What is the effect of cross-listing on corporate ownership and control?

Craig Doidge*

Revised, August 2005

* Rotman School of Management, University of Toronto, email: craig.doidge@rotman.utoronto.ca. This paper is a revised version of Chapter 3 of my dissertation at Ohio State University that previously circulated under a different title. I thank Warren Bailey, Natasha Burns, Simeon Djankov, John Griffin, Jan Jindra, Andrew Karolyi, Wayne Mikkelson, Tatiana Nenova, Lee Pinkowitz, Frederik Schingemann, Andrei Shleifer, René Stulz, Ralph Walkling, Michael Weisbach, Rohan Williamson, Karen Wruck, and seminar participants at the 2001 FMA Doctoral Student Seminar, Ohio State University, Queen’s University, University of Oregon, University of Toronto, University of Western Ontario, and York University for helpful comments and suggestions.

Abstract

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.

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1. Introduction.

The economic implications of cross-listing in the U.S. have received considerable attention

from financial economists, accountants, and legal scholars in recent years. As such, many aspects of

cross-listing have been studied. For example, the prior literature has examined the role and impact of

cross-listing on valuation, cost of capital, access to capital, market segmentation, risk exposures,

liquidity, price discovery, cross-market arbitrage, the disclosure and regulatory environment, private

benefits of control, visibility, analyst coverage, method of payment and premiums in cross-border

M&A, the home bias puzzle, stock market and currency crashes, and spillover effects on both rival

firms and home country stock markets.1 However, one important issue that has not been addressed in

the literature is the effect of cross-listing on corporate ownership and control.2

Some of the changes that occur when firms cross-list have implications for corporate

ownership and control. For example, cross-listing lowers the value of control, and at least for some

firms, improves the liquidity of their shares. Coffee (1991) and Bolton and Von Thadden (1998) predict

that greater liquidity leads to more dispersed ownership structures; the law and finance view of

corporate ownership is that the magnitude of the private benefits of control determine equilibrium

ownership structures (La Porta, Lopez-de-Silanes, Shleifer, and Vishny, 2000). This implies that when

firms cross-list, controlling shareholders have both opportunities and incentives to change the firm’s

ownership structure. A time series analysis of ownership structures around firms’ U.S. listing dates

provides an opportunity to study the dynamic nature of corporate ownership for non-U.S. firms and to

understand how ownership changes when firms’ disclosure and regulatory environments change.

Therefore, the goal of this paper is to examine whether and how firms’ ownership structures change

after cross-listing. Specifically, I address the following questions: Is there a significant decrease in

ownership concentration after cross-listing? Are there a large number of control changes? Does the

ownership composition change, i.e., is there a change in the type of shareholders that control cross-

listed firms? How does the market view these changes?

To address these questions, I compiled a sample of 101 firms from emerging market countries

that cross-listed on a U.S. stock exchange from 1990 – 1997 and collected data on their ownership

1 For further details and references, see surveys by Karolyi (1998, 2004), Claessens, Klingebiel, and Schmukler (2002), and Benos and Weisbach (2004). 2 Bradshaw, Bushee, and Miller (2004) and Ammer, Holland, Smith, and Warnock (2004) study U.S. investors’ holdings of cross-listed firms. Doidge, Karolyi, Lins, Miller, and Stulz (2005) examine the impact of ownership structure on firms’ cross-listing decisions. However, these papers do not examine how controlling shareholders’ ownership stakes evolve after cross-listing.

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structures from the year prior to listing through 1999. Most non-U.S. firms, and especially those from

emerging markets, trade in relatively illiquid markets and have large controlling shareholders that have

the power to expropriate minority investors, often within the constraints imposed by law (La Porta,

Lopez-de-Silanes, and Shleifer, 1999). This is in stark contrast to the situation in the U.S. where

markets are deep and liquid, ownership is generally diffuse, and the approach to corporate governance

is to impose constraints on controlling shareholders and to give minority investors power through legal

protection (Bhide, 1993; Coffee, 1999). Therefore, when firms from emerging markets cross-list on a

U.S. stock exchange, they can experience changes in the liquidity of the market for their shares, in the

number and type of investors that hold their shares, and importantly, it can become more expensive for

controlling shareholders to expropriate minority investors due to the increased disclosure requirements

and additional monitoring by U.S. regulators, reputational intermediaries, and investors (Coffee, 1999,

2002; Stulz, 1999).

John and Kedia (2004) predict that cross-listing firms are likely to find that a different

governance structure (including ownership structure) is optimal due to the more effective U.S. legal

regime, i.e., listing firms should experience changes in their ownership structure. There are two ways

that firms’ ownership structures can change after cross-listing. First, after cross-listing controlling

shareholders can diversify their holdings and sell shares to diversified shareholders. Risk

diversification as a motivation for going public has been analyzed in the IPO literature (Pagano, 1993)

and some of the arguments from this literature can be applied to firms that list in the U.S. For example,

an improvement in the liquidity of the firm’s shares provides controlling shareholders with the

opportunity to diversify their holdings: cross-listing often leads to an improvement in liquidity,

although the magnitude of this effect varies widely across firms and over time (Smith and Sofianos,

1997; Halling, Pagano, Randl, and Zechner, 2004). Another reason why controlling shareholders may

sell some of their stake is that a U.S. listing increases firm value so that controlling shareholders can

get a higher price for their shares when they sell (Foerster and Karolyi, 1999; Miller, 1999; Doidge,

Karolyi, and Stulz, 2004). Finally, a U.S. listing increases expropriation costs, or equivalently,

decreases the private benefits of control (Doidge, 2004). La Porta et al. (1999, 2000) and Shleifer and

Wolfenzon (2002) conclude that ownership concentration is inversely related to the magnitude of

private benefits. This suggests that after cross-listing, lower control benefits provide incentives for

controlling shareholders to reduce their holdings to offset the costs of holding an undiversified

portfolio.

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The second way that ownership can change after cross-listing is via control transfers. In the

IPO literature, Zingales (1995) and Mello and Parsons (1998) view the transfer of control as a key

factor underlying the decision to go public. Similarly, listing in the U.S. could be a way for controlling

shareholders to sell control. A U.S. listing increases firms’ visibility in the media and among analysts

(Baker, Nofsinger, and Weaver, 2002). Therefore, more potential control acquirers can learn about the

firm, including foreign buyers. Moreover, the high disclosure standards and increased transparency that

accompanies a U.S. listing helps potential buyers assign more accurate valuations to the firm, which

increases their willingness to make a bid. From the selling shareholders’ perspective, U.S. listed firms

have higher valuations and controlling shareholders that wish to sell their stakes can get a higher price.

The tradeoff is a lower control premium (Dyck and Zingales, 2004), although a lower value of control

means that a controlling shareholder that wishes to sell its control stake is no longer limited to

searching for a buyer that wants to acquire control predominantly to extract private benefits.

