RFS Advance Access published online on March 20, 2008
Review of Financial Studies, doi:10.1093/rfs/hhn013
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Strategic Disclosure and Stock Returns: Theory and Evidence from US Cross-Listing
Barclays Global Investors and Moore School of Business, University of South Carolina
Jones Graduate School of Management, Rice University
College of Business Administration, University of Rhode Island
Address correspondence to: Masahiro Watanabe, Jones Graduate School of Management, Rice University, 6100 Main St., Houston, TX 77005-1892; telephone: (713) 348-4168; fax: (713) 348-6296; e-mail: watanabe{at}rice.edu; http://www.ruf.rice.edu/
watanabe/research.
JEL Classification: G14, G15, F30
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Abstract |
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When a firm exercises discretion to disclose or withhold information (strategic disclosure), risk-averse investors command higher expected returns when expected cash flows decrease, producing a negative correlation between these expectations. Moreover, stock returns exhibit stronger reversal than they do when full disclosure is enforced. We propose a model that makes these predictions and provide consistent evidence using a panel of foreign firms that list American Depositary Receipts (ADRs). We find significant shifts in the time-series properties of stock returns for firms that undergo large changes in disclosure environments, such as those cross-listing on the NYSE/AMEX/NASDAQ and those from less-developed/emerging markets and code-law countries.
We are grateful to Arturo Bris, John Griffin, Gustavo Grullon, Andrew Karolyi, Michael King, Christian Leuz, Karl Lins, Christian Lundblad, Steve Mann, Kyoko Nagata, Karen Nelson, Greg Niehaus, Shinya Okuda, Barbara Ostdiek, Razvan Pascalau, Eric Powers, Michael Schill, Sergey Tsyplakov, Shane Underwood, Akiko Watanabe, Shu Yan, Donghang Zhang, session participants at the 2007 Darden/NYSE Conference on Emerging Markets, the 2007 European Finance Association meetings, the 2007 Financial Management Association meetings, the 2007 McGill Conference on Global Asset Management, the 2007 Nippon (Japanese) Finance Association meetings, and the 2007 Western Finance Association meetings, and seminar participants at Rice University, University of North Carolina–Charlotte, University of South Carolina, and Barclays Global Investors for helpful comments. We also thank Matthew Spiegel (the editor) and anonymous referees for constructive suggestions. All errors are our own. A technical appendix is available on the journal's and the authors' Web sites. The paper was written when the third author was at the Moore School of Business, University of South Carolina. The views and opinions expressed in this paper are the authors' own and do not represent Barclays Global Investors'.