Cross-Listing, Bonding Hypothesis and Corporate Governance: Andreas Charitou, Christodoulos Louca and Stelios Panayides

Journal of Business Finance & Accounting, 34(7) & (8), 1281–1306, September/October 2007, 0306-686X
doi: 10.1111/j.1468-5957.2007.02021.x
Cross-Listing, Bonding Hypothesis and

Corporate Governance
Andreas Charitou, Christodoulos Louca and Stelios Panayides∗
Abstract: This paper examines the relationship between cross-listing and corporate governance
for Canadian firms, that were cross-listed on US stock exchanges during the period 1997–2003.
We find that cross-listed firms have more independent boards and audit committees after the
listing relative to a non-cross-listed matched sample of firms and relative to the pre-listing period.
Moreover, cross-listed firms experience changes in their ownership structure after the listing.
Finally, we provide evidence that the sensitivity of the relation between cross-listed firm valuation
with audit committee independence and ownership structure becomes more important after
the listing. The results are robust after adjusting for various firm risk characteristics. Overall,
the results are consistent with the literature on the bonding role of cross-listings on US stock
exchanges.
Keywords: cross-listing, corporate governance, bonding hypothesis
1. INTRODUCTION
There is mounting evidence that countries’ institutional frameworks play an important
role in equity valuation and for access to finance (La Porta et al., 1997, 1998 and
2000). In light of this evidence, cross-listing in countries with strong legal institutional
frameworks has been suggested as a way for firms from countries with poor institutional
framework to privately overcome these effects. Consistent with this notion, Coffee (1999
and 2002) states that foreign firms incorporated in a jurisdiction with weak investor
protection rights cross-list on US stock exchanges to ‘legally bond’ themselves to higher
∗ The first and third authors are from the University of Cyprus. The second author is from the University of
Durham, UK. They would like to thank M. Walker (editor) and an anonymous referee for very valuable
suggestions. They also thank I. Georgiou, I. Karamanou, N. Lambertidis, G. Mardas, S. Martzoukos,
G. Nishiotis, G. Theodoulou, N. Vafeas, the participants of the 2006 European Accounting Association
conference, and the participants of the 6th Annual Conference on Contemporary Issue in Capital Markets and
Financial Economics (2006) for helpful comments on earlier drafts. They would also like to thank S. Charitou
and the American Embassy in Nicosia for providing access to the Lexis Nexis database. They acknowledge
financial support from the University of Cyprus and from the Institute of Certified Public Accountants
of Cyprus (PriceWaterhouseCoopers, Deloitte and Touch, Ernst and Young, KPMG, Chrysanthou and
Christoforou, Moore Stevens, Demetriades, Siakos, Pifanis, Gregoriou & Co). (Paper received January 2006,
revised version accepted September 2006. Online publication May 2007)
Address for correspondence: Andreas Charitou, Department of Business Administration, University of

Cyprus, P.O. Box 20537, Nicosia, CY 1678 Cyprus.
e-mail: charitou@ucy.ac.cy

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and 350 Main Street, Malden, MA 02148, USA. 1281
1282 CHARITOU, LOUCA AND PANAYIDES
disclosure standards and stricter enforcement. Prior studies examined the role of cross-
listing on firm valuation, cost of capital, information environment, price discovery,
market segmentation and private benefits of control, among others. 1 However, thus
far, there has been very limited research on the relation between cross-listings and
corporate governance.
In this study, we examine the relation of cross-listing with corporate governance.
Specifically, we address the following issues: First, we examine the impact of corporate
governance on the decision to cross-list on US stock exchanges. Evidence on this issue
is expected to complement Pagano et al. (2002) who examined the impact of firm
characteristics on the decision to cross-list and Doidge et al. (2005) who examined the
impact of control rights held by controlling shareholders on the decision to cross-list. To
the best of our knowledge, this is the first study that investigates the relation of corporate
governance with the likelihood of the decision to cross-list. Second, we examine
whether cross-listed firms experience improvements in their corporate governance
after the listing compared to the pre-listing period. Possible improvements in firm
governance might shed more light on the cross-listing role regarding the convergence
of governance mechanisms among countries as suggested by Stulz (1999). Finally, we
examine whether the sensitivity of the relation between corporate governance and
cross-listed firm valuation improves after the listing. Such a relation is expected to
corroborate prior evidence on the bonding hypothesis, which supports the view that
cross-listing improves investor protection.
To address these issues, we use Canadian cross-listed firms on US stock exchanges for
three main reasons: First, Canadian firms make up the single largest group of foreign
firms listed on US stock exchanges. 2 As a result, we ensure a satisfactory sample of
firms with the same institutional framework. Second, most cross-listing studies focus
on foreign firms that issue American Depositary Receipts (ADRs) with an emphasis on
those ADRs subject to the highest regulatory requirements. Canadian firms, however,
are required to cross-list using ordinary shares, which are not different from the shares
issued by US firms. These Canadian firms must meet all the filing and disclosure
requirements applied by all US firms, and are subject to supervision and enforcement by
the Securities and Exchange Commission (SEC). Finally, the cross-listing benefits apply
to Canadian firms for the following reasons: previous research suggests that the level
of investor protection in the US is qualitatively higher than in Canada either because
of stricter supervision by the SEC or greater scrutiny by reputational intermediaries
(Coffee, 2002). In this vein, a number of studies find evidence of information leakage
ahead of takeover announcements in Canada (Jabbour et al., 2000; and Bris, 2005).
This pattern suggests that certain investors systematically have access to information
before it is made public and they are able to trade on it. This information asymmetry
may lead minority shareholders to perceive that their shareholders rights are not
well protected. Consistent with the aforementioned evidence is also the research on
concentrated ownership. Canada has more concentrated corporate ownership with
large firms controlled by wealthy families, more frequent use of pyramidal ownership
structures, and more prevalent use of multiple classes of voting rights compared to the
US (Attig et al., 2002). In this environment, theory predicts that investor protection
1 See Karolyi (2006) and Benos and Weisbach (2004) for a review.
2 Based on data from the SEC web page, by the end of 2003 there were 80 Canadian firms listed on NYSE,
78 on NASDAQ, 38 on AMEX and 284 firms on the OTC market.
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CROSS-LISTING AND CORPORATE GOVERNANCE 1283
in Canada will be at a disadvantage relative to investor protection in the US. Direct

