Multivariate analysis

The main question we address in this section is whether cross-listing in the US has any effect on the acquisition premium obtained by cross-listed targets. For this purpose, we estimate the following model using ordinary least squares with robust standard errors corrected for clustering at the country level:

Premiumi = β0 + β1Exchange-listedi + β2Non-exchange-listedi + β3Control variablesi + β4Shareholder protectioni + εi

Control variables are related to firm- and transaction-level attributes as described previously: target size, growth opportunities, cross-border dummy, tender offer dummy, contested bid dummy, hostile dummy, percentage toehold, and acquirer's MB ratio. As a measure for shareholder protection, we use the anti-self-dealing index of Djankov et al. (2008).

29

We report the estimation results in Table 4. Interestingly, for all five specifications, we find that cross-listing on US exchanges, whether listed via ADR programs (Level II or III) or directly via common shares, significantly increases the premium obtained by cross-listed targets. This increase is of a magnitude of 0.10 in the logarithm of the premium, which translates into an average increase of 10.5% in the premium. Cross-listing with non-exchange ADRs (level I or Rule 144a) also has a positive but insignificant impact on the acquisition premium. These results support the idea that cross-listing on US exchanges increases the attractiveness and the value of foreign firms on the market for corporate control.

In specification 2, we add control variables at the transaction level. The results correspond to the expected outcomes and the existing literature: Except for the toehold, all control variables (cross-border, tender offer, contested bid, and hostile) show positive and significant coefficients. More importantly, the impact of a cross-listing on US exchanges on the takeover premium remains significant at the 1% level. In specification 3, we include the market-to-book (MB) ratio of the acquirer to control for the willingness of growth firms to overpay for their acquisitions. The sample drops to 983 observations due to limitations on acquirers’ firm-level data, since our initial sample also includes private acquirers. Contrary to our expectations, the effect of the acquirer's MB is negligible, and, even if the sample size drops, the significance and magnitude of the cross-listing effect is only slightly modified. Therefore, we conduct the next analysis using the entire sample and excluding the acquirer's MB ratio from the regressions.

Specifications (4) and (5) introduce the impact of the level of shareholder protection in the target country on the takeover premium. We use the anti-self-dealing index of Djankov et al. (2008) as a measure for the shareholder-protection level. Consistent with the results of Rossi and Volpin (2004), we find that shareholder protection in the target country is positively related to the acquisition premium at the 10% significance level. As noted by Rossi and Volpin, one

30

possible explanation is that targets subject to tighter regulation have lower cost of capital which exacerbates competition among bidders and therefore increases the acquisition premium. Furthermore, to account for the portion of the premium attributable to the private benefits that the acquirer is expecting to extract from its target, we add the difference between the acquirer and target countries’ shareholder protection in specification (4). Control would be more valuable for acquirers coming from countries with poor shareholder protection, since they are better able to extract private benefits of control. Therefore, we should observe higher acquisition premiums for deals involving acquirers from countries with low investor protection. As in Rossi and Volpin (2004), we do not find a significant effect for this variable, though it has the expected sign.

In specification (5), we add two interaction variables between the difference in shareholder protection levels between the US and target countries and both types of cross-listing (exchange and non-exchange). The overall impact of shareholder protection on the acquisition premium is still positive and significant at the 10% level as in the previous specification. The difference in shareholder protection levels for non-exchange firms (measured by the second interaction variable) has a negative and significant effect on the premium, suggesting that lower shareholder protection in target countries (a higher difference with US standards) is associated with a lower premium. For firms cross-listed on US exchanges, however, this variable has the opposite sign, which implies that the weaker the legal protection in the target country, the higher the premium. This result is interesting and provides support for the bonding hypothesis: The benefit from cross-listing in US exchanges measured by the takeover premium is higher for firms from countries with poorer investor protection. Cross-listing is viewed as a signal of commitment to non-expropriation of minority shareholders. This raises investors’ expectations about future cash flows, lowers the firm's cost of capital and improves its ability to generate and exploit growth opportunities (Hail and Leuz, 2009). Acquirers perceive cross-listing on US exchanges as a

31

bonding device and are therefore willing to pay more to acquire a less risky firm with higher growth prospects. Thus, their valuation is higher for exchange-listed targets, especially those coming from poorly regulated countries, while the non-cross-listed and non-exchange-listed ADR firms are valued downward.

*** Insert Table 4 about here ***