Do Cross-Border Listing Firms Manage Earnings or Seize a Window of Opportunity.pdf

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Do Cross-Border Listing Firms Manage Earnings or Seize a Window of Opportunity.pdf

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Do Cross-Border Listing Firms Manage Earnings or Seize a Window of Opportunity

1009 THE ACCOUNTING REVIEW Vol. 82, No. 4 2007 pp. 1009–1030 Do Cross-Border Listing Firms Manage Earnings or Seize a Window of Opportunity? Gordian A. Ndubizu Drexel University ABSTRACT: Firms raising new equity capital at cross-listing (IPO) and those cross- listing existing home-country public shares (non-IPO) benefit from earnings that are high when they cross-list on U.S. stock exchanges. IPO firms have greater benefits than non-IPO firms because they receive cash infusion at listing. I find that performance (ROA) and cash flows peak at cross-listing period for all cross-border firms. Using a matched-firm research design to control for industry and performance, the results sug- gest that both IPO and non-IPO firms time cross-listing when performance is peaking (seize a window of opportunity). Further tests investigate whether IPO and non-IPO firms differ in their incentives to engage in earnings management at the time of cross- listing. The results suggest that both appear to engage in the same level of earnings management at the time of cross-listing. This suggests that incentives to boost earn- ings to obtain higher cash infusion are not the main motivation for the earnings man- agement observed. Other incentives, such as greater investor recognition could be a stronger motivation. Keywords: cross-listing IPO; discretionary accruals; earnings management. I. INTRODUCTION The recent literature on the globalization of capital markets has reported several ben-efits of cross-listing on U.S. stock exchanges.1 Specifically, these benefits include(1) a more liquid market for foreign shares leading to lower bid-ask spreads, (2) an ability to raise capital at cheaper prices on a more efficient market, (3) broadening the shareholder base to diversify financial risk, and (4) an increase in prestige and investors’ recognition of cross-listing firms. Merton (1987) demonstrates that variation in the levels 1 See the Geneva Group, Inc., the Bank of New York—the basics benef