquidity of their stocks; A recent Bonding Hypothesis argues that by cross listing, firms signal their commitment to higher standard of corporate governance, which enhances investor protection, therefore attracts more investors. Strategically, firms who seek cross listing were also motivated by increasing visibility of the firm and product in international market. Moreover, existing literature supports liquidity and awareness hypotheses, as firms are more likely to delist when they have a lower percentage
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of turnover in the U.S. And NASDAQ-listed firms are more likely to cross –delist as it’s less regulated and less liquid, considering majority of Chinese firms cross listed on NASDAQ. Some studies provide evidence from European’s and large Canadian companies’, that, these companies delisted from U.S. market were due to increase market integration and high cost of SOX compliance, thus the benefit didn’t outweigh the cost. Do these motivations apply to Chinese firm in term of their decision to reverse cross listing in U.S?
I examine this question by firstly identifying 144 Chinese firms who are currently active in U.S. equity market and a sample of 38 firms who left during the period of 2007 through 2012. I further collected data to formulate potential factors from CRSP database, such as Tobin’s q, ROA, ROE, Price earnings ratios, market-book ratios and trading volume. An ordinary least square regression was applied to test the correlation between these factors and cross delist decisions. For the delisted firms, these factors are measured one year prior to delisting. To take a closer look at delisted firms, I run the same regression with a focus on delisted samples, and compare the results between voluntary delisted and involuntary delisted companies. The study shows continued listed Chinese companies have higher profitability and were able to archive bigger market valued those who left U.S equity market. There is significant correlation between firm value and cross delist decision, while the result on ROA and ROE is mixed, which suggests that delisted companies has lower leverage ratio than continued listing companies. This is reflected on market value which further supports significant correlation between firm valuation factors on cross listing and delisting decision. Results also show significantly positive price earnings ratio impact on cross list decision, while unexpectedly there is no evidence on trading volume factors. This indicates share price has stronger impact on generating market value for Chinese companies, liquidity on trading volume is very sensitive to price change, thus, share price development is an important factor for Chinese firms to attract U.S. investors and to continue realize cross list benefit.
This study support market segmentation theory and bonding theory that profitability growth and the ability to generate firms’ valuation premium are main factors that influence Chinese companies’ cross listing decision. It also provides evidence on competitive theory that due to information asymmetric and culture reasons, delisted companies will seek opportunities in other exchanges after delist in U.S, mainly Asian market such as domestic, Hong Kong and Singapore. However this studies is not able to provide evidence to support Liquidity theory. This will be further discussed by future studies.
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2 Literature review
The growth of cross listing activities during 1990s has attracted a lot of research interests. Traditionally firms listed overseas primarily for financial reasons such as raising cheap capital and increasing liquidity, but strategic reasons such as enhancing visibility or gaining entry into foreign markets are becoming increasingly important in recent years. In this section, I will review the prior theory and literature related to my study.
2.1 Theory review
2.1.1 Market segmentation Theory
Theory of market segmentation was explained by Alexander, Eun, and Janakiramanan (1988), that a shift from market segmentation towards integration reduces the systematic risk of stock, and increasing the price of the stock. The lowering cost maybe different due to tax rate difference, interest rate parities, inflation, reporting standard, exchange rate and regulation requirement. It predicts that stock prices will rise due to market integration. Therefore, before cross listing, firms’ market capitalization will increase, and firm assets will increase after cross listing. Morten (1987) further suggests that integrating market and removing cross border barriers to investment, such as regulatory restriction, direct costs, or information asymmetric, which will allow for more efficient diversification. This theory predicts in response to cross listing, stock prices will rise in home country and a firm’s cost of capital will decline. There has been extensive empirical studies tested this hypothesis. Each of these predictions has been tested extensively and the findings are consistent with the hypothesis. In relate to Market segmentation theory, Investor recognition Merton, (1987) assumes that investors have incomplete information about foreign securities and cross listing mitigates these information asymmetries.
2.1.2 Liquidity Theory
The market liquidity theory (Amihud and Mendelson, 1986) point out that returns are an increasing function of illiquidity as measured by bid-ask spreads. Fanto and Karmel (1997) and (1992) find that managers cross-list to increase the liquidity of their stock. Some other studies argue that by listing their stocks in foreign markets, the companies have access to more liquid markets with larger capital. This will improve the firms’ liquidity. As a result, trading volume of firms stock will increase. On the other hand, the benefit of improved
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liquidity due to cross-listing will be lost with cross delisting. Thus one contributor to why foreign firms may fail to realize the benefits of listing are that their performance drops that cannot achieve necessary greater investor recognition, liquidity, or capital raising.
