Analysis of the benefits of Chinese companies cross-listing on the NYSE

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Analysis of the benefits of Chinese companies cross-listing on the

NYSE

Supervisor: Jeroen Ligterink Name: Longbing Yu

Student number: 10580379 Master in Business Economics Track: Finance

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1. Introduction:

The globalization of capital market accelerates the increasing number of foreign corporations to cross list their shares on the oversea stock exchanges in recent decades. Among these foreign corporations, there are a lot of Chinese companies whose main activities in mainland China, but would like to list their shares overseas to access to more capacious capital market. The stocks of those Chinese companies that are been trading on overseas stock market are referred as Chinese concept stock. But why would Chinese companies like to cross list their stocks? The reason that those Chinese companies to list oversea could be various.

Among the overseas stock exchanges, London, Euronext, Frankfurt and so on, most Chinese companies would like to choose to list their stocks on Nasdaq, NYSE and AMXE in the U.S.. At the end of 2010, China had more U.S. listed companies (Citibank, 2011). Till the March of 2014, there have been 202 Chinese company's listing in the U.S three main stock exchanges. Moreover, there are more Chinese companies which are planning to list their stocks in the U.S. For example, Alibaba, a Chinese electronic commerce company which has listed its stock on Hongkong stock exchanges. Recently, at the 15th March, 2014, Alibaba has submitted IPO application documents to the U.S Securities and Exchange Commission and planned to raise five billion dollars for the company’s future development. Also, Alibaba would prefer to list their share stocks on the NYSE.

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To what extent do Chinese companies benefit from cross listing in U.S. stock exchanges?

The rest of the paper is organized as follows: some background and motivation for the Chinese cross-listing will be discussed in section 2. In section 3, the overview of related literatures on cross-listing will be provided. In section 4, Methodology and hypothesis for this research will be described. Data and description will be shown in section 5. Section 6 will demonstrate the results and economic explanation of the

3 analysis. Finally, Section 7 will contain the summary and conclusions.

2. Background and motivation

The two Chinese stock exchanges, Shanghai Stock exchange (SSE) and Shengzheng stock exchange (SZSE) were established since 1990-91. Since then, the Chinese equity market has grown exponentially from 1.62 billion USD in 1991 to 3.57 trillion USD at the end of 2009 (MCF Global Investment Management, 2010). However, due to its short history, the Chinese stock market is small and undeveloped relative to other developed markets (Allen et al., 2005). Even the Chinese stock market booms rapidly, the stock market shows a bad performance and can not reflect the actual performance of the firms. Since 1990s, the China’s GDP grows around 8% every year, while the average underpricing IPO ratio of Chinese stock market is 267%. This distinct underpricing IPO ratio is considered one of the largest among countries, and therefore, reflect the relative inefficiency of the Chinese stock exchanges.

Moreover, because the Chinese stock exchanges was originated from central planned communist economy, the Chinese stock market has many restrictions (Berg, 2012). Most percentage of public trading equity in the Chinese stock market remains closed to all foreigners. Only a few select funds, insurance companies, securities firms, commercial banks and some other international institutions which have Qualified Foregin Institutional Investor (QFII) status are permitted to invest in Chinese stock market under a strict quota system. The quota is usually between US 100 million and US 200 million for each QFII. On the other hand, the Chinese Securities Regulatory Commission (CSRC) also controls the amount of QFIIs by delaying the application of QFII. Normally, It takes from nine months up to two years to complete the application process. Even though, the stock market for international investors are increasing, the available securities which could be invested by international investors only count less than 1% of the total market capitalization (MCF Global Investment Management, 2010). Thus, if the domestic firms do not list abroad or in Hong Kong, most of the Chinese firms are limited access to the foregin equity capital.

4 Another noticeable peculiarity is that the Chinese stock market is largely dominated by retail investors, which account for more than 75% of the market capitalization of Chinese stock market. While, the percentage of retail investors in other developed market are less than 40%. The high percentage of institutions and foreign investors in developed market is beneficial for the stock market. As large institutions, investors can serve as monitors, which lead to the stock market be more efficient and discover the firms’ accurate price more quickly. However, because there are more retail investors than the amount of institutions and foreign investors in the Chinese stock market, as a consequence, this situation will make the Chinese stock market highly speculative and volatile (Berg, 2012). Another serious problem caused by the high percentage of retail investors is the limited supply of capital in the Chinese market. The reason is that the significant risk-averse of Chinese retail investors are more willing to invest in safe securities and minimize risk. Thus, the shares of firms which contain risks will hardly be invested by the risk averse of Chinese retail investors, especially for those small privately controlled firms.