evidence on the economic impact of the above issues was provided by King and Segal
(2004). They found that Canadian firms are valued at a significant discount relative to
US firms. This discount is about 20 per cent based on multiples of book value and 10
per cent based on multiples of earnings.
We analyze a sample of Canadian firms cross-listed on US stock exchanges and an
industry-size matched control sample of non-cross-listed Canadian firms during the
period 1997–2003. We have assembled a unique, hand-collected dataset that contains
detailed information on corporate governance characteristics of these firms. The
specific corporate governance characteristics that we analyze are: board characteristics,
independence of board and audit committees, chief executive officer’s (CEO)
influence on the board and finally, ownership characteristics. First, we examine the
impact of corporate governance on the decision to cross list. After controlling for firm
characteristics, results show that corporate governance does not seem to have an impact
on the decision to cross list.
Then, we provide evidence for corporate governance improvements after the
cross-listing compared to the pre-listing period. Improvements that relate to board
characteristics and CEOs influence on the board are found in the non-cross-listed
firms as well, suggesting that during the period under examination there is pressure
for improved governance. This pressure could arise from macro factors that affect all
Canadian firms or could arise from changes in corporate governance of the cross-listed
firms as suggested by Stulz (1999). In the latter case, our results support the view that
cross-listing might play a role in the convergence of corporate governance and the
capital market integration.
Moreover, we provide evidence that cross-listed firms experience improvements in
independence of board and audit committees after the listing relative to the non-cross-
listed matched sample of firms and relative to the pre-listing period. Specifically, we
find higher use of directors’ incentive plans and more independent audit committees
after the listing. These results, in line with the general context of the bonding effect of
the cross-listing in the US, suggest that cross-listings reduce controlling shareholders
discretion to take actions that reduce the wealth of minority shareholders due to
improved governance. 3
Furthermore, we provide evidence that cross-listed firms’ ownership characteristics
change after the listing relative to the non-cross-listed matched sample of firms and
relative to the pre-listing period. Specifically, we document significant decreases in the
percentage of insider ownership (control rights) for cross-listed firms relative to the
non-cross-listed matched sample of firms and relative to the pre-listing period. These
results are consistent with Coffee (2001) who suggests that dispersed ownership could
arise and persist if there is significant improvement in the protection of minority rights.
Moreover, we suggest that the behaviour of insiders may relate to the fact that the greater
the portion of firm shares that insiders hold, the lower the cost of expropriation prior to
the listing (Lemmon and Lins, 2004). In such a case, insiders bear higher unsystematic
risk as well. Since a US cross-listing reduces insiders’ ability for expropriation, the need
for diversification increases. As a result, after the listing insiders might sell shares for
diversification purposes. Another explanation for the insiders’ behavior may relate to
3 Moreover, results are consistent with the prediction of John and Kedia (2004) that cross-listed firms are
likely to experience rapid changes in their corporate governance on cross-listing.

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the fact that US cross-listings increase firm value, and thus insiders can get a higher
price for the shares they sell (Foerster and Karolyi, 1999; Miller, 1999; Doidge et al.,
2004; and King and Segal, 2004).
Finally, we provide evidence on the sensitivity of the relation between corporate
governance and firm valuation after the listing, relative to the sensitivity of the relation
prior to the listing. Relative to year −1, we find a positive and statistically significant
change in the sensitivity of the relation between firm valuation and audit committee
independence after the listing. This result indicates better investor protection and
improved firm valuation in an economically meaningful manner. Furthermore, relative
to year −1, we find a statistically significant negative change in the sensitivity of the
relation between insider ownership and firm valuation after the listing. This result
suggests that after the cross-listing, lower insider ownership is needed to induce
managers to behave like shareholders, due to improved investor protection. Overall,
our results, consistent with the literature on the bonding role of cross-listings on US
stock exchanges, suggest an increased importance of corporate governance on cross-
listed firms’ valuation after the cross-listing.
The remainder of the study is organized as follows: Section 2 discusses the relation of
cross-listing with corporate governance. Section 3 discusses the corporate governance
issues. Section 4 provides details on the sample and data. Section 5 evaluates the
empirical results. Section 6 provides concluding remarks.
2. THE RELATION OF CROSS-LISTING WITH CORPORATE GOVERNANCE

Cross-listed firms on US stock exchanges face (1) increased enforcement by the SEC,
(2) a more demanding litigation environment, and (3) enhanced disclosure and
reconciliations to US generally accepted accounting principles. These cross-listing
effects may reduce the information asymmetry between the management of the firm
and its shareholders. As a result, a cross-listing on US stock exchanges commits firms
to respect minority shareholder rights. This argument is known in the literature as the
bonding hypothesis.
The consequences of the bonding hypothesis are still a subject for debate.
Proponents of this hypothesis suggest that it may serve as a screening mechanism,
attracting firms that are willing to comply with the more demanding environment (see
Coffee, 2002; Stulz 1999, Lang et al., 2003a; Doidge et al., 2004; Doidge, 2004; and
Reese and Weisbach, 2004), whereas opponents of the bonding hypothesis argue that
the added costs may keep away some firms from listing (see Cochrane et al., 1996; Licht
2004; and Gozzi et al., 2005).
“To understand the effects of bonding hypothesis we need to distinguish between
legal bonding and reputational bonding. Legal bonding involves the rules set by stock
exchanges and capital market regulators that a cross-listing company has to abide.
Reputational bonding relates to the way that the investment community and industry,
including investors, analysts, auditors, investment banks and others, appreciate the
firm” (Wojcik et al., 2005). Firms might build on reputational bonding by maintaining
good governance mechanisms, however, they cannot commit to legal bonding without
cross-listing in a country with stricter institutional framework. Both reputational
and legal bonding relates to the risk that managers will extract private benefits
from the firms’ capital. This risk relates to the quality of corporate governance
and consequently, highlights the relation of cross-listings and bonding hypothesis
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with corporate governance (Shleifer and Vishny 1997). Stulz (1999) suggests that
a direct linkage of cross-listing with stricter corporate governance should press on
non-cross-listed firms to adjust their corporate governance as well. This argument
strengthens the need for investigating the relation between cross-listing and corporate
governance which in turn is expected to provide insights on the potential contribution
of cross-listing to the convergence of corporate governance systems and capital market
integration among countries.
From the aforementioned discussion, there seems to be a relation between corporate
governance and cross-listing. To further elaborate on this relation, similar to Wojcik
et al. (2005), we separate the cross-listing period into the period after the cross-listing
and the period before the cross-listing.
(i) Period After the Cross-Listing

After the cross-listing, firms are subject to pressure by the US legal and reputational
corporate governance regime. Coffee (1999) claims that once an issuer lists on a US
exchange, the US securities laws become broadly applicable to it. Consistent with this
view, empirical evidence suggests that cross-listed firms experience higher valuation
relative to non-cross-listed firms, have voting premiums which are 43% lower than the
premiums of non-cross-listed firms, have greater access to equity capital, have richer
information environment and are more subject to reputational US intermediaries
(Doidge et al., 2004; Doidge, 2004; Reese and Weisbach 2004; Lang et al., 2003a; and
Lang et al., 2003b).
However, Licht (2004) questioned both US legal and reputational enforcement of
the cross-listing. For legal enforcement he suggests that some rules under section
13 and 14 of the Exchange Act are tailored to the measures of US firms. Since US
firms differ from cross-listed firms, these rules are less effective for foreign firms. 4
Moreover, he suggests that the anti-fraud liability under Rule 10b-5 is weak. In the
same vein, Siegel (2005) studied Mexican firms with American Depositary Receipts
traded on US stock exchanges and found that US law enforcement neither deterred
nor punished Mexican insiders who expropriate assets from those firms. This evidence
clearly raises questions about the effectiveness of the legal aspect of the bonding
hypothesis.
Concerning the reputational enforcement, Licht (2004) suggests that requirements
such as, the need for independent directors, independent audit and remuneration
committees that in principle apply to foreign issuers, can be exempted from the
corporate governance listing requirements. 5 The SEC has approved this practice in line
with the SEC’s policy to relieve foreign issuers of corporate governance requirements,
in order to attract them to the US cross-listing. 6 In essence, these arguments question
the bonding hypothesis and consequently the valuation effect of the cross-listings.
In this line, Gozzi et al. (2005) provide evidence that cross-listed firms’ valuation
4 For example, US firms are widely-held whereas European and Asian firms are controlled by a large
blockholder (LaPorta et al., 1999; and Claessens et al., 2000). As a result, cross-listed firms might face
lower risk for hostile bids and a group of minority shareholders could sustain in them and being exploited.
5 See Special Study Group of the Committee on Federal Regulations of Securities, American Bar Association,
Section of Business Law, Special Study on Market Structure, Listing Standards and Corporate Governance,
47 Bus Law 1487, 1514 (2002).
6 See Securities Exchange Act Release No 24634 (1987).