The evidence in this paper shows that prior to listing in the U.S., firms from emerging markets

have concentrated ownership structures. In the listing year, average voting rights decrease significantly,

although the majority of the decrease is due to equity issues that accompany the listings. After the

listing year, the average firm does not adopt a significantly less concentrated ownership structure. In

total, only 2% of the firms that had a controlling shareholder prior to listing in the U.S. did not have a

controlling shareholder at the end of the sample period in 1999, a period of five years after listing for

the median firm. For firms that list via Level 2 ADRs and for firms that issued secondary offerings via

Level 3 ADRs, there is no significant decrease in ownership concentration for up to five years after

listing. This suggests that diversification by selling shares to minority investors is not an important

motivation for cross-listing for the controlling shareholders of these firms. However, for firms that did

their IPO in the U.S., there is a significant decrease in ownership concentration. Prior to listing,

controlling shareholders own 78% of the voting rights. At the end of the listing year, they own 57% of

the voting rights and five years after listing, they own 48%. The post-listing decrease provides some

weak evidence consistent with the notion of an inverse relation between private benefits and ownership

concentration. At the same time, the change in ownership concentration is often not dramatic and is

limited to IPO firms. This raises the question of why controlling shareholders retain large stakes and

thereby forego the benefits of diversification and liquidity. Moreover, it suggests that large blocks are

often held for reasons other than extracting private benefits.

Rather than sell pieces of the control block to diversified shareholders, many controlling

shareholders sell their control block intact after listing. In total, 26% of the firms experience a change

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in control and the majority of these changes occur through negotiated control transfers. As a result of

the control changes that occur after listing, there is a significant shift in the identity of the controlling

shareholders. There is a decrease in the number of firms that are controlled by families, partnerships,

and management and an increase in the number of firms that are controlled by other public

corporations. The majority of control changes are accompanied by a change in top management, the

majority of new controlling shareholders are foreigners, and the average announcement reaction is

positive.

The control change results suggest two important implications. First, diversification by selling

a control block occurs frequently and represents a potentially important aspect of cross-listing that has

not been recognized in the literature to date. Second, the control change results provide further

evidence on the link between private benefits and ownership. The value of control is lower after listing

in the U.S. Therefore, the control stakes become more attractive for controlling shareholders who can

exploit fewer private benefits and less attractive for controlling shareholders who are better able to

exploit more private benefits. Managers at widely held corporations have fewer ways to extract private

benefits compared to managers at family owned firms (Claessens, Djankov, Fan, and Lang, 2002). The

result that control shifts from a local family or partnership to a foreign entity, often a public

corporation, suggests that control shifts from owners who value consumption of private benefits more

to owners who value consumption of private benefits less. The positive abnormal returns around the

announcement dates of the control changes are also consistent with this argument. If the buyer is

predominantly motivated by private benefits, we would expect to see a negative stock price reaction

when the control transaction is announced (Barclay and Holderness, 1992). In fact the stock price

reaction is positive: the average abnormal return is 6.31%, which indicates a relative increase in the

shared benefits of control. Further, the stock price reaction is largest when control shifts from a local

family to a foreign public corporation. Taken together, the evidence on post-listing control changes

suggests that control shifts from those who value private benefits more to those who value private

benefits less.

The paper proceeds as follows. Section 2 provides some details on cross-listing and on the

changes in the disclosure and regulatory environment that occur when firms cross-list. Section 3

describes the sample and the sources used to collect the ownership data. Section 4 analyzes the

ownership structure of firms that list in the U.S. and explains the procedures used to characterize the

ownership structures. Section 5 examines how ownership concentration and control changes after

listing in the U.S. Section 6 concludes.

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2. U.S. cross-listings and the regulatory environment.

The U.S. regulatory environment is designed to protect minority shareholders and as such,

significantly limits the rights and advantages of controlling shareholders. Much of the discretion and

potential for opportunistic actions to extract private benefits that controlling shareholders can take

under other legal regimes is sharply limited in the U.S. Further, when non-U.S. firms cross-list in the

U.S., they become subject to many U.S. rules and regulations. In particular, non-U.S. firms that list on

U.S. stock exchanges must register with the Securities and Exchange Commission (SEC) and are

subject to ongoing disclosure and reporting obligations that typically go beyond what is required in

their home country.3 Registration with the SEC also implies that listing firms are subject to U.S.

securities laws, which not only seek to improve disclosure and financial reporting, but to reduce agency

costs and restrain controlling shareholders by imposing substantive obligations on them (see Coffee,

1999 and Green et al., 2000 for further details). Coffee (1999, 2002) and Stulz (1999) argue that that

cross-listing on a U.S. exchange commits firms to respect minority shareholder rights and to provide

fuller disclosure. This argument is known as the bonding hypothesis in the literature.

The bonding hypothesis posits that cross-listing should improve firms’ disclosure and

regulatory environments and thereby make it more expensive for controlling shareholders to extract

private benefits. The issue of importance for this paper is whether or not managers and investors

actually perceive this to be the case. Papers by Reese and Weisbach (2002), Doidge, Karolyi, and Stulz

(2004), Doidge (2004), Dyck and Zingales (2004), Tribukait (2002), and Hail and Leuz (2004) provide

empirical evidence that is consistent with the bonding hypothesis. Reese and Weisbach show that

3 A foreign firm can cross-list its shares in the U.S. either by listing its shares directly or via an ADR program. Rule 144a ADRs are capital-raising issues that are privately placed to qualified institutional buyers (QIBs) and trade over-the-counter among QIBs. Rule 144a issuers are not required to register under the Securities Act or the Exchange Act, which thereby exempts them from most civil liability provisions as well as both SEC disclosure requirements and U.S. GAAP accounting rules. Level 1 ADRs trade over-the-counter as pink sheet issues. Minimal SEC disclosure is required and home-country accounting is allowed, although the statements must be in English. Level 2 ADRs are securities that trade on a U.S. exchange. Foreign firms listing via Level 2 ADRs must register with the SEC on Form 20-F in accordance with the Exchange Act. Registration obligates the firm to file periodic and other reports with the SEC, including a reconciliation of financial statements to U.S. GAAP accounting. Firms must also meet the minimum listing standards for foreign companies set by the U.S. exchanges and satisfy the exchanges’ corporate governance requirements. Foreign firms can obtain waivers on a case-by-case basis for many of the corporate governance requirements as long as the issuer’s practices do not violate the law of the issuer’s home country. Level 3 ADRs are similar to Level 2 ADRs, but include a capital-raising element in addition to the listing and the firm must also register on Form F-1 in accordance with the Securities Act. Finally, it is important to note that ADR holders are entitled to vote if the ADRs they hold represent voting shares. The depositary bank usually notifies ADR holders of matters submitted for shareholder vote. A number of voting arrangements are possible, but typically the depositary will vote only those shares for which instructions have been received from the ADR holders. See Karolyi (1998) and Greene et al. (2000) for further details.

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foreign firms that cross-list on U.S. exchanges raise more capital equity after listing and that the

increase in equity offerings is larger for firms from countries with weak shareholder protection. They

also find that after cross-listing, firms from countries with weak investor protection are able to raise

more equity capital at home. Doidge et al. find that foreign firms cross-listed in the U.S. have higher

valuations than those that are not, and, further, that the valuation differential is negatively related to the

level of investor protection in the firm’s home country. Doidge finds that foreign firms cross-listed on

U.S. exchanges have voting premiums that are significantly lower than foreign firms that do not cross-

list and that the difference in voting premiums is larger for firms from countries that provide poor

protection to minority investors. Dyck and Zingales find similar results with control premiums.

