COST OF CAPITAL AND OPERATING PERFORMANCE EFFECTS FOLLOWING ADR LISTINGS

The paper investigates whether a foreign stock cross-listing in the U.S. by means of an ADR program is associated with a lower cost of capital, changes in cash flow performance, and/or taking advantage of a window of opportunity to raise funds. Evidence drawn from changes in cash flow performance can help derive more conclusive inferences regarding the lower-cost-of-capital hypothesis. We find that average period returns adjusted on a matched-firm basis decline in the post-ADR period consistent with other studies. However, we find modest deterioration in operating returns. These findings taken together cast doubt on previous claims that lower post-ADR returns constitute evidence of a lower cost of capital. Change in match-adjusted operating returns are not found to be impacted by country factors that assess the quality of corporate governance. However, these operating return changes are directly related with Tobin’s Q in line with the argument that firms pursuing cross-listing have stronger growth opportunities and access a more liquid market to raise funds. We do not find evidence of opportunistic timing of cross-listing via ADRs