Furthermore, the small privately controlled Chinese firms with high growth rate are relatively difficult to raise capital through the bank loans. That is because the privatization of government-owned banks controlled the source of the loans, and the state-owned companies have the priority access to bank loans. Thus, there are limiting remaining sources of capital for the small privately controlled Chinese firms. If the privately controlled Chinese firms choose equity market to raise the capital instead of the credit market, they may fail to satisfy the extremely strict listing requirements set by CSRS and thus should choose another way to raise capital for future development. The listing requirements set by CSRS claims that the firms should have a positive net income, no less than 30 million RMB net assets and the total operating incomes are more than 500 million RMB for each year of the recent three years. Also, it mentioned that the intangible assets should be less than 20%, which block the most internet and e-commerce firms to list on the Chinese stock market (Chen and Yuan, 2004). In

5 addition to the written requirements, the factor of politician play a significant role in the listing process. If the firms have a weak political relation with the Chinese government, the possibility of IPO successfully will decrease (Piotroski and Zhang, 2012).

Even the privately controlled firms could meet the strict requirement, the application process to list their shares on the Chinese stock exchange is quite lengthy and cumbersome. Because the Chinese government sets strict regulations for initial public offerings and controls the size and the allocation of resources on the stock market, it will take extremely long time for the regulators go through careful screening and finally approve to list the Chinese firms’ shares on the domestic stock exchange (Gao, 2002). The application process of IPO could even go five years in particular. Therefore, it will be a high oppo5rtunity cost for the high growth rate of privately controlled Chinese firms to wait such a long period of time in order to meet their financial demand.

To sum up, the various objective reasons listed above make the Chinese stock market not the first candidate for the Chinese firms to raise the capital. Thus, more and more Chinese firms are highly motivated to cross-list their shares overseas to have a better access to the capital market for their future development.

3. Literature review:

Some research has been done that cross-listing in foreign market could benefit from the foreign companies. Foerster and Karolyi (1993) did cross-listing research based on

market segmentation hypothesis. It indicates that the segment market incentive

companies to reach a wider investment, expansion of sales and reduce their cost of capital by action of cross-listing. Pagano, Roell, and Zechner (2002) find that some European companies are high-tech or export-oriented expand and growth quickly after they listed their stocks on U.S. exchanges.

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Bonding hypothesis also imply companies could benefit from cross listing (Stulz,

1990). On this hypothesis, the management of the company bond themselves to a better governance system. So the management of the company will be well monitored by the securities and exchange commission (SEC), debt-rating agencies and institutional shareholders. Thus the higher degree of protecting the minority shareholders in the U.S., reduce the chance of the management to extract private benefits and increase their risk of litigation if the company do not obey with SEC regulation. Doidge, Karolyi and Stulz (2004) tested the bonding hypothesis and find that the U.S listing foreign companies obtain a higher Tobin’s Q than those companies not listed in the U.S.. The result support this bonding hypothesis that investors would like to pay more for those U.S. cross listing foreign companies which are subject themselves with U.S. laws and are more credible to public investors.

The awareness hypothesis (Merton, 1987) implies that the investors hold the securities which contains complete information. They will not hold foreign securities in their portfolio, if they do not know about this kind of securities. However, cross-listing exposes those foreign securities in a different country, changes the investor recognition and mitigates the phenomenon of asymmetric information. Thus, investors will accept cross-listing company securities and hold them in their portfolios. Foerster and Karolyi (1999) found support for this hypothesis that there is a significant increase of the shareholder base after U.S. cross listing.

Another benefit of cross listing is based on the liquidity hypothesis (Amihud and Mendelssohn, 1986). The cross listing could results a reduction of bid-ask spread of a company’s share. The decreasing spread lead to an increase in liquidity of companies share. The higher the liquidity could attract more investors as investors value liquidity, they will pay a higher price for a higher liquidity of the company’s share. And, finally, increase the cross-listing company’s value. Witmer (2005) tested the cross-delisting decision, and the result turns out that if companies with low percentage of turnover in the U.S., those companies would like to delist, which are consistent with the liquidity

7 hypothesis and Merton’s awareness hypothesis the other way around.