Tribukait finds that the price reactions of Mexican firms around earnings announcements are different

for firms that are cross-listed on a U.S. stock exchange. Firms that are not cross-listed have significant

price reactions about 30 days before the news is publicly released, while firms that are cross-listed have

price reactions much closer to the announcement date. He concludes that the U.S. disclosure and

regulatory environment affects insiders’ behavior and reduces self-dealing activities. Hail and Leuz

find that cross-listing on a U.S. exchange decreases firms’ cost of capital, especially for firms from

countries with weak institutional structures. Finally, Appendix A provides some anecdotal evidence

from various media sources which indicate that firms and investors believe that listing in the U.S. has

disclosure, corporate governance, and legal implications.

In addition to U.S. securities laws, foreign firms also become subject to the scrutiny of

reputational intermediaries such as U.S. underwriters (for firms that list via Level 3 ADRs), debt rating

agencies, auditors, and analysts. Moreover, these intermediaries play an important role in monitoring

cross-listed firms. Lang, Lins, and Miller (2002) find that when non-U.S. firms list in the U.S., their

information environment improves. Listing firms obtain more coverage from analysts and have

increased forecast accuracy relative to firms that are not cross-listed. Similarly, Bailey, Karolyi, and

Salva (2005) show that the market’s reaction to earnings announcements increases subsequent to cross-

listing. This suggests that information is more closely followed and reflects the greater information

content of the announcements. Further, there is evidence that foreign intermediaries take their role as

monitors of cross-listed firms seriously and are sensitive to the U.S. legal environment. Seetharaman,

Gul, and Lynn (2002) find that U.K. auditors charge higher fees for client firms that are listed in the

U.S. to compensate for the higher risk of litigation; they estimate that the premium due to the U.S.

litigation environment is about 20%.

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Finally, it is important to recognize that while cross-listing firms’ disclosure and regulatory

environments improve, they do not face the same standards and obligations that U.S. firms do. For

example, Licht (2003) points out that the SEC cuts corners on corporate governance rules for cross-

listing firms and argues that the SEC generally has a hands off policy towards foreign firms. Further,

the extent to which U.S. securities laws impact foreign firms is mitigated by the fact that the SEC is

less likely to prosecute foreign firms than U.S. firms and that shareholders may face obstacles

enforcing U.S. court rulings against foreign firms (Siegel, 2005). In fact, critics of the bonding

hypothesis argue that the increased enforcement risk associated with a U.S. listing has been

exaggerated.4 To be certain, cross-listed firms do not become equivalent to U.S. firms. However, the

point that matters is that cross-listed firms become subject to a more stringent disclosure and regulatory

environment, via both formal and informal monitoring, relative to the environment in their home

market.

3. Data.

3.1. Sample description.

The sample construction begins with a complete list of Level 2 and 3 ADRs and direct listings

obtained from the Bank of New York (BoNY), the NYSE, and Nasdaq. These sources provide basic

information such as company name, home country, where the cross-listed shares trade, and the listing

date. From the original list, all firms incorporated in an emerging market country, as defined by the

International Finance Corporation are identified. Focusing on firms from emerging markets that list in

the U.S. ensures that differences between the home market and the U.S. market are significant. Most

importantly, the disclosure and regulatory environments are considerably weaker in emerging markets

compared to the U.S.

Firms that list via Rule 144a or Level 1 ADR programs are not included – these types of

listings have little liquidity and the SEC imposes few requirements on them. Although these firms

represent a potentially interesting benchmark sample, collecting time series ownership data for these

4 See however, recent studies by PricewaterhouseCoopers (available at http://www.10b5.com). From 1996 to 2002, 97 foreign registered firms were named in private class action suits with an average settlement of $23 million, (compared to an average settlement of $15.5 million for U.S. firms over the same period). From the beginning of 2002 through November 2003, foreign issuers agreed to pay $700 million to settle class actions in the U.S. (the average settlement of $23 million and the figure $700 million are influenced by the $300 million settlement agreed to by DaimlerChrysler). In 2003 and 2004, 44 class actions were launched against foreign registered firms.

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firms is generally not feasible. The issue is that these firms are not required to register with the SEC

and are not required to file Form 20-F. Therefore, the information needed to trace their ownership

structures is often not available. As noted below, it is the ownership data provided in Form 20-F that

allows firms’ ownership structures to be tabulated each year.

The sample includes listings that occurred between 1990 and 1997. 1990 is chosen as the

initial cutoff date because it is difficult to get ownership information and other financial data for most

emerging market firms prior to that time. This restriction has little effect on the sample because few

firms from emerging markets listed on a U.S. exchange prior to 1990. 1997 is chosen as the ending

cutoff date so that by starting in the year prior to cross-listing and going forward to 1999, each firm will

have a minimum of four years of data. These requirements leave 183 firms in the sample. The sample is

further restricted to include only those firms that are covered by Worldscope. Worldscope covers 95%

of the total value of the world’s equity markets. It aims to provide complete coverage of major regional

and local equity indices. Generally, firms with higher market capitalizations are given priority.

Requiring Worldscope coverage reduces the sample to 102 firms from 16 different countries. It is

important to note that, of the 81 firms that drop out of the sample, 48 are Israeli firms that are directly

listed on Nasdaq. A large number of firms from Israel go public on Nasdaq and the majority of these

firms are young, high-tech firms (Blass, Yafeh, and Yosha, 1998). One more firm drops out of the

sample because data on its ownership structure is unavailable.5

For the final sample of 101 firms, the basic data is supplemented in a number of ways. First,

the listing dates are verified using Lexis Nexis searches and by examining 20-F statements. Second,

information on capital raising issues is obtained, both at the time of listing, and in subsequent years

through 1999 from the BoNY depositary receipt capital-raising database and from Securities Data

Corporation. For capital raising issues, I determine if the companies’ shares were publicly traded in the

home market (or in another foreign market) prior to listing in the U.S. If a firm did not have its shares

publicly traded in any market prior to listing in the U.S., it is classified as an IPO. Third, information

on the use of low-voting, high-voting, and non-voting common equity is collected from Moody’s

International Manuals and 20-F statements. I include non-voting stock designated as preferred stock

when the dividend rights and payments are equal to those of the common stock. This has an important

5 This company is Sasol Limited from South Africa, which listed on Nasdaq in June 1994. It is common for shareholders in South Africa to hold their shares through nominee accounts. “The unknown identity of Sasol’s shareholders...is of concern to us, and we will investigate it as a matter of priority” – Board chairman Pierre Brooks, quoted from Business Times (SA), June 1998.

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effect only for Brazilian companies. Finally, I include data on the legal environment, protection of

minority shareholders, rule of law, corruption, and accounting standards for each country represented in

the sample.

Panels A and B of Table 1 show the distribution of the sample, both by year of listing and by

country. The majority of firms are from Latin America and listed after 1993. Only 20% of the firms

listed their shares via a Level 2 ADR program; the other 80% of the firms listed via Level 3 ADRs and

raised equity capital along with their initial listing. Of the firms that raised equity capital, 35% were

IPOs. Subsequent to the initial listing in the U.S., 29% of the firms raised additional equity via ADR

issues in the U.S. Raising equity in the U.S., both at the time of cross-listing and in the years following

the listing, is an important motivation for these firms (see also Lins, Strickland, and Zenner, 2005). A

total of six firms in the sample were delisted from U.S. exchanges by the end of 1999. Three firms

delisted because they experienced financial difficulties and fell below the NYSE’s minimum listing

standards, two firms were taken private, and one firm was delisted due to merger.