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quickly relinquishes the increases of the previous years after the listing. On the one
hand, this evidence might challenge models stressing that cross-listing produces an
enduring effect on firm valuation by bonding firms to a better corporate governance
system. On the other hand, if cross-listing is indeed linked with a better corporate
governance system, then according to Stulz (1999), all non-cross-listed firms and
especially cross-listed firms’ competitors might be under pressure to improve their
governance. In that case, the cross-listing will exert pressure to eliminate governance
differences between the two samples of firms and consequently, cross-listing is not
expected to have an enduring effect on firm valuation for a long time after the listing.
Obviously, it is not easy to answer whether reputational enforcement is strong or
not.
Siegel (2005), provides evidence that investors punish Mexican cross-listed firms
by reducing their access to capital and thus, suggests that reputational enforcement
in the US is strong. In the present study, we suggest that corporate governance is
another proxy for reputational bonding. Thus, by examining the effect of cross-listing
on firm corporate governance we provide evidence on how well reputational bonding
works in practice after the cross-listing. In this line, we hypothesize that the governance
system of the cross-listed firms after the listing is expected to improve relative to the
prelisting period governance, and relative to the governance system of the non-cross-
listed firms. Furthermore, we expect improvements in the sensitivity of the relation
between governance and cross-listed firms’ valuation after the listing, relative to the
pre-listing period.
(ii) Period Before the Cross-Listing

The quality of the firm’s corporate governance prior to the cross-listing decision might
affect the costs and benefits that arise from a cross-listing in the US. On the one hand,
firms with weak governance are expected to face higher costs for complying with the
listing requirements, i.e. managers need to forgo higher private benefits relative to firms
with strong governance. On the other hand, cross-listing for firms with weak governance
imply higher benefits. In this vein, evidence by Miller (1999) and Foerster and Karolyi
(2000) suggest that investors reward more favourably those firms that have made the
greatest ‘leap’ in choosing to harmonize and disclose regularly their financial statement
information in line with the more rigorous US accounting standards. Thus, it will make
sense for firms to cross-list on US stock exchanges when the sum of the costs of foregone
benefits of control and direct listing and corporate governance related costs are lower
from the sum of the cross-listing benefits. Prior studies suggest that firms might cross-list
to ensure access to capital for exploiting investment opportunities, among other
reasons. If for example, firms face relatively low investment opportunities prior to the
decision to cross-list, then firms with strong governance might be more likely to cross-list
(given that the benefit from exploiting these investment opportunities outweigh the
costs of cross-listing only for firms with strong governance). If, however, we assume
high investment opportunities then we cannot necessarily infer that firms with weak
or strong governance are more likely to cross-list (benefits might outweigh cross-listing
costs for all firms regardless whether they have weak or strong governance). 7 As a result,
7 A similar rationale might apply for other cross-listing motivations.
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the relation of governance with the probability of cross-listing is ambiguous. Between

the cross-listing announcement and the actual listing, firms may take actions to improve
their governance. Thus, during this period we expect firms to take actions to improve
their corporate governance relative to their pre-listing period governance, and relative
to the governance system of non-cross-listed firms.
3. CORPORATE GOVERNANCE ISSUES

In this section we present an overview of the governance measures we employed in this
study and their relation to cross-listing. Since, as we discussed in the previous section,
the relation between cross-listing and corporate governance prior to the decision to
cross-list is ambiguous, our discussion focuses on the period after the cross-listing
decision; period in which we expect improvements in corporate governance.
Consistent with prior governance literature we separate governance measures in four
main categories, namely, measures related to board characteristics; measures related to
the independence of boards and audit committees; measures on the ability of CEOs’
to influence the board, and various ownership characteristic measures (Agrawal and
Chadha, 2005).
Board characteristics
Prior studies provide empirical evidence for various board characteristics, namely,
board size, audit committee and the existence of a corporate governance committee.
Regarding board size, Lipton and Lorsch (1992) suggest an optimal board size between
seven and nine directors. Yermack (1996) documents an inverse relation between board
size and firm size due to higher coordination costs and process losses that firms face.
To the extent that board size makes the monitoring process inefficient prior to the
cross-listing decision, we expect an improvement to the optimal board size after the
listing.
As far as the second board characteristic is concerned, the primary purpose of
the audit committee is to oversee the financial reporting process of a firm. Ex ante
large committee size is likely to have a non-linear effect on committee performance.
Moreover, a larger number of audit committee members does not necessarily ensure
that audit committee adequately oversees the firm’s audit process and its internal
accounting controls. 8 The main concern for audit committees is to ensure the
independence of their members. However, we expect a positive relation between audit
committee size and cross-listing in the US.
A third board characteristic refers to the presence of a corporate governance
committee. The primary purpose of this committee is to ensure that the firm closely
follows corporate governance rules. However, in Canada the law does not require the
presence of a corporate governance committee. The presence of this committee and/or
other voluntary established committees by the firm suggests better governance quality.
Thus, we expect (a) a positive relation between cross-listing and the presence of a
corporate governance committee, and (b) a positive relation between cross-listing and
the total number of committees.
8 For example, Xie et al. (2003) find an insignificant relation between audit committee size and discretionary
accruals.

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Independence of boards and audit committee

In addition to the board characteristics, prior literature provides empirical evidence for
a number of board independence measures, among those, directors’ independence,
outside directors’ incentive plans and audit committee independence. As far as
directors’ independence is concerned, it is believed that independent directors are
better able to monitor managers (see, Byrd and Hickman, 1992, Cotter et al., 1997;
and Peasnell et al. 2005). Firms with more independent boards have a lower incidence
of accounting fraud and higher financial reporting quality (Beasley, 1996; and Klein,
2002). Therefore, we expect board independence to be positively related to cross-listing.
Regarding outside director incentive plans, in recent years, they have become
an increasingly popular measure for inducing outside directors to improve their
monitoring performance. If such plans motivate directors to become better monitors
as suggested by Perry (1996), then firms with such plans should have better governance
quality. Consistent with this view, Vafeas (1999) suggests that firms that rely more on
boards as a monitoring device, adopt director incentive plans. Thus, we expect more
firms to use these plans after the cross-listing decision.
Another approach that has been employed in order to enhance the firm monitoring
is through independent audit committees. Independence of the audit committee might
facilitate better monitoring and higher investor protection. Prior studies suggest that
the presence of inside directors in audit committees is likely to be related to poorer
financial reporting choices because insiders often have incentives to tolerate a lower
quality of reported earnings (Klein, 2002; and Bedard et al., 2004). Thus, we expect a
positive relation between independence of audit committees and cross-listing.
CEO’s influence on the board

A CEO’s influence on the board can reduce the board’s effectiveness in monitoring
managers and thus weaken investor protection. The greater the CEO’s influence on the
board, the less likely it is for the board to suspect irregularities that a more independent
board may have caught. The CEO’s influence on the board might be higher when the
positions of the CEO and the chairman of the board are held by the same person.
In this line, shareholder activists have long argued that the roles of the CEO and the
chairman of the board should be separated to contain CEO dominance over other
board members. Strickland et al. (1996) and Wahal (1996) report several cases in
which shareholder activists targeted firms for a split in the CEO = Chairman roles.
Thus, we expect cross-listed firms to have lower incidence of same CEO = Chairman.
An alternative way, in which the CEO’s influence on the board might increase, is when
the CEO participates in the firm’s committees. In some cases, the CEO’s influence in a
number of committees might be desirable (i.e. strategy and investment committees). In
contrast, in other committees it might be undesirable (i.e. audit committee). Thus, it is
not clear how cross-listing relates to the CEO’s participation in committees. However,
to the extent that cross-listing improves corporate governance, we expect a negative
relation between cross-listing and the CEO’s participation in the audit committee.
Ownership characteristics
An efficient contracting view of the firm suggests that market pressures induce each
corporation to economize on agency costs by adopting an optimal mix of control
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mechanisms, namely, insider ownership, outside blockholders ownership and the