2.1.3 Bonding Hypothesis
Coffee (1999, 2002) and Stulz (1999) are the first to point out bonding hypothesis. They argue that by bonding to more rigorous governance standards, firms with poor home country corporate governance improves access to capital, which, in turn, lowers the cost of capital and increases the value of the firm. Cross-listing limits the ability of controlling shareholders to take private benefits from their firms, but it also provides external finance and funds firm’s investment opportunities. A sizable literature has tested the bonding hypothesis, by examining the firms’ valuation premium with and without cross-listing; it shows a significant positive valuation premium for firms cross-listed in the U.S. On the other hand, the bonding theory also explains firms’ cross delist decision. Studies indicate firms with no growth opportunities and poor governance are tend to delist because benefit from listing has disappeared. Contrary to the bond hypothesis, Witmer (2005) found out firms are more likely to voluntarily cross-delist if they are from countries with weaker investor protection, or cross list in less regulated markets. Particularly, the cost associated with SOX altered firms’ listing decisions away from the U.S., voluntary delisting are low-quality firms, namely firms with lower profitability, assets, and market capitalization, with poor pre-SOX stock price behaviour and lower analyst coverage. Similar finding also report that smaller firms, which are less able to absorb the costs of listing, and more poorly governed firms are less likely to list in the U.S. given SOX. Hostak (2007) find that voluntarily delisting firms are typically firms with weaker governance. These firms delist not to avoid the excessive costs but to avoid the additional regulatory constraints by SOX.
2.1.4 Competitive hypothesis
Thomas and Paolo (2003) examine how standard competition among exchanges affects cross listing choice. Their paper shows that while exchanges use their listing standards as a tool to compete for listings with other exchanges, this will not necessarily lead to a ‘‘race to the bottom’’ in listing standards. By contrast, high-reputation exchanges set high listing standards and become first-tier stock markets, while low-reputation exchanges set lower listing standard and become lower tier markets. (Doidge, Karolyi, and Stulz 2008) suggests
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even firms with growth opportunities and the need for external finance are likely to cross-delist because of the associated costs. SOX typically impose additional cost on cross listing firm, which overweight benefit. In this situation, firms are overregulated, resulting in excessive costs and low or even negative benefits from listing.
2.2 Empirical literature review
Managerial research have been conducted on European and Canadian firms that listed in the U.S. (Bancel and Mittoo,2001), managers from both countries gave similar reasons for their cross listing decisions; European companies consider increased liquidity and prestige and image as most important benefit of cross listing. Studies also shows only 12% of the managers believe that cross listing did not deliver benefit. For Canadian managers, growth of shareholder base and appeal to foreign investors are considered to be most important, followed by increase access to foreign capital market.
Extensive literature has tested the market segmentation, liquidity and bonding hypotheses by estimating a firm’s cost of capital. The prediction is that cross listing leads to a reduction in the firm’s cost of capital. Foerster and Karolyi (1999) and Errunza and Miller (2000) examine the effects of cross listings on the cost of capital. Foerster and Karolyi modeled the returns on cross listed stocks as a function of the returns on their domestic market index and the returns on a World Index. They conclude that the cross listing firms were successful in lowering their cost of capital. Errunza and Miller (2000)‘s research model try to express the returns as a function of the domestic and World Index betas. They predict that if markets are segmented, cross listing will lead to a reduction in the cost of capital that will manifest itself as a reduction in post listing buy and hold returns relative to the pre listing buy and hold returns. The post listing buy and hold returns will be lower because the mirror image of a lower cost of capital is a lower required risk-adjusted rate of return.
Market value is a significant determinant of cross-delisting, indicating that larger firms are less likely to cross-delist. This is consistent with the results in Pagano (2001), who find that larger firms are more likely to cross-list and their hypothesis that smaller firms are less able to absorb the fixed cross-listing costs. Witmer(2008), by looking into Canadian firms examples, conclude cross-listed firms that get delisted from NASDAQ, who make up more
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than 40% of Canadian NASDAQ -listed firms, experience low levels of liquidity in the U.S. while cross-listed. The median NASDAQ-listed Canadian firm that eventually becomes involuntarily delisted trades on only 90% of the days, suggesting minimal liquidity benefits of cross-listing for many NASDAQ listed Canadian firms. Same study also indicate that cross delisted smaller firms are more likely to be involuntary delisted, Canadian firms smaller than $100M in total assets are more than three times more likely to get delisted than small foreign firms. Leuz, Triantis and Wang (2004) examine U.S. delisted companies, and find negative abnormal returns at delisting announcement, with a sharp drop in liquidity, which is calculated by volume and the bid ask spread.
However other studies argue exchanges who actively sought new listings as a way to generate revenue for the exchanges, thus lowering of listing standards leads to sharp rise in low quality firm access to the capital markets. Delisting these low quality firms is one way for exchange to remove “mistakes”. Macey, O’Hara and Pompilio (2005) shows that delisting is a reactive process, which mean the exchanges eventually removing firms after some malfeasance or insolvency is publicly reported. Its hypothesis is that exchanges delist when it appears that firms may be unable to pay on-going listing fees. And there is little evidence of exchange expeditiously removes errant firms, delisting for corporate governance short-comings rarely happens. In support of competitive theory, exchanges are now facing competition, which causing changes in exchange business models and corporate governance alike when they evolve to meet new economic realities. Such as their competition on listing fees, delisting practices are lower priority.