Appendix B summarizes the country-level variables taken from La Porta et al. (1998), Pistor,

Raiser, and Gelfer (2000), and Allen, Qian, and Qian (2005). La Porta et al. do not provide data for

China or Hungary so where it is available, it is taken from Allen et al. (China) and Pistor et al.

(Hungary). The legal system in the majority of the countries included in the sample is based on the civil

law tradition. In contrast, the legal system in the U.S. is based on the common law tradition. Common

law countries offer more protection to outside investors from insiders than civil law countries do (La

Porta et al., 2000). The low protection afforded to minority shareholders is also seen by looking at the

anti-director rights variable. It is intended to measure how strongly a country’s legal system protects

minority shareholders against managers or dominant shareholders. It is an index that ranges from 0 to

6, where higher values of the index indicate stronger investor protection. The index combines six

different measures of shareholder rights that are specified in countries’ laws: four of the rights focus on

ensuring the effectiveness of public shareholders’ voting rights and two of the rights focus on ensuring

that public shareholders’ rights (mostly cash flow rights) are not violated in certain circumstances. The

mean (median) value of the anti-director rights index for the countries in the sample is 3.00. It ranges

from a minimum of one in Mexico and Venezuela to a maximum of five in Chile and South Africa. In

comparison, the anti-director rights index is five for the U.S.

The next two variables are proxies for the quality of enforcement of shareholder rights. The

first variable, rule of law, is an assessment of the law and order tradition of the country. It also ranges

from 0 to 10 and higher scores indicate more tradition of law and order. The mean (median) of the

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sample is 5.81 (5.35), while in the U.S. the value is 10.00. The third variable is a corruption index,

where lower scores indicate higher levels of corruption. The sample mean (median) is 5.73 (5.30); in

the U.S., the value is 8.63. The final variable is intended to measure the quality of a country’s

accounting standards (an index that ranges from 0 to 90). The mean (median) score is 55.6 (57),

although there is considerable dispersion, with scores ranging from 36 in Portugal to 78 in Singapore.

The average score is well below the score of 71 for the U.S.

Although not reported in the appendix, estimates of private control benefits provide further

support for the argument that the sample contains firms that are primarily from countries with poor

investor protection, low disclosure standards, and weak systems of legal enforcement. Nenova (2003)

and Dyck and Zingales (2004) estimate that private control benefits are 20-28% of firm value in

emerging markets compared to 2-4% in the U.S. Overall, when firms from emerging markets list their

shares in the U.S., there is significant shift in the regulatory and disclosure environment that they are

subject to.

3.2. Ownership data.

For each firm in the sample, data on cash flow rights and voting rights are collected at the end

of the year, for each year from the year before a firm first lists in the U.S. through the end of 1999.

There is no single source for this data so I use all information sources available including: Worldscope,

Moody’s International Manuals, annual reports, 20-Fs, prospectuses, Lexis Nexis searches, Mergent

Online, and various editions of the Argentina Company Handbook, Asian Company Handbook, Brazil

Company Handbook, Hoover’s Master List of Major International Companies, Latin American

Companies Handbook, and Mexico Company Handbook. Because companies list in different years,

there is a minimum of four years of ownership information up to a maximum of 11 years of complete

ownership information for each firm.

Previous research such as La Porta et al. (1999), Claessens, Djankov, and Lang (2000), and

Lins (2003) that studies the ownership of non-U.S. firms typically collects ownership information in a

particular year (or around a narrow window of years). In general, data availability limitations restrict

ownership studies such as these to cross-sectional analyses of the subset of firms that have ownership

data available. Because this paper focuses on a narrower sample of firms that are required to provide

ownership information to the SEC, I am able to tabulate complete ownership information for the

sample firms each year. Firms that list on a U.S. exchange are required to file Form 20F where they are

required to identify all owners that beneficially own 10% or more of any class of equity, disclose the

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shareholdings of officers and directors as a group, disclose any known arrangements for a change of

control, and identify family relations among shareholders. Firms must also supply information about

officers and directors, their term of office, and family relations among officers and directors.

4. The ownership and control of U.S. listed firms.

4.1. Why would firms with controlling shareholders list their shares in the U.S.?

Before studying how cross-listing affects firms’ ownership, it is necessary to understand their

ownership structure prior to listing in the U.S. Theoretical work by Bebchuk (1999) and Shleifer and

Wolfenzon (2002) and empirical evidence by La Porta et al. (1999), Claessens et al. (2000), and Lins

(2003) shows that firms from countries with weak investor protection have concentrated ownership

structures. However, none of the previous empirical papers specifically focuses on the ownership

structure of cross-listed firms.

The sample of U.S. listed firms in this paper are from emerging market countries where

investor protection is weak, private benefits are high, and typical firms have large controlling

shareholders. Therefore, we would expect that they have highly concentrated ownership structures.

However, recall that listing in the U.S. reduces the value of private benefits that controlling

shareholders can extract. Bebchuk and Roe (1999) argue that in countries with weak investor protection

where controlling shareholders enjoy substantial private benefits of control, controlling shareholders

have incentives to avoid any changes in regulations that would force them to share the corporation’s

earnings more equitably. This raises the question: why would controlling shareholders want to list their

firm’s shares in U.S.?

In addition to the private benefits controlling shareholders derive from their stake, controlling

shareholders also care about the value of their stake and listing in the U.S. affects both (see Doidge et

al., 2004). If the expected increase in the value of their stake due to listing is greater than the expected

loss of private benefits, controlling shareholders will choose to list. Aside from increasing firm value, a

U.S. listing provides other benefits for controlling shareholders that want to diversify their holdings, or

sell their entire stakes.

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4.2. Ownership structures prior to cross-listing.

This section provides a description of the ownership and control structures of the sample firms.

It also defines key variables and outlines a set of rules for characterizing ownership structures – I

generally follow the procedures established by La Porta et al. (1999) and Claessens et al. (2000).

Each year, for each firm, I begin with the question: does the firm have a shareholder(s) with

substantial control rights, either directly, or indirectly through a chain of holdings? The first step is to

identify the immediate or first-level shareholders that directly hold at least 10% of a firm’s votes. These

shareholders are called direct blockholders. Ten percent is chosen as the minimum cutoff to ensure that

only shareholders that have substantial voting rights are identified. However, this cutoff is rarely

important and choosing a higher or lower cutoff would have little or no impact on the results.