The context of the market segmentation and bonding theories assume that cross listing resulted in lower costs of capital and higher market valuations for the company, which is the benefit of cross-listing. In order to check the theories, Bessler et. al. (2011) tested the NYSE and NASDAQ listing and delisting decisions of German companies by using the cumulative abnormal return method. But turns out there are no systemic evidence to support the theories in the case of Germany cross-listed companies. There is no systemic impact on market value based on market to book and Tobin’s q ratios. And, the change of market beta that imply for the cost of equity capital is not significant either.

In the other study about the cross-listed firms of European countries that listed on the U.S stock market, Bancel et al. (2008) analyze the ADR listings of European firms in the period of 1970 to 2002, by using cumulative abnormal returns and buy-and-hold abnormal returns. It turns out that those European cross-listed firms perform worse than their US and European industry peers around 37% over the three years after cross-listed on the U.S stock market.

While in the study of Canadian firms that cross-listed on the U.S stock market, Karolyi (1993) finds the sample of 53 Canadian firms shows a negative abnormal return after they cross-listed in the U.S. Also, Mittoo (2003) discover a negative post-listing performance during the three years following the listing, by using 71 Canadian firms.

In the field of research Chinese cross-listed firms, most authors focus on the cross-list on the Hongkong stock exchange. The main finding of Wang and Zhang (2012) is that the politically connected firms’ post-overseas listing's performance is worse than that of non-political-connected firms.

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4. Data and Description

The sample includes the Chinese firms that cross-list on the New York Stock Exchange (NYSE) from 1993 to 2011. For the study purposes, it should be important to identify the Chinese firms that cross-listing on NYSE firstly. According to the criteria for choosing Chinese cross-listing firms as mentioned by Zhang (2008), the firms should be incorporated in China and its operational headquarters are located in China or held by a holding company that incorporated in China. After repeatedly check the information provide by the web page of the NYSE and the web page of Ministry of Commerce of the People's Republic of China (MOFCOM), the final sample consists of 80 Chinese firms that cross-list on the NYSE till the end of June, 2011.

The dataset includes the stock price return of each Chinese cross-listed firms are obtained from the Datastream. The daily and monthly returns of reference index include the NYSE index, S&P 500 and the SSE index are collected from Yahoo finance.

Figure 1

Number of listing by year

The phenomenon of Chinese firms that started to cross-list on the NYSE began in 1993. The first company that land on the NYSE is Sinopec Shanghai petrochemical corporation, which is a Chinese state-owned oil and gas firm. During the following 10

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9 years, there are at least one Chinese firms cross-listed on the NYSE every year, except for the year of 1995 and 1999. But the number of the cross-listing firms is not very much till 2006. As it is shown in the figure 1, there is a boom of listing event in 2007. 18 firms cross-listed on the NYSE that year. However, because of the influence of global financial crisis, the phenomenon of cross-list cool down to 4 and 8 for the year of 2008 and 2009. But in the next year of 2010, it reaches the peak, the number of cross-listed firm is as high as 22. A notable thing is that the first 14 firms are identified as Chinese state-owned firms over this 18-year period, and most of them are energy or telecom companies. After the Chinese state-owned firms cross-list on the NYSE, the other 64 privately controlled firms start to land on the NYSE in the year of 2004.

Figure 2

The market index by year

The figure 2 display the three different indices over the last decade start from 1993, the year of first Chinese firms that cross-list on the NYSE. From the year of 1993 to 2002, each index shows a relatively ascending trend in this period. And most of the Chinese state-owned firms are listed in the time period. After 2002, the performance of both U.S and Chinese stock market decline a little bit, but recover soon and step into a bull market. The SSE index of Chinese stock market reaches the peak of 5914

0 2000 4000 6000 8000 10000 12000 SSE index S&P 500 NYSE index

10 in the beginning of 2008. Also, the NYSE index goes up to more than 10300 at the same time. This bull market is corresponding to the boom of cross-list activity of Chinese firms. However, the extraordinary high indices drop significantly in 2008 and 2009. Similarly, the cross-listing events decrease as well in this phase. Afterwards, the U.S stock market enters an upward tendency, while the Chinese market shows a downward stage from 2010 till now. Thus, how is the performance of these Chinese cross-listed firms compare with the performance of U.S stock market and as well as the Chinese stock market is interesting to be explored.