In support of the bonding theory, growth opportunities are considered to be one of the main factors on firms’ cross list and cross delist decision. In Tobin’s (1969, 1978) original formulation, Tobin’s q captures the ratio of market value to the replacement cost of production assets at the margin. Besides Tobin’s q, methods for accounting profit such as ROA and ROE as the measurement of firm performance have been used widely. As in Doidge (2004), firms that cross-list have more growth opportunities are more in need of external finance. Thus these firms should receive a higher benefit from cross-listing. They find that US cross-listed firms have a Tobin’s q that is 17% higher than foreign firms that are not listed in the US. In addition, firms that list on a major US exchange have a Tobin’s q that is 37% higher than these other firms. Moreover, Leuz (1994) identify characteristics of deregistering firms and find that these firms have fewer growth opportunities, fewer
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institutional shareholders, lower stock returns, and are smaller than going private firms. Doidge (2010) more recent studies show one of the reasons that foreign firms cross-listed in U.S. delists is due to low growth opportunities or they no longer require external funds to finance their growth.
Liu (2011) examines impact of bonding corporate governance practices (mechanisms) on firm valuation in the context of Chinese cross listing firms. The results suggest that Chinese cross-listings exhibit a bonding premium only in the U.S. markets rather than exchanges in other countries. Further, the results reveal that for all the listed Chinese firms, profitability rate and the leverage ratio play a positive role in improving the firms’ performance. The adoptions of international accounting standards have less effect on Chinese firms’ performance. The study suggests that merely borrowing a corporate governance mechanism does not guarantee the improvement of the firm performance. Overall, the results revealed that the non-cross-listed Chinese firms outperform cross-listed Chinese firms in all of the foreign markets with the one exception of the cross-listings on the NASDAQ market.
Hamet (2012) research argues that the motives and the consequences of cross listing could vary with the geographic location of the company, the development of its home market, its jurisdiction, or its industry. Chinese cross-listed firms are mostly in technological industry. The reason why Chinese companies seek mostly a primary listing in the US, could be attributed to the lack of development of the domestic stock market. Meanwhile significant information asymmetry between Chinese and foreign investors negatively affects stock prices. However, China is also the only large emerging market that has not reach an agreement with the SEC for information sharing.
Other related study compared Chinese firms listing in Hong Kong and in U.S. Yang and Lau (2004) pointed out that the benefit for Chinese firms to cross list in the U.S. is less than those with a Hong Kong listing. Particularly, Chinese firm listed in Hong Kong has better information environment, Chinese firms listing in the U.S. has higher financial constraint than those listed in Hong Kong which may due to their ability to access U.S. capital market for external financing.
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3 Listing and delisting requirements on major U.S. exchanges
3.1 The new rule 12h-6
In March 21,2007, a new Exchange Act Rule 12h-6 was proposed on delisting process in the U.S., firms can qualify for deregistration if less than 5% of worldwide average daily trading volume take place on U.S. markets. After SEC adopted this new rule, it becomes substantially easier for companies who wish to leave delisted from the exchanges, which leads to sharp rise of number of delisted companies. Average stock price reaction to the adoption is insignificantly negative, and it’s concentrated in firms from countries with weaker home country disclosure requirements.
Related studies argue that exchanges who actively sought new listings as a way to generate revenue for the exchanges, thus lowering of listing standards leads to sharp rise in low quality and smaller firms access to the capital markets. Delisting these low quality firms is one way for exchange to remove “mistakes”. Macey, O’Hara and Pompilio (2005) shows that delisting is a reactive process, which mean the exchanges eventually removing firms after some malfeasance or insolvency, is publicly reported. Its hypothesis is that exchanges delist when it appears that firms may be unable to pay on-going listing fees. And there is little evidence of exchange expeditiously removes errant firms, delisting for corporate governance short-comings rarely happens. In support of competitive theory, exchanges are now facing competition, which causing changes in exchange business models and its own corporate governance when they evolve to meet new economic realities. Such as their competition on listing fees, delisting practices are lower priority.
3.1.1 Quantitative and financial criteria
To qualify for listing on NYSE and NASDAQ, a foreign issuer, an American Depositary Receipt (ADR) or similar security issued in respect of a security of a foreign issuer shall satisfy a set of requirement. There are different requirements for domestic firms and foreign firms to be listed in the U.S. major exchanges. NYSE requires domestic companies to have a minimum number of shares and shareholders; For foreign companies, NYSE has stricter standard in terms of their requirement. However, they may use their global distribution of shares rather than its U.S. distribution to meet the standards. NASDAQ allows foreign
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companies to use home market shares to meet the listing criteria if the ADRs do not qualify; NASDAQ, however has other requirements, for example, any company listing common stock is required to disclose their equity compensation plans to NASDAQ. Companies listing only ADR do not have to provide this disclosure to NASDAQ.
To maintain the exchange’s reputation and they eliminate companies which are unprofitable to the exchange. Therefore, after a company gets listed on the market, it must maintain certain standards to continue trading. NYSE and NASDAQ may suspend a company or delist a company for failing to meet certain criteria. Falling below the minimum required share price, or market capitalization, is one of the major factors triggering a delisting. They can also delist a company if its corporate governance does not meet its requirement.