Many of the direct blockholders are holding companies or trusts that are designated to hold the

shares of those who actually control the votes. Direct blockholders could be owned by a large number

of small shareholders where no single shareholder has a controlling vote, or direct blockholders could

be completely controlled by a single individual or family. Therefore, it is necessary to look beyond the

direct blockholders to determine who actually controls the sample firms. If a firm does not have at least

one direct blockholder, then it is classified as not having a controlling shareholder and no further work

is required. As shown in Table 2, only two sample firms do not have a controlling shareholder prior to

listing in the U.S. If a firm does have a direct blockholder, then it is necessary to determine who

controls the votes held by that blockholder. To determine who ultimately controls the votes held by

each direct blockholder, the owners of each direct blockholder are traced, and then the owners of the

owners are traced, and so on, until an ultimate owner is identified for each direct blockholder. For each

direct blockholder, only one ultimate owner is identified. If a direct blockholder is owned by more than

one large shareholder, the shareholder with the most voting control is defined as the ultimate owner. If

a firm has three direct blockholders, then three ultimate owners are identified, one for each direct

blockholder. However, if one ultimate owner controls the votes of two of the direct blockholders, the

stakes from each line of control are combined. In this case there will be three direct blockholders and

two ultimate owners. After identifying each ultimate owner, I determine which ultimate owner has the

most voting control and define it as the firm’s controlling shareholder. The controlling shareholder (and

each ultimate owner if the firm has at least one other ultimate owner in addition to the controlling

shareholder) will have a minimum of 10% of the firm’s total voting rights.

13

To classify the identity of the ultimate owners, I follow La Porta et al. (1999).6 An ultimate

owner is classified as one of the following: 1) a family or individual (the unit of analysis is the family

level – holdings by individual family members are aggregated together), 2) the state, 3) another public

corporation that does not have a controlling shareholder, or 4) miscellaneous, such as a partnership,

cooperative, voting trust, or a group with no single controlling shareholder. For each ultimate owner,

each year, I calculate total voting (control) rights and total cash flow rights.7

Table 2 shows that 99 out 101 firms have a controlling shareholder in the year before listing in

the U.S. Of the 99 firms that have a controlling shareholder, 26 firms also have a second ultimate

owner that controls at least 10% of the voting rights, but controls fewer votes than the controlling

shareholder. Family ownership is predominant in nine out of the 16 countries and it is particularly

predominant in Argentina, Chile, Israel, and Mexico. In total, 59 firms are controlled by families (the

definition of family ownership allows only for a single family – firms controlled by more than one

family acting together as a single ownership group are classified as miscellaneous). Another 16

controlling shareholders are classified as miscellaneous, of which four are partnerships of two to five

families, four are partnerships of more than five families or individuals, six are the firm’s management,

and two are labor organizations. Therefore, a total of 73 sample firms are controlled by families and

small groups of families and/or individuals. Nineteen firms are controlled by the state and five firms

are controlled by other public corporations. Results are similar when IPOs are excluded from the

sample of firms that list their shares in the U.S.

Panel A of Table 3 shows the voting and cash flow rights of the controlling shareholders. Prior

to listing in the U.S., controlling shareholders control an average of 58% of the firms’ voting rights,

although the range is from 12% to 100%. For state controlled firms, the mean (median) voting rights

controlled by the state is 78% (100%), which is significantly higher than the voting rights held by the

other types of controlling shareholders. State ownership is significantly higher because 11 out of 19 of

state controlled corporations were not publicly traded prior to the U.S. listing. The average family

controls 54% of the voting rights, which is similar to the voting rights held by miscellaneous owners.

6 La Porta et al. (1999) allow for five different types of ultimate owners, while I allow for four types. When the ultimate owner is a public corporation that does not have a controlling shareholder, they distinguish between non-financial corporations and financial institutions. Because there are only five firms in the sample that are controlled by public corporations this distinction is not made. 7 The measure of voting rights accounts for company specific voting caps or cases when a controlling shareholder is designated the voting rights for shares it does not own. Voting caps are rarely used by the sample firms.

14

Overall, the controlling shareholders have significant control, with the average controlling shareholder

holding majority voting power.

Bebchuk, Kraakman, and Triantis (2000) show how agency problems between controlling

shareholders and minority shareholders are exacerbated if the controlling shareholders have voting

rights in excess of their cash-flow rights (discussion of how controlling shareholders can separate

voting rights from cash flow rights is deferred to Panel B of Table 3). On average, controlling

shareholders have more voting rights than cash flow rights –cash flow rights are 49%, or 10 percentage

points less than voting rights. Average differences in cash flow rights across the types of controlling

shareholder are similar to the differences for voting rights noted above. The degree of separation of

voting rights from cash flow rights is also seen by looking at the ratio of cash flow rights to voting

rights (C/V). If C/V equals one, then cash flow rights are equal to voting rights. However, when C/V is

less than one, voting rights exceed cash flow rights. The average value for C/V is 0.79, which is

significantly different from one. Therefore, the average controlling shareholder can control 100% of the

firm’s voting rights with 79% of the cash flow rights, although it is important to note that many of the

listing firms do not separate cash flow rights from voting rights – the median value for C/V is one.

There are no significant differences in average C/V across the different types of controlling

shareholders.

Panel B of Table 3 shows how controlling shareholders enhance their control rights. The

simplest way to enhance control is to create dual classes of equity, where one class of equity has

different voting rights relative to cash flow rights. Of the 99 sample firms that have a controlling

shareholder, 30 use low voting shares to enhance control.8 A second way controlling shareholders can

enhance control is through the use of pyramids. A firm’s ownership structure is defined as a pyramid

when there is an ultimate owner for the sample firm and there is at least one intermediate company

between the ultimate owner and the sample firm in the chain of control. If the ultimate owner owns

100% of the intermediate company, then I do not define the ownership structure as a pyramid. There

8 Dual class shares are not allowed in many countries. Further, corporate law in some countries restricts the voting ratio between high and low voting shares and/or the numerical ratio between high and low voting shares (see Nenova, 2003). In the U.S., rules for dual-class shares differed widely across exchanges prior to the 1980s (ranging from no restrictions on Nasdaq, to limited restrictions on AMEX, to a strict one share-one vote rule on the NYSE). In 1994, the exchanges agreed to a uniform minimum voting rights rule based on a more stringent rule (Rule 19c-4) previously adopted by the SEC in 1988. The current rules allow disparate voting rights and the listing of nonvoting common stock as long as shareholders are afforded certain safeguards which seek to align the rights of nonvoting shareholders with those of voting shareholders. However, foreign issuers can obtain exemptions from rules governing voting rights as long as the company’s voting structure is not prohibited by its home country’s laws (see Karmel, 2001).

15

can be more than one intermediate company between the ultimate owner and the sample firm and the

more layers there are in the pyramid, the larger is the separation between control rights and cash flow

rights. In addition to enhancing control, pyramids help to hide the identity of the ultimate owner. A

total of 36 sample firms are controlled through pyramid structures.9 Pyramids are predominantly used

by families to enhance control, and in many cases, to conceal their identities or exact holdings in the

company. A third mechanism to enhance control is cross-holdings. A cross-holding occurs if the

sample firm owns any shares in its controlling shareholder or in the companies along the control

chain.10 Only five firms use cross-holdings to enhance their control and all of these firms are controlled

by families.

Finally, two other methods that help to enhance control are described, although they do not

explicitly separate voting rights from cash flow rights. I define a dummy variable that equals one if a

firm has a controlling shareholder that has at least 50% of the votes, irrespective of the presence of any

other ultimate owners. Fifty-two of the sample firms have a controlling shareholder that controls over

50% of the firms’ voting rights (many of these are IPO firms). Almost half of the firms controlled by

families are majority controlled and about 70% of state owned firms are under majority control. A

related dummy variable equals one if a firm has a controlling shareholder and there is no second

ultimate owner that has at least 10% of the votes. For 73 of the firms, there is no second ultimate owner

that could restrict the ability of the controlling shareholder to make decisions for its own benefit.

