Craig Doidge

Why are Foreign Firms Listed in the U.S. Worth More

At the end of 1997, the foreign companies listed in the U.S. have a Tobins q ratio that exceeds by 16.5% the q ratio of firms from the same country that are not listed in the U.S. The valuation difference is statistically significant and largest for exchange-listed firms, where it reaches 37%. The difference persists even after controlling for a number of firm and country characteristics. We propose a theory that explains this valuation difference. We hypothesize that controlling shareholders of firms listed in the U.S. cannot extract as many private benefits from control compared to controlling shareholders of firms not listed in the U.S., but that their firms are better able to take advantage of growth opportunities. Consequently, the cross-listed firms should be those firms where the interests of the controlling shareholder are better aligned with the interests of other shareholders. The growth opportunities of cross-listed firms will be more highly valued than those of firms not listed in the U.S. both because cross-listed firms are better able to take advantage of these opportunities and because a smaller fraction of the cash flow of these firms is expropriated by controlling shareholders. We find that our theory explains the greater valuation of cross-listed firms. In particular, we find expected sales growth is valued more highly for firms listed in the U.S. and that this effect is greater for firms from countries with poorer investor rights.

U.S. cross-listings and the private benefits of control: evidence from dual-class firms

Non-U.S. firms that cross-list on U.S. exchanges have voting premiums that are on average 43% lower than other non-U.S. firms that do not cross-list. Using a panel data set comprised of 745 firms that have dual class shares, this paper shows that the difference in voting premiums is statistically significant after controlling for firm and country level characteristics and that this result is robust to alternative benchmarks and methodologies. Further, it finds that the difference in voting premiums is larger for firms from countries that provide poor protection to minority investors. An event study shows that, on average, both the high and low voting share classes benefit when firms announce they will cross-list in the U.S. However, the low voting class benefits by a larger amount, which leads to the decrease in the voting premium. Overall, the evidence supports the bonding hypothesis: cross-listing in the U.S. improves the protection afforded to minority investors and decreases the private benefits of control.

Why do Foreign Firms Leave U.S. Equity Markets

This paper investigates Securities and Exchange Commission (SEC) deregistrations by foreign firms from the time the Sarbanes-Oxley Act (SOX) was passed in 2002 through 2008. We test two theories, the bonding theory and the loss of competitiveness theory, to understand why foreign firms leave U.S. equity markets and how deregistration affects their shareholders. Firms that deregister grow more slowly, need less capital, and experience poor stock return performance prior to deregistration compared to other foreign firms listed in the U.S. that do not deregister. Until the SEC adopted Exchange Act Rule 12h-6 in 2007 the deregistration process was extremely difficult for foreign firms. Easing these procedures led to a spike in deregistration activity in the second-half of 2007 that did not extend into 2008. We find that deregistrations are generally associated with adverse stock-price reactions, but these reactions are much weaker in 2007 than in other years. It is unclear whether SOX affected foreign-listed firms and deregistering firms adversely in general, but there is evidence that the smaller firms that deregistered after the adoption of Rule 12h-6 reacted more negatively to announcements that foreign firms would not be exempt from SOX. Overall, the evidence supports the bonding theory rather than the loss of competitiveness theory: foreign firms list shares in the U.S. in order to raise capital at the lowest possible cost to finance growth opportunities and, when those opportunities disappear, a listing becomes less valuable to corporate insiders and they go home if they can. But when they do so, minority shareholders typically lose.

Taxes and Corporate Policies: Evidence from a Quasi Natural Experiment

We exploit a surprise announcement that imposed corporate taxes on a group of Canadian publicly-traded firms to provide new evidence on the interaction between tax incentives and corporate policies. The announcement resulted in a dramatic decrease in value though prospective tax shields offset part of the losses, adding 4.6% to firm value. We also show that firms adjust corporate policies to changing tax incentives. After the announcement, they increased leverage to gain interest tax shields and reversed changes in payout, cash holdings and investment that had been made to capitalize on the tax benefits. Overall, the evidence supports the view that taxes are important for corporate decision making.

The U.S. listing gap

The U.S. had 14% fewer exchange-listed firms in 2012 than in 1975. Relative to other countries, the U.S. now has abnormally few listed firms given its level of development and the quality of its institutions. We call this the “U.S. listing gap” and investigate possible explanations for it. We rule out industry changes, changes in listing requirements, and the reforms of the early 2000s as explanations for the gap. We show that the probability that a firm is listed has fallen since the listing peak in 1996 for all firm size categories though more so for smaller firms. From 1997 to the end of our sample period in 2012, the new list rate is low and the delist rate is high compared to U.S. history and to other countries. High delists account for roughly 46% of the listing gap and low new lists for 54%. The high delist rate is explained by an unusually high rate of acquisitions of publicly-listed firms compared to previous U.S. history and to other countries.