Table 3.1
NYSE NASDAQ
Initial Listing
Total Shareholders 5000 2200
Public share 2.2MM 1.25MM
Aggregate Pre-tax Income for last 3 years $100MM $11MM
Global Market Capitalization $500MM $550MM
Revenues (most recent 12-month period) $100MM $110MM
Aggregate Cash Flow for last 3 years $100MM $27.5MM
Market Value of Publicly Held Shares $40MM $45MM
At least 12 months of operating history Yes -
Bid price $4.00 $4.00
Continued listing
Minimum average closing price over a consecutive 30 trading-day period $1.00 $1.00 Average global market capitalization over a
consecutive 30 trading-day period is less than $15MM $5MM
Publicly Held share 600000 750000
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3.1.2 Qualitative Criteria for Listing
There are also qualitative criteria for listing and continued listing from these major exchanges. If a company is below compliance with continued listing standards or has failed to make a timely filing with the Securities and Exchange Commission. The exchanges can decide to suspend and delist a company due to poor corporate governance, impending bankruptcy or protection of public interest. Comparing with domestic companies, foreign companies however sometimes are exempt from governance requirements. For example, as long as the company’s practices are not prohibited home country law and it is disclosed in annual reports to the S.E.C., they may not meet a certain requirement as domestic companies. However, such as audit committee requirements need to be met regardless domestic or foreign companies as below table.
Table 3.2
Basis of Preparation Balance Sheet Statements of Income, Cash Flow and Changes in Stockholders’ Equity, Comprehensive Income Audited annual financial statements
US GAAP 2 years 2 years
IFRS 2 years 2 years
Home country GAAP
2 years
reconciled to US GAAP
Three years with the two most recent years reconciled to US GAAP
Unaudited interim period financial statements*
US GAAP, IFRS or Home Country GAAP
At least as of the end of the first six months
For period from the latest fiscal year-end to the interim balance sheet date, and for the corresponding period in the prior fiscal year
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4 Hypothesis and Measurements
4.1 Main research question:
What are the factors govern Chinese firms’ decision on list and subsequently cross-delist in the U.S.?
And the study will address below sub questions:
What is the connections between Chinese firm cross listing decision in the U.S. and the company valuations;
Does these factors play a different roles
Does Chinese firm cross listed behaviour support bonding hypothesis What is the connection between firm size and cross delisting;
Do these factors have same impact on cross delist decision between voluntary delist and involuntary delist?
4.2 Measurement variables
To study whether there is firm performance has impact on Chinese company’s continued listing decision. The chosen performance measures are summarized as following:
Table 4.1
Variable name Notation
(i) Tobin' s ɋ ΔTOBIN
(ii) Return on Asset ΔROA
(iii) Return on Equity ΔROE
(iv) Market-to-Book ratio ΔMtB
(v) Earning per Price ratio ΔMtB
(vi) Adjustment Trading Volume ΔATV
(vii) Minimum Price Requirement ΔMPR
4.2.1 Tobin’s ɋ
The Tobin q has been considered one of the most extensively used performance measurement on firm performance, in particularly, the relationship between managerial equity ownership and firm value, as well as the relationship between managerial performance and tender offer
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gains, investment opportunities, financing, dividend, and compensating policies (Wolfe, 2003) The advantage of using Tobin's q is that the difficult problem of estimating either rate of return or marginal costs is avoided. In Tobin’s (1969, 1978) original formulation, Tobin’s q calculate market value to the replacement cost of production assets at the margin. Due to the difficulty of computing the replacement of cost of assets, the proxy for this is will be book value of assets.
Tobin’s q will be computed with below formula, all variables in the Tobin’s q calculation will be obtained from CRSP database:
Besides Tobin’s q, other accounting profit variable ROA, ROE and profitability as the measurement of firm performance will be tested. Intuitively, profitability variables, which will be calculated as earnings before interest and tax divided by the total assets, will have positive impact on cross list decision and negative impact on delisting decision.
4.2.2 Return on Asset & Return on Equity
ROA is calculated by taking the net result over assets. ROA measure how efficiently the company’s assets are used to generate profit. The ratio is often used by investor and potential investors to evaluate a company’s performance. ROA is popular in practice to compare company between different industries.
ROE is calculated by taking the net result over shareholders’ equity. ROE measures what return the company is making on shareholder’s funds invested in the company. A high ROE return means the business is capable of generating profit.
Bother ROA and ROE are subject to accounting practice, which would bias evaluation on current management decisions and their risk of investment decision. However due to ease in accessing these measures and the wide knowledge of both, we decide to use these ratios.
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4.2.3 Market to Book Ratio
In the studies variable growth opportunities will be measure by Market-to-Book, and 3 years annual revenue growth firm performance. I will expect this variable to positively impact cross listing decision and have negative impact on delisting decision, which means larger Chinese companies and less likely to delist.
4.2.4 Earnings per Share Ratio
Earnings per share measure the amount of earnings of each outstanding share by a company. Stock holders pay very close attention on EPS, as net income are expected to be communicated to them on a per share basis, in such a way they can easily compare it with market price of the shares. Investors do not focus on per share values but more interested in the business’s total net income. Bancel and Mitto (2002) examine that earning per share is considered to be as important factor in issuing equity by around 66% of managers. In this study, EPS will be calculated by
4.2.5 Adjusted Trading Volume
A loss in liquidity is often cited as one of the main reasons for the negative returns on delisting, higher liquidity can translate into a lower cost of capital. Study shows that listing increased liquidity significantly over time, suggesting broader acceptance and interest in foreign shares. The bid-ask spread is relatively high and somewhere between 6% to 25% of the trading days within the first six months of listing have zero trading volume for foreign firms.At 12 months after listing, a higher percentage of days have zero trading volume.
