Why is there a positive price response

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Reference no: EM131116236

The following table shows how average share prices jump (in percentage) after the announcement that the stocks will be cross-listed (see Miller, 2000). The price response should be interpreted as corrected for risk and market movements that happened on the same day:

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Although these numbers appear small, it is important to realize that announcements of domestic equity issues, which by definition raise capital, lead to an average negative return response of 2% to 3%. The main reason is that capital-raising equity issues are viewed as a signal by the managers that the firm may be overvalued in the stock market. Given what you learned in this chapter, answer the following:

a. Why is there a positive price response when a company's shares are cross-listed?

b. Why might the response for emerging-market firms be larger than for developed-market firms?

c. Without knowing that equity issues in a domestic context are associated with negative price responses, is the difference between capital raising and non-capital-raising ADRs a surprise? Why or whynot?

Reference no: EM131116236

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