Financial Globalization and the Rise of IPOs Outside the U.S.

During the past two decades, the fraction of the worlds initial public offerings (IPOs) accounted for by U.S. firms has fallen sharply. This decrease is attributed to higher IPO activity outside the U.S. and lower IPO activity in the U.S. We show that financial globalization has played a major role in the growth of IPOs outside the U.S. Historically, a countrys IPO activity was strongly related to the quality of its institutions and better institutions helped explain the higher IPO activity in the U.S. compared to other countries. However, greater financial globalization has been associated with a reduction in the importance of institutions as determinants of a countrys IPO activity. A large part of the increase in IPO activity outside the U.S. occurred through global IPOs, IPOs in which some of the proceeds are raised outside the firms home country. Financial globalization has enabled firms from countries with poorer institutions to make use of global IPOs and they have done so more than firms from other countries. The evidence is consistent with the view that access to global markets and, more generally, financial globalization helps firms overcome the obstacles of poor institutions.

Collective Action and Governance Activism

Can institutional investors generate sufficient power through collective action to drive improvements in governance? We use proprietary data on the private communications of a formal coalition of Canadian institutional investors and find that its private engagements influenced firms’ adoption of majority voting and say-on-pay advisory votes, improved compensation structure and disclosure, and influenced CEO incentive intensity. Spillovers to non-engaged firms occur through board interlocks and to firms in which the CCGG is expected to be more powerful in a voting contest. This form of activism is both a substitute and complement to other interventions to address governance concerns.  Doidge and Dyck are at the Rotman School of Management, University of Toronto. Mahmudi is at the Price College of Business, University of Oklahoma. Virani is at the Eller College of Management, University of Arizona. We thank the Canadian Coalition for Good Governance for making their information available to us and Matt Fullbrook and the Shareholder Association for Research and Education (SHARE.ca) for providing data. Anita Anand, David Beatty, Bernard Black, Susan Christoffersen, Peter Cziraki, Craig Dunbar, Stephen Erlichman, Rüdiger Fahlenbrach, Chitru Fernando, Bing Han, Ed Iacobucci, Wayne Kozun, Randall Morck, Michael Robinson, and Richard Sias provided many useful comments as did seminar participants at the Chinese University of Hong Kong, City University of Hong Kong, Hong Kong Polytechnic University, Imperial College London, Rotman-ICPM Discussion Forum, Simon Fraser University, University of Alberta, University of Arizona, University of British Columbia, University of Calgary, University of Hong Kong, UC San Diego, University of Oklahoma, University of South Florida, and Warwick University, and conference participants at the 2015 NBER Corporate Finance meeting and 2015 EFA meeting. Tetyana Balyuk, Mary Lou, Ashley Newton, Livia Nguyen, and Eric Wilson provided excellent research assistance. We are grateful to the Rotman International Centre for Pension Management for financial support.

What is the Effect of Cross-Listing on Corporate Ownership and Control?

This paper examines whether and how ownership structure changes when firms from emerging markets cross-list their shares on a U.S. stock exchange. Prior to listing in the U.S., firms have controlling shareholders. After listing, controlling shareholders of firms that do their IPO in the U.S. significantly reduce their holdings. However, controlling shareholders of most other firms do not. In addition, there is a change in control in 26% of the firms. As a result, there is a decrease in the number of firms that are controlled by families and partnerships and an increase in the number of firms that are controlled by foreign public corporations. The abnormal return around the announcement of a control change is 6.31%. The results suggest that ownership shifts to controlling shareholders that place a lower value on private control benefits.

Taxes, Valuation, and Organizational Structure

This paper estimates the impact of taxes on firm value by taking advantage of a dramatic and completely unanticipated increase in taxes for a group of publicly-traded Canadian firms called income trusts. When the tax rate for income trusts unexpectedly increased from 0% to 31.5%, equity value fell by 21% and firm value fell by 18%, on average. Prospective tax shields mitigate the decline, adding 4.9% to firm value. Consistent with the presence of tax-based investor clienteles, the impact of the tax change depends on the marginal investor’s personal tax status, which influences the value of tax shields. Therefore, simple estimates using the permanent debt approach in the Modigliani and Miller (1963) model substantially overstate the value the market places on tax shields. Finally, this dramatic change in tax policy provides new evidence on the significance of taxes for organizational form choices.

Eclipse of the Public Corporation or Eclipse of the Public Markets

Since reaching a peak in 1997, the number of listed firms in the U.S. has fallen in every year but one. During this same period, public firms have been net purchasers of