presence of dual class shares. Concerning insider ownership, in the presence of a
strong legal environment, as insider ownership rises, insiders have incentives to protect
shareholders’ interest and thus would need less supervision, albeit in a non-linear
fashion (Morck et al., 1988; and McConnell and Servaes, 1990). However, without
a strong legal environment, as insider ownership rises, insiders have lower costs for
extracting private benefits from the firm. Since in Canada investor protection is
perceived to be weaker than in the US, we expect firms with high insider ownership
to have lower investor protection and be less likely to cross-list in the US. 9 Consistent
with this rationale, Doidge et al. (2005) document that firms in which controlling
shareholders have greater ownership of voting rights, and, therefore tighter control of
the firm, are negatively related to the existence of a US listing.
As far as outside blockholders ownership is concerned, it is believed that it could
facilitate better corporate governance since blockholders are in a position to monitor
management. Consistent with this notion, Shivdasani (1993) reports that the likelihood
of a hostile takeover increases whenever outside blockholders are present. However,
Singh and Davidson III (2003) suggest that outside blockholders may only have a limited
effect on reducing agency costs. Thus, since the evidence on this issue is mixed, we
examine the relation between outside blockholders and cross-listing in the US.
An additional ownership mechanism that might affect the monitoring ability of
blockholders and thus increase the agency costs among insiders and shareholders is
the presence of dual class shares. Doidge (2004) provides evidence that the voting
premium between dual class shares is reduced by 43% after the cross-listing. Moreover,
the difference in voting premiums between cross-listed and non-cross-listed firms is
statistically significant. As a result, cross-listing reduces the risk of private benefits of
control. Thus, we expect a lower incidence of dual class after the listing and a negative
relation with a cross-listing in the US.
4. DATASET
The dataset consists of Canadian firms that cross list on NYSE, NASDAQ or AMEX
exchanges during the period 1997 to 2003. 10 Governance data were obtained from
firms’ annual proxy statements filed in the System for Electronic Document Analysis
and Retrieval (SEDAR). 11 Since SEDAR was launched in 1997, the year 1997 is used
9 Bhattacharya and Daouk (2002) show that insider-trading laws were enacted in Canada much later than in
the US, and their first prosecution by Canadian officials was almost two decades after the first prosecution in
the United States. In addition, several studies documented substantial insider trading ahead of takeover
announcements, ahead of announcement of an acquisition and during other various events (Jabbour
et al., 2000; Bris, 2005; and McNally and Smith, 2003). The severity of these investor protection issues was
noted (November 2003) by the ‘Insider Trading Task Force’, a group of Canadian securities regulators and
supervisors who highlighted several important differences from the US This lack of enforcement has caused
the Canadian government to act with the introduction of legislation in June 2003 to admit white-collar crime
under the Criminal Code. Overall, the aforementioned discussion suggests that managers are able to trade
on inside information, consistent with poor protection of minority shareholder’s rights.
10 We exclude Canadian firms cross-listed on OTC because these firms do not face any minimum listing
standards and there is no business relationship between the quotation service and the issuers. Consequently,
the cross-listing effects should be limited. In this line, Miller (1999), Foerster and Karolyi (1999) and Doidge
et al. (2003) provide evidence for substantially lower cross-listing benefits on OTC cross-listed firms relative
to the exchange cross-listed firms.
11 The Canadian Securities Administrators (CSA) operates the SEDAR system in order to make Canadian
public securities filings easily accessible to all.

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as the initial cut-off year for our sample. Accounting data were retrieved from the
COMPUSTAT database and stock returns from DATASTREAM.
The initial sample consists of 109 firms that had their first listing on a major US stock
exchange during the period 1997 to 2003. We impose two main restrictions to isolate
the pure cross-listing effect. The first restriction refers to excluding firms with other
confounding effects that might complicate the analysis whereas the second one refers
to data availability.
As far as the restriction on other confounding effects, we excluded the following
firms: (a) sixteen firms that listed their shares on US and Canadian stock exchanges
during the same year. In this case there are two events, initial public offering and
cross-listing, that might affect the results on corporate governance, (b) four firms that
listed their shares on US exchanges prior to their listing in Canada. For these firms
the effect of listing to a stricter regulatory environment cannot be detected, (c) four
firms that were formed after a merger and listed their shares on US stock exchanges
during the same year. For these firms we could not identify the changes in firm’s
governance regimes due to the listing, (d) two firms that changed their fiscal year
during the period under investigation, since the periods under investigation are not
comparable.
As far as the restriction on data availability, we excluded eleven firms with unavailable
governance data. These criteria/restrictions lead us to a final sample of 72 firms. For this
sample we have identified listing dates through stock exchanges’ webpages and through
the Lexis/Nexis database. We then collected data for the one-year period around the
event year. The event year is the fiscal year in which the listing has occurred. This
procedure yielded a total of 216 firm-year observations.
As a benchmark against which we compare the governance changes around the
cross-listing, we constructed a matched sample as follows: each cross-listed firm is
matched by size and industry at the year prior to the cross-listing with a Canadian non-
cross-listed firm. Specifically, we selected one matched firm that has the closest total
assets with the cross-listed firms’ total assets starting with firms in the same four-SIC
industry code. Forty firms or 55.6% of the sample firms were matched using
four-SIC industry code, nine firms or 12.5% of the sample firms were matched using
three-SIC industry code, fourteen firms or 19.4% of the sample firms were matched
using two-SIC industry code and nine firms or 12.5% of the sample firms were matched
using one-SIC industry code. For this sample we collected data for the one-year period
around the event year. This procedure yielded a total of 216 firm-year observations.
5. EMPIRICAL RESULTS
This section investigates the relation between cross-listing and corporate governance
mechanisms. We discuss (i) descriptive statistics, (ii) the corporate governance around
the cross-listing event, and (iii) the relation of corporate governance and firm value
around the cross-listing.
(i) Descriptive Statistics

Table 1 presents descriptive statistics for the cross-listed firms. The data cover the period
1997–2003. Results are presented by year, exchange of destination and by industry.
Panel A of Table 1 presents descriptive statistics by year. Each year accounts for about
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Table 1
Descriptive Statistics for Canadian Firms Cross-Listed on US Stock Exchanges for
the Period 1997–2003
Panel A: Distribution of Cross-Listed Firms by Year of Listing
Year Frequency %
1997 8 11.11
1998 7 9.72
1999 8 11.11
2000 18 25.00
2001 10 13.89
2002 10 13.89
2003 11 15.28
Total 72 100.00
Panel B: Distribution of Cross-Listed Firms by Exchange Listing
Exchange Frequency %
AMEX 21 29.17
NASDAQ 23 31.94
NYSE 28 38.89
Total 72 100.00
Panel C: Distribution of Cross-Listed Firms by 2-digit SIC Industry Code
Industry (SIC 2 codes) Frequency %
Mining (10—14) 22 30.56
Food and tobacco (20) 1 1.39
Textiles and apparel (23) 1 1.39
Lumber, furniture, paper and print (25–27) 3 4.17
Chemicals (28) 7 9.72
Petroleum (29–30) 2 2.78
Primary and fabricated metals (33) 2 2.78
Machinery (35–36) 6 8.33
Transport equipment (37) 1 1.39
Instruments and miscellaneous manufacturing (39) 1 1.39
Transport, communications, utilities (40–49) 7 9.72
Wholesale trade (51) 1 1.39
Finance, insurance, real estate (60–69) 7 9.72
Hotels and personal service (70) 1 1.39
Services (73–87) 10 13.89
Total 72 100.00
Note:
This table presents descriptive statistics for 72 Canadian cross-listed firms in the US. Panel A presents
information for the year of listing. Panel B shows a classification of our sample based on the US exchange
used for cross-listing. Panel C presents information by industry (2-digit SIC codes) for each cross-listed
firm.
10% to 15% of the sample with the exception of year 2000, which accounts for 25%
of the sample. Panel B of Table 1 shows a classification of the sample based on the
US exchange used for cross-listing. Twenty-eight (39%) of the cross-listed firms chose
to list on the US’s largest exchange, NYSE, twenty-three (32%) firms were listed on
NASDAQ and twenty-one (29%) firms were listed on AMEX. In Panel C of Table 1
we present descriptive statistics by industry, with the cross-listing activity taking place