There are number of factors used in prior studies as indicators of liquidity, in this study, we will use adjusted volume, which is trading volume ÷ shares outstanding and days with positive trading volume as indicator to explain acceptance level and interest in these Chinese shares.
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4.3 Methodology and Data
4.3.1 Methodology and Model Specification
To capture the relationship between the variables and the listing/delisting decision, the following equation is formulated base on our literature review and variables description:
ε
Where
i = 1, 2, 3…, N, refers to a cross-section unit (Chinese cross listed firms in the U.S.); t = 1, 2, 3 …, T, refers to time period (2007–now).
The coefficients measure the sensitivity of the decisions of these variables.
Dependent variable Y takes the value 0 if the firm decide to stay in listing in the U.S., and value 1 if the firm decide to delist. For the delisted firms the independent variables are measured one year prior to delisting.
To test whether these factors have same impact on cross delist decision between voluntary delist and involuntary delist, I focus on delist sample, and apply the same ordinary least square regression as below on both voluntary delist dataset and involuntary delist dataset;
Where
i = 1, 2, 3…, N, refers to Chinese firms who voluntary/ involuntary delist from U.S. exchange, t = 1, 2, 3 …, T, which refers to time period (2007–now).
The coefficients measure the sensitivity of the decisions of these variables.
In the case involuntary data panel, dependent variable Y takes the value 0 if the firm voluntary leave U.S. exchange, and value 1 if the firm decide to delist. For voluntary panel, dependent variable Y takes the value 0 if the firm involuntarily delisted by stock exchanges, and value 1 if the firm decide not to continue listing.
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4.3.2 Data
The data sample contains 182 Chinese companies that are cross-listed on a major U.S. exchange between 2007 and 2012. To collect the data sample, I identify all Chinese companies in CRSP database and then filter by stock exchange code of NYSE, Nasdaq, the American Stock Exchange and OTC markets in the form of ADRs. CRSP database provide active/inactive status marker, which indicate whether a company is still actively listed. As I find out this information is not entirely accurate, I manually checked it on company websites, and other internet source, to verify these companies are indeed delisted and I conclude my sample of 144 active companies and 38 delisted companies. I then download a set of financial data over the period of 2007 to 2012 (end of fiscal year). I analyse the sample of 182 Chinese companies, 15 of them are voluntarily delist while the rest of 23 are involuntarily delist.
Table 4.2 Data sample of Chinese companies by sector over the period of 2007-2012 Sector Total No. of companies No. of listing No. of delisted
Consumer Discretionary* 38 32 6 Consumer Staples** 18 13 5 Energy 9 5 4 Financials 9 8 1 Health Care 15 10 5 Industrials*** 18 11 7 Information Technology 58 50 8 Materials 14 13 1 Telecommunication Services 1 0 1 Utilities 2 2 0 Overall 182 144 38
*Consumer Discretionary consists sub sectors of Automobiles, Consumer Durables & Apparel, Hotels Restaurants & Leisure, Media and Retailing;
**Consumer Staples includes industry such as Food &Drug retailing, Food Beverage & Tobacco, Household &Personal products;
***Industrial includes sub sectors such as Capital Goods, Commercial & Professional Service, and Transportation;
Among the involuntarily delist sample, 13 of them delisted during 2011 and 17 of them delisted in 2012, there are also 6 of the sample delisted at the beginning of 2013 after 2012 fiscal year closed. In table xxx, I analyse the reasons why these companies are delisted by looking up exchange notification and internet source, 57% of them are involuntarily delisted due to non-compliance issue, while 39% is due to not able to meet continued listing requirements from the stock exchange, such as minimum price per share and market value of public held share.
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Table 4.3 Reasons of delist in the U.S. among Chinese companies
Number of companies 2009 2010 2011 2012 2013 Total
Bankruptcy 1 1
Does not meet continue listing requirement* 5 1 3 9
Non Compliance** 3 8 2 13
No. of Involuntary Delist 1 8 9 5 23
Shift to other exchanges 3 2 5
Merger & Acquisition 1 2 6 1 10
No. of Voluntary Delist 1 5 8 1 15
Total 1 1 13 17 6 38
*Fail to meet listing requirements such as below bid price for significant period of time, minimum US dollars' public float capitalization, average global market capitalization;
**Fail in compliance such as fail to timely file Form 10-K, non-reliance on previously issued financial statements and audit report; question on integrity of the Company's financial statements, its operations and internal controls; cannot respond in full within the time frame that the Exchange has demanded;
For the overall sample of voluntary delisting, merger and acquisitions make up the largest category of 67% from voluntary delist. The other reason is to seek listing opportunity elsewhere in other exchange, in particularly, Chinese speaking market, such as mainland Chinese and Hong Kong’s stock exchange. From an interview with Yang Tianfu, CEO from Harbin Electric Inc, which listed in Hong Kong after leaving U.S. exchange, he said that, “I am tired of the U.S.; we just couldn't communicate with the investors”. This is supported by Hamet (2012) research which argues that significant information asymmetry between Chinese and foreign investors negatively affects stock prices, regardless its growth opportunities and returns. While others mentioned “maintaining the listing has imposed difficult burdens on the Company”.