5. Methodology and hypothesis 5.1 Buy-and-Hold Abnormal Returns

The event time method will be applied in this paper, but will be slightly changed to adapt to this specific case of Chinese cross-listed firms. The cumulative abnormal returns of the short time period and long time period of post the listing date of the whole sample of 80 Chinese cross-listed firms will be tested separately. And the buy-and-hold abnormal returns (BHARs) will be computed as the differences between the stock returns and the reference portfolios. The market index: NYSE index and S&P 500, are applied as reference portfolios to check the difference between the performance of the Chinese cross-listed firms and the U.S stock market in the analysis of the short time period. The equation of BHARs describes as follows:

BHARi = �(Ri,t− T t=1 Rm,t) With T=3,7,15 days (1) With T=12, 24,36 months (2)

In the equation of BHARs, Ri,t is the daily return for the stock of the Chinese firms that cross-listed on the NYSE. Rm,t is the daily return of the NYSE index and S&P 500. Because in the short time period, the Chinese domestic stock market is less sensitive to short-term returns. Thus, the benchmark of the SSE index will not be adopted here. The event study window for the short time period will be 3, 7 and 15

11 days after each Chinese cross-list date.

The method of BHARs will also be applied for a long time period. But in the analysis of the long term abnormal returns for the Chinese cross-listed firms, the Ri,t and Rm,t will be changed to monthly returns of the stock of the Chinese cross-listed firms and the benchmarks, respectively. Besides the NYSE index and S&P 500, the SSE index will be used as a benchmark to check the performance difference between the Chinese cross-listed firms and the Chinese domestic stock market. The estimate horizon will be expanded to 12, 24 and 36 months. The cross-list date for each Chinese firms will be found in the appendix 1.

After the BHAR of each Chinese cross-listed firm is computed, the cumulative buy-and-hold abnormal return (CBHARi) can be computed as the sum of all the BHARs for each Chinese cross-listed firm.

CBHARi = � BHARi n

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(3)

In order to test whether the BHAR of each Chinese cross-listed firm is statistically different from zero, T-test approach will be applied and the equation is as follows:

T-test =

(BHAR_sd sqrt(n)⁄ )

(4)

Where BHAR_sd is the standard deviation of the abnormal return. Thus, the result of T-test will be compared with the critical t-value to check whether the null hypothesis, the average BHAR are zero, can be rejected or not.

5.2 Fama-French three-factor model

In order to check the long term performance and the cost of equity of the Chinese cross-listed firms more accurate and more specific, the Fama-French three-factor model (Fama and French, 1993) will be applied (Sarkissian and Wang, 2013;

12 Carpentier et al., 2009). The model equation is described as follows:

Ri,t-Rf,t=αiFF_{+ βi}FF

(Rm,t- Rf,t)+ si*SMBt+ hi*HMLt + ei,t (5)

Here, in equation (5), Ri,t is the monthly returns for Chinese cross-listed firms, Rf,t is the risk free rate which will be applied by the monthly rate of three-month T-bill rate. Thus, the dependent variable of this regression is the monthly excess returns of each portfolio (Ri,t-Rf,t ). On the left side of regression, Rm,t is the monthly return of the U.S stock market. So the independent variables are market risk premium, SMB and HML factor. More specifically, SMB stands for “Small minus Big” and HML stands for “High minus Low”, they are Fama-Frech size factor and book-to market factor, respectively. The excess monthly abnormal return of each Chinese cross-listed firms after they cross-list on the NYSE, the intercepts αiFF , can be obtained to illustrate the long term abnormal returns.

5.3 Hypothesis

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Hypothesis1: The Chinese firms cross-listed on the NYSE tend to have positive buy-and-hold abnormal returns in the short-run time period after cross-listed date.

Hypothesis2: The Chinese firms cross-listed on the NYSE tend to have positive buy-and-hold abnormal returns in the long-run time period after cross-listed date.

Hypothesis3: The Chinese firms tend to have lower cost of capital after they cross-listed on the NYSE.