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largely within the mining industry (31%), in the services industry (14%) and in the
transport, communications and utilities industries (12%). We also observe that seven
(10%) firms belong in the finance, insurance and real estate industry.
(ii) The Corporate Governance Around the Cross-Listing
(a) Unadjusted Corporate Governance Measures

In this subsection, we discuss governance variables, levels and changes, for the one-year
period around the listing. Results are presented in Table 2. 12
The number of audit committee members and the number of committees are similar
around the cross-listing period. In contrast, board size and the presence of a corporate
governance committee improve substantially after the listing. Specifically, board size
increases on average (median) by 0.37 (0.500) members from the one-year period
prior to the listing to the one-year period after the listing (the median difference is
statistically significant at the 5% level) whereas for the same period the proportion of
firms with corporate governance committee increases on average (median) by 14%
(0%). Both mean and median figures are statistically significant at the 1% level of
significance. The fact that more cross-listed firms are having corporate governance
committees, may indicate that firms closely follow corporate governance rules after the
listing.
Independence of board and audit committee

The independence of board and audit committees is expected to improve after the
cross-listing decision. Cross-listed firms increase the percentage of outside directors
in the board and use directors’ incentive plans more frequently after the listing.
Specifically, the percentage of outside directors increases on average (median) by 2.6%
(3.3%) whereas for the same period the percentage of firms that provide a directors’
incentive plan increases on average (median) by 11% (0%) after the listing (both
figures are statistically significant at the 10% level for outside directors and at the 5%
level for the directors’ incentive plan, respectively). Consistent with our expectations,
the percentage of independent directors in the audit committee increases on average
(median) by 5.5% (0%) from the one-year period prior to the listing to the one-year
period after the listing. Both mean and median figures are statistically significant at the
5% level.

We observe that after the listing there has been only a slight decrease in the cases
where the CEO does not chair the board or attends firms’ committees (statistically
12 All results presented in this section are robust to the exclusion of finance, insurance and real estate
industry.
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C

Table 2
Univariate Comparison of Corporate Governance Variables for the Pre-Listing and the Post-Listing Period
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Mean Median Mean Median Mean Median Mean t-statistic Median z-statistic
Board size 8.94 7.50 9.14 8.00 9.31 8.00 0.370∗ 1.870 0.500∗∗ 2.095
Aud.members(#) 3.56 3.00 3.56 3.00 3.61 3.00 0.050 0.664 0.000 0.878
Corp.gover comm 0.61 1.00 0.69 1.00 0.75 1.00 0.140∗∗∗ 3.384 0.000∗∗∗ 3.162
No of committees 3.10 3.00 3.19 3.00 3.22 3.00 0.120 1.013 0.000 1.497
Independence of boards and audit committees
% Outside dirs 65.12 66.67 66.72 66.67 67.70 70.00 2.574∗ 1.761 3.333∗ 1.903

Dirs. incentive plan 0.71 1.00 0.82 1.00 0.82 1.00 0.110∗∗ 2.044 0.000∗∗ 2.000
Aud.Ind.% 89.56 100.00 91.13 100.00 95.09 100.00 5.530∗∗ 2.484 0.000∗∗ 2.332
CEO=CHAIRMAN 0.53 1.00 0.53 1.00 0.50 0.50 −0.030 −0.815 −0.500 −0.816
CEO committees 0.58 0.00 0.51 0.00 0.51 0.00 −0.070 −0.897 0.000 −0.898
CEO in audit comm. 0.14 0.00 0.07 0.00 0.06 0.00 −0.080∗ −1.933 0.000∗ −1.897
% Ins.Own. (voting power) 24.14 13.90 20.61 9.95 18.71 10.25 −5.428∗∗∗ −4.249 −3.655∗∗∗ −4.643
% Outs.Blockholders Own. 5.15 0.00 4.45 0.00 5.12 0.00 −0.035 −0.036 0.000 −0.046
CROSS-LISTING AND CORPORATE GOVERNANCE
DualClass Shares 0.21 0.00 0.19 0.00 0.19 0.00 −0.020 −0.575 0.000 −0.577
Note:
The table shows mean and median values for Canadian cross-listed firms from the one-year period prior to the listing to the one-year period after the listing
and tests for differences between the pre-listing and the post-listing periods. The dataset consist of 72 Canadian firms cross-listed on US stock exchanges during the
period 1997–2003. All variables are defined in the Appendix. The paired sample t-test (2-tailed) and the Wilcoxon signed rank tests (2-tailed) were used to test for the
significance of the results. Significance is designated by ∗∗∗ at 1%, ∗∗ at 5% and ∗ at 10%.
1293
insignificant). In addition, the CEO presence on the audit committee is reduced on

average (median) by 8% (0%) after the listing (statistically significant at the 10% level).
Overall, cross-listed firms appear to reduce the influence that the CEO exerts on the
board after the listing.
We observe significant changes in the ownership characteristics around the cross-listing.
Specifically, insider ownership after the listing is on average (median) 5.4% (3.7%)
lower relative to the pre-listing period. Both mean and median figures are statistically
significant at the 1% level. Moreover, we observe improvements in the percentage of
outside blockholders and a slight reduction in the use of dual class shares after the
listing (statistically insignificant at the 10% level).
(b) Matched Adjusted Corporate Governance Measures

In the previous subsection, we discussed corporate governance changes around the
cross-listing on US stock exchanges. The benchmark against which we compared
governance variables was the pre-listing firms’ governance variables. To examine the
robustness of the results we also use a control sample approach. However, the use of
a control sample may bias the results against finding governance differences between
the two samples. On the one hand, the governance of both the cross-listed and the
control sample firms may be affected by macro factors. In that case, independent of
the cross-listing effects, macro factors may eliminate governance differences between
the two samples of firms. On the other hand, if cross-listing is indeed linked with stricter
corporate governance, then according to Stulz (1999), all Canadian firms and especially
cross-listed firms’ competitors might be under pressure to improve their governance.
In that case, the cross-listing will exert pressure to eliminate governance differences
between the two samples of firms. As a result, by finding no differences in governance
between the cross-listed and the control sample of firms is not necessarily evidence
against the reputational bonding effect of the cross-listing. Consequently, this type of
analysis is conservative and should be interpreted with caution.
In Table 3 we present matched adjusted governance measures around the listing.
These measures are defined as the difference between the governance measures of
cross-listed firms and the governance measures of the corresponding control firms.
The two groups of firms have similar board characteristics during the period tested
with the exception of board size. Specifically, one year after the listing the number
of the board members in cross-listed firms is higher on average (median) by 0.9 (0)
relative to the matched firms (significant at the 5% and 1% level, respectively). Given
that in Table 2 we provide evidence for substantial increases in the presence of a
corporate governance committee for cross-listed firms, results in Table 3 suggest that a
similar increase is observed for the control sample, resulting in insignificant differences
between the two samples.
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Table 3
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Univariate Comparison of Corporate Governance Variables of Cross-Listed and Control Firms
Years
−1 0 1
Mean Median Mean Median Mean Median
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Board size 0.240 0.000 0.640 0.000 0.861∗∗ 0.000∗
0.559 0.196 1.577 1.484 1.984 1.935
Aud.members(#) 0.180 0.000 0.170 0.000 0.125 0.000

