Sovereign Credit Ratings and the Stock Price Informativeness of Cross-Listings

Abstract

This paper examines the benefits foreign firms gain from cross-listing shares on a major U.S. exchange. I study sovereign credit rating changes in 49 countries to investigate whether secondary listings in the U.S. are associated with improvements in a firm’s information environment. I document that firms without a cross-listing experience significantly negative abnormal returns around negative sovereign rating events, while foreign firms with secondary listings on major U.S. exchanges on average experience no significant surprise reaction. I show that these events are value-relevant for cross-listed firms and that the difference in abnormal return behavior is not a result of unobservable disparities in firm characteristics between cross-listed firms and firms without a secondary listing. Several proxies for the amount of (private) information incorporated in U.S. share prices are determinants of abnormal return behavior for cross-listed firms around sovereign rating announcements. Ownership of cross-listed U.S. shares by more informed investors similarly reduces price sensitivity to these events for cross-listed firms. In addition, I examine the lead-lag relationship between returns of cross-listed U.S. shares and the underlying home market shares and document information spillovers from the U.S. to the home market shares in the period prior to a sovereign rating announcement. These results provide an information based rather than corporate governance related explanation for the observed value premium of cross-listed firms.