Hypothesis4: The Chinese privately controlled firms perform better than the Chinese state-owned firms in the long-run time period after cross-listed date.

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6. Result and analysis 6.1 Short term performance

Table 1

Short-term Cumulative Abnormal Returns of Chinese US Cross-listed Firms (BHARs) Post-cross-listing days Benchmarks NYSE S&P 500 Coeff. (S.D) Coeff. (S.D) (+1,+3) -0.012 0.008 -0.013 0.008 * (+1,+7) -0.015 0.007 ** -0.017 0.007 ** (+1,+15) -0.013 0.005 ** -0.013 0.005 **

Table 1 summarizes the cumulative abnormal returns for the whole sample of Chinese firms that listed on the NYSE before August, 2011. The abnormal returns are computed as buy-and hold abnormal returns (BHARs) relative to stock market portfolios, or benchmarks in other words. Two different U.S stock market benchmarks are applied to analyze the effects of alternative benchmarks, which are NYSE composite index and S&P 500. Three short-term windows are analyzed: the post-cross-listing at 3, 7, and 15-day periods.

The stock price performances of the Chinese firms that cross-listed on the NYSE are slightly weaker than the market portfolios. After 3 days of the listing date, the Chinese cross-listed firms perform 1.2% worse than the NYSE composite index, and underperform 1.3% compared with the index of S&P 500. Furthermore, one week past the cross-listing date, the stock price of the Chinese cross-listed firms perform worst among the three short-term windows. In the seven-days windows, the performances of the Chinese cross-listed firms are 1.5% and 1.7% weaker than NYSE composite index and S&P 500, respectively. But one week later, in the half-months window, the stock price recovers a little bit, but still underperform than the stock market portfolios. It is worthwhile to note that the standard deviation decrease from 0.8% to 0.5% after 15-day periods, which means after two weeks trading, the fluctuation of the Chinese cross-listed firms is deceasing and become more stable than the first three trading

14 days.

6.2 Long term performance of BHARs

Table 2

Long-term Cumulative Abnormal Returns of Chinese US Cross-listed Firms (BHARs)

Post-cross-listing Months

Benchmarks

NYSE S&P 500 SSE

Coeff. S.D Coeff. S.D Coeff. S.D

Panel A: Whole sample

(+1,+12) -0.167 0.022 *** -0.181 0.022 *** -0.079 0.019 *** (+1,+24) -0.240 0.022 *** -0.274 0.022 *** -0.144 0.018 *** (+1,+36) 0.034 0.027 -0.015 0.027 0.204 0.024 *** Panel B: State-owned firms

(+1,+12) -0.109 0.040 *** -0.096 0.040 ** -0.082 0.046 * (+1,+24) 0.090 0.042 ** 0.091 0.043 ** 0.121 0.045 *** (+1,+36) 0.378 0.040 *** 0.380 0.042 *** 0.440 0.045 *** Panel C: Privated controlled firms

(+1,+12) -0.180 0.025 *** -0.200 0.003 *** -0.079 0.021 *** (+1,+24) -0.310 0.024 *** -0.351 0.025 *** -0.200 0.019 *** (+1,+36) -0.040 0.031 -0.099 0.032 *** 0.154 0.028 ***

Table 2, panel A indicates the long-term performance of the stock prices of the whole sample of Chinese US cross-listed firms. Similar to the short-term cumulative abnormal returns, the difference buy-and-hold returns between the Chinese firms and index are computed as abnormal returns of Chinese firms that listed on the NYSE. However, instead of using daily returns, the monthly returns of each firm’s stock price are applied. And the event windows extend to one year, two year and three year that past the listing date. The NYSE composite index and S&P 500 are applied as a benchmark in long-term as well. Besides, the Shanghai stock exchange (SSE) index is used to check the relative performance of the Chinese US cross-listed firms compare with its domestic stock market performance.

When the NYSE composite index is applied as a reference portfolio in the long-run performance analysis, the result demonstrates that the Chinese cross-listed firms perform worse than the benchmark about 16.7% and 23.9% in the first year and first

15 two years, respectively. However, if the analyzing window expands to three years post the listing date, it found that the Chinese cross-listing firms perform 3.4% better than the stock market portfolio. Unfortunately, the result is not significant at 10% critical level, which means there are remarkable diversity exist in the three-year performance of the Chinese cross-listed firms.