1.356 1.264 1.565 1.442 1.118 0.994
Corp.gover˙comm 0.070 0.000 0.110 0.000 0.097 0.000

0.843 0.845 1.526 1.512 1.355 1.347

No of committees 0.070 0.000 0.030 0.000 0.042 0.000
0.380 0.303 0.174 0.335 0.253 0.418

% Outside dirs 1.228 0.385 2.880 1.656 2.365 3.182
0.427 0.372 0.995 0.774 0.848 0.685
Dirs. Incentive plan 0.111 0.000 0.180∗∗ 0.000∗∗ 0.167∗∗ 0.000∗∗

1.472 1.461 2.501 2.414 2.176 2.121
CROSS-LISTING AND CORPORATE GOVERNANCE
Aud.ind.% 3.958 0.000∗ 5.231∗ 0.000∗∗ 6.574∗∗∗ 0.000∗∗∗

1.411 1.935 1.839 2.143 2.758 3.052
Ceo’s influence on the board
CEO=CHAIRMAN 0.150∗∗ 0.000∗∗ 0.208∗∗∗ 0.000∗∗∗ 0.208∗∗∗ 0.000∗∗∗

2.171 2.117 2.928 2.785 2.928 2.785
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Table 3 (Continued)
Years
−1 0 1
Mean Median Mean Median Mean Median
CEO committees −0.130 0.000 −0.097 0.000 −0.014 0.000

−1.101 −1.256 −0.961 −0.988 −0.125 −0.233
CEO in audit comm. 0.010 0.000 −0.028 0.000 −0.014 0.000

0.217 0.218 −0.630 −0.632 0.376 −0.378
% Ins.Own. (voting power) −7.010 −2.085 −9.948∗∗ −3.034∗ −11.204∗∗∗ −3.500∗∗∗
−1.600 −1.061 −2.372 −1.942 −2.733 −2.643
% Outs.Blockholders Own. 0.160 0.000 0.064 0.000 0.408 0.000

−0.090 0.047 0.039 0.328 0.243 0.047
DualClass Shares 0.030 0.000 0.000 0.000 0.000 0.000

0.445 0.447 0.000 0.000 0.000 0.000
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Note:
This table presents mean and median values for matched samples of cross-listed and control firms and tests for differences between the two groups. The
cross-listed sample consists of 72 firms that enter US stock exchanges during the years 1997–2003. Each cross-listed firm is matched with a control firm that has the
closest size (total assets at the end of the fiscal year ended one year before the listing) from among all firms in its industry (SIC codes). The paired sample t-test

(2-tailed) and the Wilcoxon signed rank tests (2-tailed) were used to test for the significance of the results (with bold below the coefficient). Significance is designated
by ∗∗∗ at 1%, ∗∗ at 5% and ∗ at 10%.

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With the exception of the percentage of outside directors, cross-listed firms appear to
have more independent boards and audit committees relative to the control sample.
Specifically, for both year 0 and year +1, the difference between cross-listed and control
firms that use directors incentive plans is on average (median) more than 16% (0%).
These differences are statistically significant at the 5% level. Moreover, cross-listed firms
experience increases in the percentage of independent directors on audit committees
after the event relative to the control sample. The difference in the mean (median)
proportion between cross-listed and control sample of firms is 3.96% (0%) one year
prior to the listing (statistically insignificant and statistically significant at the 10%
level, respectively) whereas the difference in the mean (median) proportion improves
to 5.23% (0%) in the year of listing (both statistically significant at the 5% and 1% level,
respectively) and to 6.57% (0%) one year after the listing (both significant at the 1%
level). These results, in conjunction with the similar pattern that we observed in Table
2, lead us to conclude that cross-listing is driving the difference in the two samples of
firms.

One year prior to the listing, the percentage of CEOs chairing the board in cross-listed
firms is 15% higher relative to the control sample of firms, while after the listing we
observe that this difference increases to 20.8% (significant at the 1% level). Since in
Table 2 we observe about the same frequency of the CEOs chairing the board, both
before and after the listing, we conclude that the observed pattern is due to the control
sample of firms. Moreover, prior to the listing, the CEOs of the cross-listed firms did not
participate in committees as much as the CEOs of the control firms. However, after the
listing the CEO’s participation in committees increased and became more similar in
both the cross-listed and the control sample of firms. Concerning CEO participation in
the audit committee prior to the listing, evidence shows that the CEO of the cross-listed
firm participated more. After the listing, evidence shows the opposite results but these
differences are statistically insignificant. Thus, we suggest that cross-listed and control
firms appear very similar in the measurable degree of influence that the CEO exerts
on the board.
Cross-listed and control firms appear to have similar ownership structures prior to the
listing. Significant differences emerge after the cross-listing only for the percentage
of insider owners. Specifically, cross-listed firms appear to have on average (median)
11.2% (3.5%) lower insider owners relative to the control sample one year after the
listing. The mean and median differences are statistically significant at the 1% level
of significance. Since in Table 2 we provide evidence that insiders sell shares after the
cross-listing, we suggest that cross-listing drives the observed pattern.
(c) Conditional (Fixed Effects) Logistic Regression Analysis

In this subsection, we examine whether the relationship between corporate governance
and cross-listing, identified in the preceding subsections, holds after we account for

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Table 4
Conditional (Fixed Effects) Logistic Regression Results
Years
Variables −1 0 1
LnAT 3.321∗∗∗ 2.840∗∗∗ 1.581∗∗∗

3.450 3.120 3.180
MB 0.330∗∗∗ 0.519∗ 0.618∗∗∗

2.630 1.730 2.680
Board size −0.031 −0.109 0.134

−0.170 −0.630 1.060
Dirs. Incentive Plan 0.328 0.842 1.299∗

0.550 1.250 1.740
Aud.Ind.% 0.024 0.064∗∗ 0.085∗∗∗

1.340 1.980 2.680
CEO=CHAIRMAN 1.144 0.343 1.264∗

1.520 0.410 1.750
% Ins.Own. (vot. power) −0.016 −0.011 −0.016

−1.630 −0.900 −1.520
Log Likelihood −23.708 −18.703 −21.910

Pseudo R 2 0.525 0.625 0.561
Sample size 144 144 144
Note:
This table presents the results of conditional (fixed effects) logistic regressions. The dependent
variable equals to one for cross-listed firms and zero for control firms. The sample consists of 72 Canadian
cross-listed firms and 72 industry-size matched firms over the period 1997–2003. Years denotes the period
for which the regression is run. LnAT is the natural logarithm of total assets. MB is the market value of
equity to book value of equity. Board size is the number of directors serving in the board at fiscal year
end; Dirs. Incentive Plan is a dummy variable that equals to one if the firm employs incentive plans for its
outside directors and zero otherwise; Aud. Ind.% is the ratio of directors serving on audit committee who
are not employees of the company or their relatives, employees of subsidiaries, retired firm employees or
gray directors to aud. Members; CEO = CHAIRMAN is a dummy variable that equals to one if the CEO
shares the same role with the chairman of the board, and zero otherwise;% Ins. Own (voting power) is the
percentage of voting power owned by officers and directors as a group. The numbers in bold are z-statistics for
testing the significance of parameter estimates. Significance is designated by ∗∗∗ at 1%, ∗∗ at 5% and ∗ at 10%.
other corporate characteristics that affect a US cross-listing decision. Because we employ