Finally, to describe the correspondence between control and management, I define a dummy variable

that equals one if the CEO, Chairman, Vice-chairman, or President is directly affiliated with the

controlling shareholder. This classification is made by comparing the identity of the controlling

shareholder to the board of directors and top executives. For each firm, I examine the background,

affiliation, and family relations for the board of directors and top executives to determine if they are

9 Control is enhanced because voting rights are determined by the minimum of the voting rights along the pyramid chain, while cash flow rights are determined by the product along the chain. An example helps illustrate how pyramids work. First, consider sample firm Y that is 40% owned by family Z. In this case, family Z, the direct blockholder is also the controlling shareholder. If there is only one class of equity, then family Z has direct control rights and cash flow rights equal to 40%. Now consider sample firm A that is 40% owned by firm B. Firm C owns 50% of firm B and family D owns 30% of firm C. Firm B is the direct blockholder and the controlling shareholder of sample firm A is family D. Family D has no direct control rights, but has indirect control rights of 30% (the weakest link in the chain of voting rights, e.g., min[40%, 50%, 30%]) through the pyramid chain. Family D also has no direct cash flow rights, but has indirect cash flow rights of 6% (the product along the ownership chain, e.g. 40%*50%*30%). 10 An example of a cross-holding is the following: firm B owns shares of sample firm A, firm C owns shares of firm B, and sample firm A owns shares in either firm B or firm C. If firm B owned shares in firm C, this is not defined as a cross-holding because firm B is not in the sample.

16

directly affiliated with the controlling shareholder. In total, 89 out of the 99 controlling shareholders

also directly manage the firm.

In sum, the evidence in Tables 2 and 3 shows that almost all of the firms that list in the U.S.

have controlling shareholders, which is consistent with the evidence based on broader samples in

papers by La Porta et al. (1999), Claessens et al. (2000), and Lins (2003). Families and partnerships (or

other small groups of individuals) control over 70% of the sample firms and their control positions are

significant: they typically have majority voting control and hold positions in the firm’s top

management.

5. Changes in ownership structure after listing in the U.S.

This section shows how ownership and control changes after cross-listing. Cross-listing on a

U.S. exchange provides both incentives and opportunities for controlling shareholders to change the

firm’s ownership structure. For example, lower control benefits may provide incentives for controlling

shareholders to reduce their holdings to offset the costs of holding an undiversified portfolio or to sell

their control block to another controlling shareholder that is less interested in consuming private

benefits. In the first part of this section, I analyze changes in ownership concentration. In the second, I

analyze changes in control.

5.1. Changes in ownership concentration.

Table 4 shows how ownership concentration changes, measured by changes in the controlling

shareholders’ voting rights, from the year prior to listing in the U.S. to up to five years after the listing

year.11 Each year, each firm’s controlling shareholder is identified and its voting rights are recorded,

regardless of any shifts in the identity of the controlling shareholder. The purpose here is to look at

changes in voting rights, regardless of who holds the control stakes. In fact, it is difficult to do this

analysis by type of controlling shareholder because of the control changes that occur after listing (this

issue is addressed in the next section). Instead, results are shown by type of listing: Level 2, Level 3

11 Approximately 31% of the firms issue ADRs with underlying shares that either have no voting rights or have minimal voting rights attached to them. When non-voting shares are sold in equity issues, controlling shareholders’ voting rights will not decrease, although their cash flow rights will decrease. However, when changes in cash flow rights are used in instead of changes in voting rights, the results are similar. The changes based on cash flow rights are slightly larger, but the main conclusions based on changes in voting rights do not change.

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issues that are not IPOs, and Level 3 issues that are IPOs. Panel A shows changes for the full sample of

99 firms from the year prior to listing to two years after listing. Panel B shows changes from the year

prior to listing to five years after listing. Note that five years of post-listing ownership data is available

for the 57 firms that listed in 1994 or earlier and have a controlling shareholder (nine are Level 2, 33

are Level 3 issues that are not IPOs, and 15 are Level 3 issues that are IPOs). The discussion that

follows focuses on the results in Panel B since the sub-sample of 57 firms is similar to the full sample

and it uses a longer time period.

The first column show changes in voting rights for all controlling shareholders. Controlling

shareholders’ voting rights decrease by an average of about eight percentage points in the listing year

from 54.6% to 46.4%. However, there is no significant decrease in voting rights following the listing

year. The next columns show the changes in controlling shareholders’ voting rights by type of listing.

For firms that list as Level 2 ADRs, there is no decrease in voting rights in the listing year, or in the

years following the listing. In fact, there is an insignificant increase of 1.5 percentage points following

the listing year. For Level 3 ADRs that are not IPOs, the decrease in the listing year is 2.3 percentage

points. Again, there is no decrease following the listing year for up to five years after listing. Prior to

listing in the U.S., controlling shareholders of firms that list via Level 3 ADRs that are classified as

IPOs hold mean (median) voting rights of 78.4% (82.1%). At the end of the listing year, they hold an

average (median) of 57% (59.5%) of the voting rights, or a decrease of about 21 percentage points.

This decrease in voting rights is significantly larger than the decrease in voting rights for controlling

shareholders of non-IPO firms. Five years after listing, average (median) voting rights significantly

decrease by 8.5 (8.0) percentage points to 48.5% (51.5%). Overall, voting rights decrease by 30% from

the year prior to listing to five years after – a significant decrease in ownership concentration.

To put the results for IPO firms into context, I compare the results with those in Mikkelson,

Partch, and Shah (1997) who study IPOs by U.S. firms. Mikkelson et al. find that for IPOs by U.S.

firms, insiders hold a median stake of 68% prior to the IPO and hold 44% immediately after the IPO

(averages are not reported). Five years after the IPO, insiders hold 29%. Controlling shareholders of

foreign firms that do their IPO in the U.S. retain more voting rights than insiders of U.S. firms, but their

ownership structure follows the same general trend as U.S. firms.

One might argue that the IPO results for cross-listing firms are just an “IPO” effect that has

nothing to do with cross-listing in the U.S. Cross-listing firms are larger than typical firms and it is

important to recognize that it may not be feasible for these firms to do an IPO in their home country.

Poor legal protection for minority investors and high private benefits are associated with poorly

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developed stock markets (La Porta et al., 1997; Dyck and Zingales, 2004). In particular, emerging stock

markets are much smaller and IPOs are much less frequent compared to the U.S. For the emerging

markets considered in this paper, the average (median) ratio of stock market capitalization held by

small shareholders to gross domestic product is 0.31 (0.11) compared to 1.18 in the U.S. for the period

from 1996 to 2000. The ratio of the value of IPOs to GDP in the U.S. is more than two and half times

larger than the average value in emerging markets (0.00547 compared to 0.00203) and it is about 14

times the value of the median (0.00039). More strikingly, in eight out of the 14 emerging market

countries, the value of IPOs to GDP was zero in at least one year between 1996 and 2000. In fact, in

almost 30% of the country-years during this period, the value of IPOs to GDP was zero.12

With weak legal protection and underdeveloped markets in the home country, firms may be

unable to find enough investors willing to pay an attractive price (from the firm’s perspective). If a firm

does issue an IPO in the home market and sells shares that are not fully priced, then controlling

shareholders are effectively giving away their private benefits – in which case, the firms will raise as

little capital as possible. If firms choose to do their IPO in the U.S. where the shares receive a higher

valuation, the controlling shareholders are selling what would have been private benefits into a better

regulatory environment. In sum, it is difficult to disentangle the IPO and cross-listing effects. However,

it is also fairly clear that cross-listing in the U.S. does play an important role in the IPO results.