5 Empirical results and discussion
5.1 Comparison by sector
Table 1a and 1b outline the characteristics of continue listed and delisted Chinese companies in the U.S., the data is obtained from CRSP for market value, holding period return, trading volume and outstanding share, to calculate adjusted trading volume. Intuitively smaller
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Chinese firms are smaller companies in terms of market value compared with those Chinese companies who continued listing in the U.S. This is consistent with Pagano (2001), and Witmer (2008) study, which indicate that cross delisted smaller firms are more likely to be involuntary delisted. It can be interpreted by liquidity theory, that a firm’s underlying motivation on cross listed in the U.S. is to benefit from increase its market value through lowering cost of capital and visibility. Delisted firms are not able to materialize such valuation benefits as the continued listing firms across all sectors. The comparisons also shows significant lower holder period return for cross delisted companies, which can lead to drop in investors’ interests and directly drop in trading volume. Consistently delisted firms’ adjusted trading volumes are significantly lower than listed firms’ across all sectors.
Table 5.1 Data sample characteristics per sector, market value of Continued cross listed Chinese companies in the U.S. over 2007-2012
Sector No. of
listing Mean Median Min Min % Return
% Standard deviation Adj. trading volume Consumer Discretionary 32 458.92 237.35 40.08 3,732.85 (0.62) 22.00 2771.335 Consumer Staples 13 187.26 114.71 25.86 644.16 (0.94) 21.53 2152.300 Energy 5 22,255.94 152.08 11.96 88,707.63 (1.2) 21.40 628.492 Financials 8 13,854.40 472.15 68.32 108,059.13 0.28 28.08 1488.895 Health Care 10 185.72 83.09 14.04 554.73 (0.74) 18.54 332.278 Industrials 11 914.02 179.73 43.32 3,855.74 (0.65) 23.68 1221.806 Information Technology 50 860.27 359.66 25.17 4,351.39 (0.34) 21.25 11519.983 Materials 13 416.03 114.59 30.06 2,967.36 (0.15) 27.77 1605.005 Telecommunication Services 0 - - - - Utilities 2 120.42 120.42 63.50 177.35 (2.02) 24.36 126.007 Overall 144 4,361.44 152.08 11.96 108,059.13 (0.49) 22.68 21847.101
*In this study, holding period return is used to examine actual investor returns. A holding period return is the
change in the total value of an investment in a common stock over some period of time per dollar of initial investment
**Adjusted trading volume is calculated by trading volume divided by common share outstanding, information is obtained from CRSP data.
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Table 5.2 Data sample characteristics per sector, market value of Delisted Chinese companies in the U.S. over 2007-2012
Sector No. of
delisted Mean Median Min Max
% Return* % Standard deviation Adj. trading volume* Consumer Discretionary 6 121.28 123.35 7.38 251.25 (2.52) 24.02 534.945 Consumer Staples 5 123.93 115.48 20.32 253.02 (2.77) 19.04 299.334 Energy 4 167.33 214.47 50.68 249.23 (1.8) 23 378.859 Financials 1 1,172.52 1,172.52 1,172.52 1,172.52 (1.93) 15.28 59.994 Health Care 5 195.61 142.49 32.70 398.46 0.53 21.2 264.557 Industrials 7 209.24 173.67 9.17 456.89 (0.84) 26.74 699.705 Information Technology 8 403.07 122.41 21.15 2,601.52 (0.74) 23.75 1054.781 Materials 1 129.29 124.94 29.66 237.60 (1.88) 21.38 1021.945 Telecommunication Services 1 19,822.73 1.00 2.00 2.00 - 0.13 9.27 194.63 Utilities 0 - - - 0 Overall 38 280.2526625 124.9449 2.00 2,601.52 (1.27) 22.97 4,508.75
*In this study, holding period return is used to examine actual investor returns. A holding period return is the
change in the total value of an investment in a common stock over some period of time per dollar of initial investment;
**Adjusted trading volume is calculated by trading volume divided by common share outstanding, information is obtained from CRSP database
5.2 Descriptive Statistics on independent variables
Table 4 provide the mean, standard deviation, minimum, maximum, skewness, kurtosis of each variable for both continued listing companies and delisted companies between the periods of 2007 to 2012. Data is gathered for all 182 sample companies. Leuz (1994) study identify deregistering firms have fewer growth opportunities. However the result is mixed for Chinese companies. Continue listing companies are 13% higher in Tobin’s q value, with mean value 1.562 and standard deviation of 1.355 against delisted companies’1.379 mean value with standard deviation of 0.915, In terms of Market to Book ratio, continue listing companies have 11.5% higher ratio as expected, reflecting higher market valuation and benefit to justify its stay in the U.S. exchanges. Adjusted Trading Volume figures are also consistent in supporting higher valuation and liquidity; both mean, min and max volumes from continue listing companies are much larger than delisted companies’ result.