Again, when the S&P 500 become the benchmark, the result is relatively similar to the result of using the NYSE composite index as a benchmark. But the portfolio of S&P 500 is much more diverse than the portfolio of NYSE composite index, this result to the S&P 500 perform better than the NYSE composite index averagely. Thus, the Chinese cross-listed firms perform much worse by comparing with S&P 500. It reports a significant abnormal performance of -18.14% and -27.35% for the first year and the first two year period following the listing date. Rather than perform better than the NYSE index in the first three-year period, it shows an insignificant negative abnormal performance.

On the other hand, when comparing with the Chinese stock market, it is found that the Chinese US cross-listed firms still perform worse than the SSE index. In the first year after list date, the stock price of Chinese cross-listed firms perform 7.92% worse than the SSE index, but the result is roundly 10% better when the pervious two other benchmarks are used. In the first two years following the list date, the underperform situation still exists and even worse, it becomes 14.39% worse. However, in the first three years of post listing date, the negative performance turn in to remarkable positive performance, which perform positive 20.36% better than the Chinese stock market.

To understand the different performances between the Chinese state-owned firms and the Chinese privately controlled firms that cross-listed on the NYSE, two samples contain these two types of companies are tested separately. The result is indicated in the panel B and panel C.

16 During the first year after the cross listing date, the BHARs of both of state-owned firms and privately controlled firms are lower than the benchmarks no matter which kind of index is used. The state-owned firms are slightly performed about 9% better than the privately controlled firms when the benchmarks the NYSE composite index and S&P 500. While, in the following two years after the first year of cross listing event, the performance of the Chinese state-owned firms is outstanding. The abnormal returns are close to 10% for the second year, and it increases to 40% for the third year when comparing with the NYSE composite index and S&P 500. After using the SSE index as benchmarks, the abnormal returns are much higher. It reaches to positive 12.1% and 44% for the second year and third year respectively. On the other hand, the average returns of the privately controlled firms are 32% lower than the U.S stock market and 20% lower than the Chinese stock market in their second year of cross-listing. Even the performance of the third year for those privately controlled firms are better than the second year’s performance, the abnormal returns are still negatively compare with the U.S stock market benchmarks. But it turns out to be better than the performance of the Chinese stock market around 15.4%, in the same period.

To sum up, when comparing the three years of post performance between the two kinds of firms, the Chinese state-owned firms perform better than the Chinese privately controlled firms every year in the first three years of cross-listing by using BHARs. More specifically, when using the NYSE index and S&P 500, the abnormal returns of the Chinese state-owned firms are 9% higher than that of the Chinese privately controlled firms in the first year of cross-listing. And in the second and third year, the Chinese state-owned firms outperform the privately controlled firms as high as 40%. When using the SSE index, the first year performance is almost the same. While in the second year and third year, the abnormal returns of the privately controlled firms are 30% lower, by comparing with the state-owned firms in both two years.

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(Explanation and discussion)

6.3 Long term performance of TFPM

Table 3

Long-term Cumulative Abnormal Returns of Chinese US Cross-listed Firms (Fama-French Three-Factor Pricing Model)

Post-cross-listing Months

Alpha Market SMB HML Adj.R2

Coeff. S.D Coeff. S.D Coeff. S.D Coeff. S.D

Panel A: Whole sample

(+1,+12) -3.278 0.658 *** 1.090 0.145 *** 0.342 0.297 -0.278 0.191 0.079 (+1,+24) -2.769 0.468 *** 0.800 0.105 *** 0.674 0.199 *** 0.247 0.129 * 0.074 (+1,+36) -1.433 0.487 *** 0.751 0.112 *** 0.811 0.202 *** 0.045 0.135 0.037 Panel B: State-owned enterprises

(+1,+12) -4.170 1.183 *** 0.668 0.257 *** 1.400 0.353 *** -0.225 0.328 0.191 (+1,+24) -3.446 0.882 *** 0.577 0.194 *** 1.048 0.258 *** 0.604 0.245 ** 0.093 (+1,+36) -2.590 0.700 *** 0.619 0.154 *** 1.018 2.000 *** 0.332 0.167 ** 0.095 Panel C: Privated controlled enterprises