The results presented above show that with the exception of IPO firms, the average decrease in

voting rights after listing in the U.S. is minimal – for most firms, ownership concentration does not

change. However, the analysis in Table 4 ignores any changes in the identity of the controlling

shareholders after listing in the U.S. so it is not possible to determine exactly what happens to the

voting rights held by the original controlling shareholders. Table 5 shows how the original controlling

shareholders’ voting rights change after listing, where the original controlling shareholder is defined as

the controlling shareholder in the year prior to listing in the U.S. Focusing on changes in the original

controlling shareholders’ voting rights helps to reveal if diversification is a motive for listing. For each

firm, each year after listing, the controlling shareholder is identified and its voting rights are recorded.

If the identity of the controlling shareholder changes, then holdings for that firm are no longer tabulated

and a zero is entered for the original controlling shareholders’ voting rights. In this table, changes in

12 The data are from La Porta, Lopez-de-Silanes, and Shleifer (2004) and are available at: http://post.economics.harvard.edu/faculty/shleifer/data.html. The numbers given in the text do not include China or Hungary.

19

voting rights in the listing year are not included to remove the effects of capital raising activity in the

listing year. Panel A shows results for two years after listing and panel B shows results for five years

after listing. Again, the discussion focuses on the longer time period in panel B.

Almost 58% of the original controlling shareholders decrease their voting rights by an average

of 20 percentage points. Of the 33 controlling shareholders that decrease their voting rights, 23

decreased their control stakes by an average of 15 percentage points, but remained in control. The other

10 controlling shareholders sold their entire average control stakes of 31%. Differences across types of

controlling shareholder are not significant. The other 24 original controlling shareholders do not

decrease their voting rights in the five years after listing and 18 of these significantly increase their

voting rights by an average of 8 percentage points. In sum, the results in table 5 show that a large

number of the original controlling shareholders significantly decrease their holdings after listing –

some decrease their holdings while others sell their entire control stake. However, consistent with the

results in table 4, many of the original controlling shareholders do not decrease their holdings at all.

Overall, the evidence on post-cross-listing changes in ownership concentration is mixed. There

is some weak evidence that is consistent with a negative relation between private benefits and

ownership concentration. At the same time, it is somewhat puzzling that many controlling shareholders

do not reduce their control stakes after cross-listing. The remainder of this section explores various

reasons for why this may be the case.

Foreign firms that list in the U.S. experience a significant change in the regulatory and

disclosure environment because they become subject to many of the legal rules that U.S. firms are

subject to. However, I cannot reject the possibility that the legal implications of listing via ADRs are

not sufficient to induce less concentrated ownership structures. Foreign firms are allowed a number of

exemptions from laws that U.S. firms must comply with, for example, the filing of proxy statements.

This points to a joint hypothesis problem.13 Second, it could be difficult for controlling shareholders to

sell off large amounts of the control block to diffuse shareholders without having a negative impact on

the price of the ADRs. That is, the controlling shareholders may be reluctant to sell off pieces of the

control block due to the costs of doing so. After listing in the U.S., firms generally experience an

13 While it is clear that minority shareholder protection is required to support low ownership concentration, it is less clear as to which specific protections are required. Recall that dispersed ownership arose in the U.S. prior to the existence of federal securities laws, when investor protection primarily consisted of the disclosure requirements imposed by the NYSE, its policy of listing high quality issuers only, and the reputational capital pledged by intermediaries (see Coffee, 2001).

20

improvement in liquidity (Smith and Sofianos, 1997; Foerster and Karolyi, 1998).14 However, the

effect on liquidity varies widely across firms and is largest in the period immediately after the listing

(Halling et al., 2004). It is also important to note that the liquidity of the typical ADR is lower than that

of a typical U.S. exchange listed stock (Bacidore and Sofianos, 2002). Third, it is possible that many of

the controlling shareholders either cannot, or do not want to sell shares and weaken their control

position. Firms from emerging markets may need large controlling shareholders to protect the firm

from expropriation by the government or other powerful groups. Alternatively, there may be cases

where large blocks are held for reasons other than simply extracting private benefits. For example,

Barclay and Holderness (1992) argue that both private benefits of control and shared benefits of control

can motivate large shareholders. Shared benefits can arise because large shareholders have both the

incentives and the opportunity to increase cash flows through better management and monitoring. The

benefits are shared because the higher cash flows benefit the large shareholder as well as minority

shareholders. While it is difficult to distinguish among these hypotheses, the evidence on control

changes in the next section provides some support for the last alternative – that both private benefits

and shared benefits can motivate shareholders to hold large blocks.

5.2. Changes in control and ownership composition.

In table 4, it was not possible to do the analysis by type of controlling shareholder because a

large number of control changes occur after the listing date. The purpose of this section is to analyze

these control changes and to understand them in the context of U.S. listings, an improved regulatory

and disclosure environment, lower private benefits of control, as well as shared benefits of control.

In the IPO literature, Zingales (1995) and Mello and Parsons (1988) view the transfer of

control as a key factor underlying the decision to go public. The initial owner uses the IPO as a step to

achieve the ownership structure that will maximize his total proceeds from the eventual sale of the

company. Going public also makes it easier to transfer control of the firm. Similarly, listing in the U.S.

could be a way for controlling shareholders to sell control. Prior to listing in the U.S., controlling

shareholders’ have significant voting rights. The evidence in Tables 4 and 5 shows that while some

controlling shareholders reduce their holdings, most do not dismantle the control blocks and sell them

14 A related point is investor interest in holding ADRs. Ammer et al. (2004) find that on average, U.S. investors hold about 17% of the market capitalization of firms cross-listed on U.S. exchanges. U.S. investors increase their holdings by 8-11 percentage points after firms cross-list.

21

to diffuse shareholders after listing in the U.S. However, they may still want to diversify their holdings

and sell their control block. Therefore, it is possible that controlling shareholders use a U.S. listing to

facilitate the sale of their control block.

Panel A of Table 6 shows the number of firms that experience a control change – a new

controlling shareholder takes the place of the original controlling shareholder. I define two types of

control changes. The first is when the original controlling shareholder sells its control stake, either to a

new controlling shareholder or to a large group of dispersed shareholders, so that after the sale the

original controlling shareholder no longer owns any shares in the firm. The second type of control

change is called a replacement control change. A replacement control change occurs when a controlling

shareholder sells some of its stake so that a second ultimate owner acquires greater voting control after

the sale. The controlling shareholder remains as an ultimate owner, but is no longer the controlling

shareholder.