However they do not necessary have higher Return on Equity than delisted companies. ROA measure how efficiently the company’s assets are used to generate profit, while ROE is the efficiency in generating profit out of equity. The factor that separates ROE and ROA is the
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leverage ratio, as balance sheet’s fundamental equation shows assets equal liabilities plus shareholders' equity. This suggest that delisted companies in fact has lower leverage ratio than continue listed companies. ROE measures net income only versus equity, it does not show how a company’s uses its financing from borrowing. Delisted companies were able to deliver good ROE ratio without being more effective at using the shareholder ‘equity to grow the companies. This implies that continue listed Chinese companies are able to much effectively utilize leverage to create value for investors than those who left the U.S. market.
Table 5.3 Summary Descriptive Statistics for Variables
This table presents summary descriptive statistics for independent variables of Chinese companies listed in the U.S. between the periods of 2007 to 2012.
Continue listed Company Mean Standard Deviation Min Max Skewness Kurtosis
Tobin' s ɋ 1.562 1.355 0.115 13.415 3.490 19.093
Return on Asset 0.034 0.160 -1.645 1.160 -2.144 28.991
Return on Equity -0.151 4.656 -100.732 24.720 -19.352 423.199
Market-to-Book ratio 2.028 7.463 -83.166 140.111 9.444 258.115
Price earnings ratio 0.238 3.618 -48.621 13.419 -8.837 116.168
Adj.Trading Volume* 2044575.32 3167311.145 18187.42 27459086.8 3.962 22.346
Delisted Company Mean Standard Deviation Min Max Skewness Kurtosis
Tobin' s ɋ 1.379 0.915 0.232 5.253 1.804 3.798
Return on Asset 0.031 0.192 -1.058 0.464 -2.340 8.917
Return on Equity -0.025 1.500 -10.450 10.430 -0.794 34.304
Market-to-Book ratio 1.820 2.814 -3.753 21.891 4.518 26.076
Earning per Price ratio 0.245 1.446 -9.300 4.969 -2.409 14.570
Adj.Trading Volume* 1589537.4 1514695.515 21654.0 7411298.5 1.379 1.668 *Adjusted trading volume is measured by trading volume divided by common share outstanding
5.3 Cross Delist Decision and Firm Valuation Empirical Results
5.3.1 Result on all samplesTable 5.4 display the correlations between the dependent and independent variables for the 699 sample data, it shows all independent variables are effectively distinguishing listing and delist companies’ except ROE. This is consistent with Bonding Theory, which suggests that higher valuation justifies companies’ incentive to cross list and continue listing. It implies
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low firm valuation, profitability and liquidity are more likely to lead to delisted event for Chinese companies in the U.S.
Table 5.4 Correlation coefficient of Variables
DTD* Tobin's q ROA ROE Market-Book ratio Price Earnings Ratio Adj. Trading Volume DTD* 1 Tobin's q -0.12 1.00 ROA -0.15 0.21 1.00 ROE 0.02 0.02 0.16 1.00 Market-Book ratio -0.05 0.26 0.01 -0.87 1.00
Price Earnings Ratio -0.03 0.08 0.55 0.09 0.02 1.00
Adj. Trading Volume -0.05 0.11 0.01 0.01 0.03 0.02 1.00
*DTD as decision to delist is the dependent variable where 1 is to delist and 0 is otherwise.
To further test the Hypothesis, I apply OLS regression on all 699 data sample, as well as on continue listing sample and delisted companies separately. Since the p-value of the test statistics is significant with a value less than 0.00001, the null hypothesis is rejected and fixed effects regression is preferred. The results for delisted decision for Chinese companies in the U.S. are reported in the table 5.5 with significant level of 0.05.
Table 5.5 Regression Analysis Result
All sample Coefficients% Standard Error% t Stat P-value
Tobin's q 1.0433 0.6491 1.607 0.109
ROA -18.2770 6.3398 -2.883 0.004
ROE 0.2388 0.5196 0.460 0.646
Market-Book ratio 0.0452 0.3298 0.137 0.891
Price earnings ratio 0.4348 0.3163 1.375 0.170
Adj. Trading volume 0.0000 0.0000 0.929 0.354
The analysis compares coefficients of each variable, which measures the sensitivity of the decisions of these variables. It examines which characteristics more likely distinguish between Chinese companies that remain listed versus those that delist.
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As shown by table 5.5, the higher profitability ratio has been valued by the markets well, and gives rise to a higher Tobin’s q. The coefficients of Price earnings ratio also has higher sensitivity on the Chinese firm’s decision to stay listed in the U.S. This is consistent with bonding theory that higher profitability companies with growth opportunities are more likely to sustain its listing incentive and archive higher market value, which will motivate them to remained listed.
However, the result is mixed on ROE and ROA, while ROE’s sensitivity is consistent with Tobin’s q, ROA has opposite impact on the decision. It suggest returns driven by high leverage is not Chinese companies’ primary interests through their cross listing in the U.S. They are more focus on how equity performs overall.