a matched-pairs (rather than a random) sample, the standard logistic regression is
inappropriate. We thus use conditional (fixed effects) logistic regression analysis. The
dependent variable equals one for cross-listed firms and zero for the control firms. We
run various models with the governance variables discussed in Section 3 and various
control variables being the explanatory variables. Specifically, as control variables we
use the logarithm of total assets (LnAT) and the market to book ratio (MB) since
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Pagano et al. (2002) suggest that cross-listed firms are large firms and/or have high
growth prospects. We run regressions separately for the year prior to the listing, the
event year, and the year after the listing. Results are presented in Table 4.
For the year prior to the listing, corporate governance variables are insignificant after
adjusting for size (LnAT) and growth (MB) effects. Thus, we do not find evidence for a
significant impact of the quality of corporate governance on the decision to cross-list on
US stock exchanges. Moreover, governance variables that relate to board characteristics
(board size) are insignificant for all the years around the listing.
After the listing, governance variables that relate to the independence of board
and audit committees and to the ownership structure become significant. Specifically,
for the one year after the listing, firms with more director incentive plans are more
likely to belong in the cross-listing category (significant at the 10% level). Perry (1996)
suggests that director incentive plans have become an increasingly popular measure for
inducing outside directors to improve their monitoring performance. Consequently,
firms with such plans should have better governance quality. In this way, the percentage
of independent directors in audit committees is positively related to the cross-listing
after the event (significant at the 5% level the year of listing and at the 1% level
one year after the listing). Finally, one year after the listing we observe a positive
relation between the cases where CEOs chair the board and the existence of a listing
(significant at the 10% level). Overall, results are consistent with the notion that cross-
listed firms improve the independence of their board and audit committees after the
listing.
Robustness checks
We examine the robustness of our results in the previous subsection to the inclusion
of other governance and control variables. We rerun the conditional (fixed effects)
logistic regression results of Table 4 using the remaining corporate governance variables
discussed in Section 3. When we add these variables as explanatory variables in our
conditional (fixed effects) logistic regression analysis, none of them is statistically
significant; their addition does not change the main results found in Table 4. Moreover,
our results remain robust to the inclusion of debt to equity ratio. We control for firms’
leverage since highly levered firms may find it more difficult or more expensive to raise
external financing in the Canadian market. Untabulated results show that for all time
periods tested, the debt to equity ratio is statistically insignificant.
We also examine the effect of the financial firms on our results. Results in Table 1
show that seven (9.7%) firms in our sample belong in the finance, insurance and real
estate industry. The exclusion of these firms does not change our basic results presented
in Table 4.
Finally, we employ the Hausman (1978) test to examine whether the probability for
a cross-listing and audit independence are endogenously determined for the year 0.
Results show that the Hausman (1978) test does not reject the null hypothesis which
states inexistence of endogeneity among the regressors and consequently cross-listing
and audit independence are not endogenously determined during year 0 (F -test =
2.501, p-value = 0.116). These results increase the confidence that cross-listing affects
firm’s corporate governance and that the results are not a symptom of a more general
internationalization process.

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(iii) Corporate Governance and Firm Value

In the previous subsection, we provided evidence for governance changes around
the listing. These governance changes suggest improved independence of audit
committees and different ownership characteristics after the cross-listing as well as
increased use of directors’ incentive plans. In this subsection, we examine whether
cross-listing affects the sensitivity of the relation between corporate governance and
firm valuation. However, we need to be cautious about the sensitivity of the relation
between corporate governance and firm valuation. Let us assume that firms with a more
sensitive relation between corporate governance and firm valuation are more likely to
cross-list. We could then conclude that cross-listing affects the sensitivity of the relation
between corporate governance and firm valuation, but it would simply reflect the fact
that the sensitivity of the relation between corporate governance and firm valuation
for the sample of cross-listed firms is higher relative to the non-cross-listed sample of
firms. 13 We therefore control for the endogeneity of the cross-listing decision by using
a fixed-effect cross-sectional time series regression model, with the year prior to the
cross-listing as the base year. 14 With this model we are able to measure the change in
the sensitivity of the relation between firm valuation and governance after the listing,
relative to the base year. Consequently, the endogeneity of the cross-listing decision
should be limited. Specifically, as dependent variable we use the market to book ratio
(MB). As explanatory variables we include control variables (size, profitability and
leverage) and corporate governance variables (board size, directors’ incentive plan,
percentage of audit committee independence, CEO = CHAIRMAN and percentage of
insider ownership). Furthermore, we employ a dummy variable (CL) interacted with
governance variables to separate the sensitivity of the relation between cross-listed firms
and non-cross-listed firms (CL equals 1 for cross-listed firms and 0 otherwise) and a
dummy variable (CL ∗ POST) interacted with governance variables to separate the
sensitivity of the relation between the pre-cross-listing and the post-cross-listing periods
(POST equals 1 for the post listing period of the cross-listed firms and 0 otherwise).
Results are presented in Table 5.
Specifically, results show that the control variables are highly significant in explaining
firm valuation. We find a negative relation between firm size and firm valuation
(significant at the 1% level) whereas, we find a positive relation between profitability
and leverage with firm valuation (both significant at the 1% level).
As far as the corporate governance variables are concerned, prior to the listing we do
not find significant differences in the sensitivity of the relation of corporate governance
and firm valuation between cross-listed and non-cross-listed firms. The only exception
is the positive relation in the sensitivity of the relation between insider ownership and
firm valuation for the cross-listed firms relative to the non-cross-listed firms, prior to
the listing (significant at the 1% level).
13 In this line, Gozzi et al. (2005) expressed endogeneity concerns for the results that suggest that cross-
listing leads to higher firm valuation since they provide evidence for a positive trend in cross-listed firms’
Tobis q s until the cross-listing year.
14 The use of firm fixed-effects models is suggested by the literature when using cross-sectional time series
(panel) data in order to control for firm-specific variables that are constant over time but vary across firms
(Perry and Zenner, 2001).
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Table 5
The Sensitivity of the Relation Between Corporate Governance and Valuation
After the Cross-Listing
Variables MB
Constant 17.113∗∗∗
6.060
LnAT −1.142∗∗∗
−4.450
ROA 9.956∗∗∗
3.850
DE 0.336∗∗∗
6.350
Board size 0.258
1.230
Dirs. Incentive Plan 0.085
0.080
Aud.Ind (%) −0.035
−1.360
CEO = CHAIRMAN −1.130
−1.000
% Ins.Own. (voting power) −0.033∗
−1.910
CL∗ Board size 0.082
0.300
CL∗ Dirs. Incentive Plan 1.971
0.920
CL∗ Aud.Ind (%) −0.033
−0.880
CL∗ CEO = CHAIRMAN 0.006
0.000
CL∗ % Ins.Own. (voting power) 0.160∗∗∗
3.710
CL∗ Post ∗ Board size −0.215
−0.850
CL∗ Post ∗ Dirs. Incentive Plan −0.765
−0.310
CL∗ Post ∗ Aud.Ind (%) 0.071∗
1.810
CL∗ Post ∗ CEO = CHAIRMAN 0.150
0.070
CL∗ Post ∗ % Ins.Own. (vot. power) −0.116∗∗
−2.340
F -statistic 6.820∗∗∗
R-square 0.540
Sample size 432

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Table 5 (Continued)
Notes:
This table presents the results of firm fixed-effects regressions of the following equation. for 72
Canadian firms cross-listed on US exchanges during the period 1997–2003 and an industry-size control
sample, for the one year period around cross-listing:

5
8
13
MBit = c 0 + c j GovernanceVars i + c k ControlVars i + CL∗ c m GovernanceVars i
j =1 k=6 m=9