(+1,+12) -2.958 0.763 *** 1.284 0.177 *** -0.307 0.393 -0.309 0.236 0.080 (+1,+24) -2.655 0.536 *** 0.923 0.127 *** 0.521 0.265 ** 0.135 0.161 0.077 (+1,+36) -1.236 0.573 ** 0.838 0.139 *** 0.776 0.284 *** -0.088 0.182 0.035

The panel A of the table 3 provides evidence of post-listing performance of Chinese cross-listed firms by using Fama-Frech three-factor pricing model (TFPM) estimations. The coefficient of alpha indicates the abnormal returns for the Chinese cross-listed firms following the list date. The post-cross-listing alphas are significant negative for the three windows, which is consonant with the result of cumulative abnormal returns that compared with S&P 500. However, the negative abnormal return that obtains in this table is decreasing as the event window expands. The Alpha is negative 3.2784 at the first year after listing date, which means the Chinese cross-listed firms perform over 300% worse than the U.S stock market. But, in the following two years, the abnormal performance raised up from -276.86% to -143.27%. All the three alphas are highly significant negative. Thus, the performance of Chinese firms that after cross-listing on the NYSE is below the average performance of the U.S stock market.

18 market coefficient. The betas decrease year by year, after the cross-listing significantly. It is over one, 1.09 for the first year, while the estimated value decreases to 0.799 and 0.751 for the two years and three years following the cross-listing date. This means the stock of Chinese cross-listed firms become less sensitive to U.S stock market after they listed on the NYSE. Based on the formula of cost of equity, the cost of equity equals to the risk free rate of return plus the beta multiply by the market risk premium. Thus, when we assume the risk free rate and market risk premium remain the same as the first day of cross-listing date, the beta of the Chinese cross-listed firms decrease over the three years past the cross-listing date, the cost equity will decrease as well.

The SMB loading is generally significantly positive for the three-year period after cross-listing. But, it is clearly seen from the table that the coefficient of SMB increase after cross-listing. They ascend from 0.342 for the first year after the cross-listing to 0.811 for the three years after the cross-listing. The result of increasing SMB indicates that the Chinese cross-listed firms tend to be relatively smaller after they cross-listed on the NYSE, slow down the growth rate and fail to use internationalization to increase their asset bases (Claessens and Schumkler, 2007).

The fourth column reports the HML loading which is negative for the first year following the cross-listing date. While in the two-year period, it increases to significant 0.247 firstly, but drop to 0.045 for the three-year period. Thus, it is hard to say that those Chinese cross-listed firms tend to be more growth-oriented than their counterparts in U.S stock market or not.

The panel B and panel C of table 3 shows the results of comparing the Chinese state-owned firms with the Chinese privately controlled firms in the first three years of cross listing by using Fama-French Three-Factor Pricing Model.

The coefficient of alpha indicates that the abnormal returns of both types of firms are still negative, which both types of firms perform worse than the U.S equity market.

19 But the alpha of the privately controlled firms is significantly higher than that of the Chinese state-owned firm, and both alpha is increasing every year following the cross-listing date. The abnormal return of the Chinese state-owned firms is negative 417% for the first year and it increases to negative 259% for the third year. On the other hand, the abnormal returns of the Chinese privately controlled firms rise from negative 295.8% to negative 123.6%. Thus, the Chinese privately controlled firms outperform the Chinese state-owned firms in the first three years of cross-listing.

In table 3, the coefficient of the market in the panel B and panel C present the beta of the Chinese state-owned firms and the Chinese privately controlled firms, respectively. As we can see from the table, the beta of the Chinese state-owned firms is much lower than the beta of the Chinese privately controlled firms. However, the beta of the Chinese privately controlled firms decreases more remarkable after the cross listing event, which drop from 1.284 to 0.838. Therefore, the Chinese privately controlled firms are more benefit from the cross-listing activity in terms of the dropping of cost of equity.

For the sample of the Chinese state-owned firms, the SMB loadings decrease from 1.4 to 1.018. This result state that the state-owned firms tend to be relatively larger after three years of cross-listing. However, the situation is opposite in the sample of the Chinese privately-controlled firms. The SMB loadings are relatively similar to the whole sample that indicate the Chinese privately-controlled firms do not significantly increase their asset bases (Claessens and Schmukler, 2007).

(Explanation and discussion)

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Reference:

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