To Follow or not to Follow? An Analysis of Competitive Peer Pressure, Information Free-Riding Incentives, and Cross-Listing Strategic Decisions

Description

Cross-listing is to list a corporate’s shares on a stock exchange other than its original exchange. E.g., Microsoft shares are traded on both Hong Kong and New York stock exchanges. A firm may elevate its prominence among investors and attract a broader shareholder base by cross-listing in more than one stock exchange. It can also help mitigate investment barriers, improve investor protection, and enhance the firm’s reputation by adhering to markets with stronger legal enforcement and higher accounting disclosure standards. The aim of this project is to examine the peer influence on a firm's cross-listing decision. If a pioneer firm decides to cross-list and then enjoys competitive advantage, other firms that do not follow suit could be disadvantaged in a competitive industry. The followers instead can benefit from freeriding on the costly information acquired by pioneering firms, including fair market valuation and investor acceptance. However, the peer effect may not be positive. If a firm perceives a significant technological gap compared with its cross-listed rivals, it may choose to focus on alternative projects rather than following its peers' cross-listing decisions. Furthermore, the freeriding benefit may be diminished if many followers are competing to be cross-listed. Therefore, it is an empirical question about the impact of the peer influence on cross-listing. To fill this gap, we will investigate formally the peer effect on cross-listing using the US firm-level dataset. We will explore both the competition and information channels through which a focal firm’s cross-listing decision is influenced by its competitors’ choices. To address the endogeneity concerns, we will conduct a quasi-natural experiment by examining the state-by-state adoption of strong poison pill statutes. Moreover, we will use the instrumental variable approach by using the staggered passage of universal demand laws as an exogenous instrument. Finally, we propose to further investigate the performance and stock price effect of newly cross-listed firms that follow their peers compared with the firms that do not follow to cross-list. We also propose to extend our analysis to cover the firm-level global dataset in the extended research. The finding of this project can provide valuable insights for the Hong Kong government and financial industry, helping them attract firms from other regions especially the Greater Bay Area to be cross-listed in Hong Kong. This, in turn, can enhance Hong Kong's status as an international financial center and increase her internationalcompetitiveness.