18
+ CL∗ POST∗ c n GovernanceVars i + εi .
n=14
Dependent variable is the market to book ratio (MB). Governance variables are: Board size, Dirs Incentive Plan
which is a dummy variable that equals to one if the firm employs incentive plans for its outside directors and
zero otherwise, Aud.Ind (%) is the percentage of independent directors serving on the audit committee;
CEO = CHAIRMAN is a dummy variable that equals to one if the firms CEO shares the same role with
the chairman of the board, and zero otherwise; Ins.Own. (%) is the percentage of voting power owned
by officers and directors as a group. As control variables we use the logarithm of total assets (LnAT), the
return on assets (ROA) and the debt to equity ratio (DE). CL is a dummy variable that takes the value of
1 if the firm is cross-listed whereas POST is a dummy variable that equals to 1 if the observation is for the
period after the cross-listing, and zero otherwise. t-statistics are presented in bold just below the coefficient.
Significance is designated by ∗∗∗ at 1%, ∗∗ at 5%, and ∗ at 10%.
After the listing we document significant changes in the sensitivity of the relation
between corporate governance and firm valuation for the cross-listed firms. Specifically,
relative to year −1, we observe a negative change in the sensitivity of the relation between
insider ownership and firm valuation (significant at the 5% level), relative to a positive
relation indicated in the period prior to the listing. A possible explanation might be
that due to improved investor protection after the cross-listing, lower insider ownership
is needed for inducing managers to behave like shareholders Moreover, relative to year
−1, we find a positive change in the sensitivity of the relation between firm valuation
and audit committee independence (significant at the 10% level) after the cross-listing.
This relation might suggest that after the listing the same level or positive changes in
audit committee independence facilitate better investor protection and thus, improve
firm valuation in an economically meaningful manner. Overall, our results, consistent
with the literature on the bonding role of cross-listings on US stock exchanges, suggest
that the sensitivity of the relation of governance and cross-listed firm valuation improves
after the cross-listing.
6. CONCLUSIONS
In this paper we examined the relationship of corporate governance and cross-listing on
US stock exchanges. Specifically, (1) we examined the impact of corporate governance
on the decision to cross-list on US stock exchanges, (2) we examined whether cross-
listed firms experience improvements in their corporate governance after the listing
relative to the pre-listing period, and (3) we examined whether the sensitivity of the
relation between corporate governance and cross-listed firms’ valuation improves after
the listing.
By using data for 72 Canadian firms cross-listed on US stock exchanges during
the period 1997–2003, we show that after controlling for firm characteristics, cor-
porate governance does not have an impact on the decision to cross-list. However,
we provide evidence for significant improvements in corporate governance after
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the listing. Improvements that relate to board characteristics and CEO’s influence
on the board were also found in the matched non-cross-listed firms. These results leave
the question open as to whether these governance improvements are the effect of a
cross-listing in the US.
Furthermore, improvements that relate to the independence of board and audit
committees and changes in ownership structure are found only in the cross-listed
firms. Specifically, we find that, after the listing, cross-listed firms use director incentive
plans more relative to the control sample of firms and have more independent
audit committees. Furthermore, we provide evidence for significant decreases in the
percentage of insider ownership (control rights) after the listing. These results are
consistent with Coffee (2001) who suggests that dispersed ownership could arise and
persist if there is a significant improvement in the protection of minority rights.
Finally, we provide evidence on whether cross-listing affects the sensitivity of the
relation between corporate governance variables and firm valuation. Results show that
the sensitivity of the relation between market to book and insider ownership and audit
committee independence become more important after the cross-listing relative to
the pre-listing period. Overall, these results are consistent with the literature on the
bonding role of cross-listings on US stock exchanges.
APPENDIX
Board size is the number of directors serving in the board at fiscal year end. Aud.
Members (#), is the number of directors serving in the audit committee at fiscal year
end. Corp Gover Comm is a dummy variable that equals one if a firm has corporate
governance committee and zero otherwise. No of Committees is the total number of
firms committees.
Independence of boards and audit committee

% Outside dirs is the ratio of directors serving in the board who are not employees of
the company or their relatives, employees of subsidiaries, retired firm employees or
gray directors to board size. Dirs. Incentive Plan is a dummy variable that equals one
if the firm employs incentive plans for its outside directors and zero otherwise. Aud.
Ind.% is the ratio of directors serving in audit committee who are not employees of the
company or their relatives, employees of subsidiaries, retired firm employees or gray
directors to audit committee members.

CEO = CHAIRMAN is a dummy variable that equals one if the firms CEO shares the
same role with the chairman of the board, and zero otherwise. CEO committees is the
number of committees with CEOs’ participation. CEO in audit comm. is a dummy variable
that equals one if the CEO participates in the audit committee and zero otherwise.
% Ins. Own (voting power) is the percentage of voting power owned by officers and
directors as a group.% Outs. Blockholders Own. is the percentage of voting power owned

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Journal compilation
by outsiders (shareholders that are not officers or directors) that exceeds 10% of firms’
voting power. Dual Class Share, is a dummy variable that equals to one if firms have more
than one class of shares and zero otherwise.
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Journal of Business Finance & Accounting, 34(7) & (8), 1281–1306, September/October 2007, 0306-686X

Cross-Listing, Bonding Hypothesis and

Andreas Charitou, Christodoulos Louca and Stelios Panayides∗

Address for correspondence: Andreas Charitou, Department of Business Administration, University of

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in Canada will be at a disadvantage relative to investor protection in the US. Direct

2. THE RELATION OF CROSS-LISTING WITH CORPORATE GOVERNANCE

(i) Period After the Cross-Listing

(ii) Period Before the Cross-Listing

7 A similar rationale might apply for other cross-listing motivations.

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the relation of governance with the probability of cross-listing is ambiguous. Between

3. CORPORATE GOVERNANCE ISSUES

Independence of boards and audit committee

CEO’s influence on the board

mechanisms, namely, insider ownership, outside blockholders ownership and the

(i) Descriptive Statistics

(ii) The Corporate Governance Around the Cross-Listing

(a) Unadjusted Corporate Governance Measures

Independence of board and audit committee

CEO’s influence on the board

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insignificant). In addition, the CEO presence on the audit committee is reduced on

(b) Matched Adjusted Corporate Governance Measures

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Aud.members(#) 0.180 0.000 0.170 0.000 0.125 0.000

Corp.gover˙comm 0.070 0.000 0.110 0.000 0.097 0.000

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Independence of boards and audit committees

Dirs. Incentive plan 0.111 0.000 0.180∗∗ 0.000∗∗ 0.167∗∗ 0.000∗∗

Aud.ind.% 3.958 0.000∗ 5.231∗ 0.000∗∗ 6.574∗∗∗ 0.000∗∗∗

Ceo’s influence on the board

CEO=CHAIRMAN 0.150∗∗ 0.000∗∗ 0.208∗∗∗ 0.000∗∗∗ 0.208∗∗∗ 0.000∗∗∗

CEO committees −0.130 0.000 −0.097 0.000 −0.014 0.000

CEO in audit comm. 0.010 0.000 −0.028 0.000 −0.014 0.000

% Outs.Blockholders Own. 0.160 0.000 0.064 0.000 0.408 0.000

DualClass Shares 0.030 0.000 0.000 0.000 0.000 0.000

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Independence of boards and audit committees

CEO’s influence on the board

(c) Conditional (Fixed Effects) Logistic Regression Analysis

LnAT 3.321∗∗∗ 2.840∗∗∗ 1.581∗∗∗

MB 0.330∗∗∗ 0.519∗ 0.618∗∗∗

Board size −0.031 −0.109 0.134

Dirs. Incentive Plan 0.328 0.842 1.299∗

Aud.Ind.% 0.024 0.064∗∗ 0.085∗∗∗

CEO=CHAIRMAN 1.144 0.343 1.264∗

% Ins.Own. (vot. power) −0.016 −0.011 −0.016

Log Likelihood −23.708 −18.703 −21.910

other corporate characteristics that affect a US cross-listing decision. Because we employ

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(iii) Corporate Governance and Firm Value

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Independence of boards and audit committee

CEO’s influence on the board

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