This result support empirical studies, which suggest that among all financing methods, Chinese firm choose short-term borrowing, equity financing, retain profit, over debt financing. Chinese typically prefers the equity financing than the debt financing because debt financing is not binding (Chen, 2004). One explanation is that Chinese firms prefer enjoy favourable stock price once they have access to the U.S. exchange market. This is consistent with ROE’s sensitivity result on cross delisting. Another reason is that the Chinese bond market is still very underdeveloped and China’s capital market plays an insufficient role in providing the long-term loans to its companies. Banks are the major or even the only source of firms’ external debt. Typically, only bigger companies or state own companies has better access in debt financing. As such, leverage ratio is not a consideration factor at all to the Chinese companies to decide cross listing, even we see ROA ratio is stronger for continue listed companies than those who delisted in the U.S.
As Market to book ratio, which can be also measure by price per book ratio, is considered not directly provide information on the ability of the firm to generate profit or cash for shareholders, therefore it is relatively insignificant in helping Chinese companies to generate higher market value, thus has weaker sensitivity on Chinese companies’ decision on delisting.
Since trading volume and security purchases directly express investor interest on a firm, it is unexpected to see adjusted trading volume merely influence on the delist decision, while both price and market value show positive. This indicates share price has stronger impact on
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generating market value, liquidity on trading volume is very sensitive to price change, thus, to attract U.S. investors’ attention, U.S. listed Chinese companies will need to maintain greater share price development. This is consistent with previous analysis that even though return of delisted companies is generally better than continue listed companies, they may not be able to benefit from market valuation if their share price is traded at discount.
5.3.2 Closer look at Delist sample
To examine the impact on voluntary and involuntary delist companies, I run the same regression on delist sample only. In table 5.6, it shows a summary of regression result on both sample set.
Table 5.6 Regression Analysis Result on delisted sample
Voluntary delisted sample Coefficients% Standard Error% t Stat P-value
Tobin's q 27.3585 5.8087 4.709897 0.00000
ROA -46.995 40.3831 -1.16372 0.246827
ROE -6.099 4.1591 -1.46644 0.145123
Market-Book ratio -5.78 3.0998 -1.86477 0.064636
Price earnings ratio 4.1043 5.464 0.751142 0.454026
Adj. Trading volume 0.0000 0.0000 3.45642 0.000756
Involuntary delist sample Coefficients% Standard Error% t Stat P-value
Tobin's q 21.565 5.6129 3.842031 0.000196
ROA 2.3973 39.0219 0.061435 0.951114
ROE -1.697 4.0189 -0.42233 0.673531
Market-Book ratio -2.007 2.9953 -0.6699 0.504200
Price earnings ratio 2.3887 5.2798 0.452411 0.651783
Adj. Trading volume 0.0000 0.0000 1.648428 0.101859
Comparing the impact of each criteria on both sample set, I observe Tobin’s q value is the most important factors on both voluntary delist and involuntary delist decision. This suggests both delist groups who left U.S. market were not able to realize their primary initial cross list intention of creating market value to the replacement cost of production assets; However ROA and ROE results are mixed. ROA is a negative factor on voluntary delists decision for voluntary delisted companies. This is consistent with prior regression result on all sample
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panels that these companies have high focus on how equity performs. They will seek other exchange market or privatization opportunities when U.S. equity value is not satisfactory. These factors have higher sensitive on voluntary delist companies’ decision, as they have the options to choose continue listing and other exchange market, therefore these criteria has much higher impact on their decision. While involuntary delist companies were forced to leave the U.S. market, partially due to not able to meet qualitative criteria.
6 Conclusion
From the trend of growing number of Chinese companies crossed list in the U.S. from 2000 to a wave of delisting in 2011, the potential benefits of cross listing in the U.S. and to be exposed to bigger scale of international equity market will continue to attract Chinese companies for further attempt.
To examine the factors govern Chinese companies cross delist, to some extent, also reflect Chinese companies’ key interests in entering U.S. equity market. In the paper, cross I collected a sample of 144 Chinese firms who are currently active in U.S. equity market and a sample of 38 firms who left during the period of 2007 through 2012. I further collect data on identified reasons from existing empirical research on other foreign firms, and apply ordinary least square regression test sensitivities of these factors on such decision.
The study concludes that overall continued listed Chinese companies have higher profitability and were able to archive bigger market valued those who left. There is significant correlation between firm value and cross delist decision. It worth to point out that continued listed companies have better holder period returns and higher leverage ratio than those who cross delisted. This shows that the continued listed companies are able to more effectively utilize leverage to create equity value for U.S. investors, therefore are able continue to realize firm value growth to justify listing in the U.S. Considering Chinese bond market is underdeveloped and only state own or bigger companies has better access in debt financing, such inter-connection place a big challenge on small and medium size Chinese companies to cross listed in the U.S.
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My findings shows no evidence of trading volume’s impact on Chinese cross delist decision, while both price and market value show positive impact on the decision. This indicates share price has stronger impact on generating market value for Chinese companies, liquidity on trading volume is very sensitive to price change, thus, to attract U.S. investors’ attention, U.S. listed Chinese companies will need to maintain greater share price development.
This studies is not without limitation, since the financial market is constantly changing and the cross delisting wave is still on going and more Chinese companies announced to leave U.S. equity market in 2013. Sample size of 38 identified companies till 2012 in this study is relatively small, and it will be interesting to compare such result with bigger sample group. Secondly, liquidity factors can be further tested with more elaborated information if data is available. It will be interesting for further studies to include evidence from other qualitative factors such as compliance, culture and information asymmetric factors.
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