Of the 99 firms that have a controlling shareholder prior to listing in the U.S., 26 of them

experience a change in control after listing in the U.S. – the median firm experiences a control change

in the third year after listing in the U.S. Nineteen of the original controlling shareholders completely

exit and seven of the original controlling shareholders are replaced by other ultimate owners that

acquire greater voting control in the firm. Twenty of the control changes are the result of negotiated

control transfers. In the remaining six cases, control changed, but not as the result of a negotiated

control transfer – in two cases the state controlled a sample firm through an intermediate corporation

and when the state sold its control stakes in the intermediate corporation, the intermediate corporation

became a widely held public corporation. The exiting controlling shareholder is the state and the new

controlling shareholder is a public corporation, although not because the public corporation purchased a

control stake. In the other four cases, the control change was not necessarily predicated on the

controlling shareholder’s desire to sell control. Family and miscellaneous controlling shareholders

(partnerships, management) account for 23 of the original controlling shareholders that no longer

control the firm by the end of 1999.

22

To put these numbers in perspective I do two things. First, I form a benchmark sample of firms

that are not listed in the U.S.15 Compared to the benchmark firms, the sample firms have a higher

incidence of control changes – two out of 25, or 8% of the benchmark firms experienced a change in

control from 1995 to 1999. Second, I compare the control change results to evidence found in related

research. Holderness and Sheehan (1988) report that out of 114 U.S. firms with majority owners that

are listed on the NYSE or AMEX, the majority shareholder changed in 20 firms over the period from

1978 to 1982. Pagano, Panetta, and Zingales (1998) find that for Italian IPOs, in 13.6% of the cases, the

control group sells the control stake to a new controlling shareholder. They note that 13.6% is about

twice the rate of a control changes in private companies and suggest that a public listing is chosen by

controlling shareholders who want to sell out. Finally, I use the number of control changes in Dyck and

Zingales (2004) as a comparison. For the emerging markets included in this paper, Dyck and Zingales

report that there are 70 control changes from 1990 to 2000. According to the 1997 IFC Emerging Stock

Markets Factbook at the end of 1996 there were 4,747 domestic listed firms in these countries, so that

about 1.5% of the firms were involved in a control change transaction. While these numbers are not

directly comparable to the results reported in this paper, they do suggest that cross-listing firms are

more likely to be involved in a control change transaction than non-cross-listed firms.16 The evidence

in this paper that 20% of the controlling shareholders sell their control stakes in a negotiated control

transfer after listing in the U.S. suggests that selling control may be an important motivation for listing.

Panel B shows how the identity of the controlling shareholders changes from the year prior to

listing to the end of the sample period, 1999. As noted earlier, six firms delisted from the U.S.

exchange (four of these firms were controlled by families, one by the state, and one by another public

15 The benchmark sample consists of foreign firms that are publicly traded in their home country, but do not list their shares in the U.S. This sample is necessarily limited because 20-Fs and other SEC filings are not available for foreign firms that do not list in the U.S. Other sources that provide ownership data such as Worldscope and Moody’s have sparse coverage of emerging markets firms prior to 1995 and for many of the firms that they cover, ownership information is not available. With these data limitations, it is not possible to find a matching benchmark firm for each sample firm and tabulate ownership data for the benchmark firms in event time around the sample firms’ U.S. listing dates. Therefore, I form a benchmark sample of 25 firms that do not list their shares in the U.S. and track their ownership from 1995 to 1999. The country composition of the benchmark sample is approximately proportional to the composition of the sample of U.S. listed firms. To select benchmark firms, the firms in each country that do not list their shares in the U.S. are sorted by market capitalization and the largest firms in each country that have ownership data available are selected. As expected, the benchmark firms have highly concentrated ownership structures. 16 There are three qualifications to note here. First, the 70 (or 1.5% of firms) control changes reported in Dyck and Zingales include control changes for both cross-listed and non-cross-listed firms, which biases the comparison number upwards. Second, Dyck and Zingales have to restrict their sample of control changes so they can compute clean estimates of control premiums. These restrictions reduce the number of control transactions in their sample relative to the sample in this paper and biases the comparison number downwards. Finally, Dyck and Zingales do not include China or Hungary in their sample.

23

corporation). Prior to listing in the U.S., the majority of firms are controlled by families and

miscellaneous controlling shareholders (partnerships and management). Very few firms are controlled

by other public corporations. The main message in Panel B is that by 1999 there is a decrease in the

number of firms controlled by families and miscellaneous controlling shareholders and an increase in

the number of firms controlled by other public corporations. A Pearson χ2 test rejects the hypothesis

that the distribution of the identity of controlling shareholders is the same in the year prior to listing in

the U.S. and in 1999.

Firms that list in the U.S. have a high incidence of control changes after listing and there is a

significant shift in the distribution of the controlling shareholders as a result of the control changes.17

What has not specifically been addressed is who replaces the exiting controlling shareholders. Table 7

provides a more detailed analysis of the control changes that occur after the sample firms list in the

U.S. Panel A shows a “transition matrix” of control changes for the original and the new controlling

shareholders. If no new controlling shareholder enters when the original controlling shareholder exits,

then the firm is classified as not having a controlling shareholder.

The first column shows the total number of each type of original controlling shareholders that

exit or sell some of their stakes and are replaced by a new controlling shareholder. The last row shows

the total number of each type of new controlling shareholders that enter. The majority of original

controlling shareholders that exit are classified as families and miscellaneous. Reading across the table,

17 of the original controlling shareholders that exit are families. The new controlling shareholders that

replace these 17 families are seven new families, seven public corporations, two miscellaneous, and for

one firm, there is no new controlling shareholder. Six of the original controlling shareholders that exit

are classified miscellaneous controlling shareholders. They are replaced by two families, two states,

one public corporation, and in one case there is no new controlling shareholder that enters. The

majority of new controlling shareholders that enter are public corporations (with no controlling

shareholder). Reading down the table, a total of eight public corporations become the new controlling

shareholders that replace the original controlling shareholders. They are replacing seven families and

one miscellaneous controlling shareholder. Overall, families and miscellaneous controlling

shareholders exit most frequently. The new controlling shareholders are primarily other families and

public corporations. Thus, there is some movement away from control by individuals (families,

partnerships, management) towards control by other public corporations. If acquiring control to

17 In a related paper, Ayyagari (2004) finds similar results.

24

consume private benefits is the primary motivation for these transactions, then we would expect to see

control going from corporations to families and not the other way around since Claessens et al. (2002)

provide evidence consistent with the argument that managers at widely held corporations have fewer

ways to extract private benefits compared to managers at family owned firms.

Panel B compares the characteristics of the original controlling shareholders to the new

controlling shareholders. For the 26 firms that had their original controlling shareholder exit, 24 firms

had a new controlling shareholder replace the original controlling shareholder and two firms did not.

The control changes are significant events in that 18 out of the 24 new controlling shareholders replace

the original controlling shareholder in the firm’s top management. It is also interesting to note that 19

of the new controlling shareholders are classified as foreigners (the controlling shareholder resides, or

is incorporated outside the country where the sample firm is incorporated). The large number of

foreigners that acquire control stakes in the sample firms provides some evidence that listing in the

U.S. may help to facilitate the control changes. Sixteen of the new controlling shareholders acquire

control through a pyramid structure – control is transferred though an intermediate holding company or

through a subsidiary company that is not 100% owned.

The next two rows show that nine of the new controlling shareholders held some stakes in the

firm prior to becoming the controlling shareholder, while 15 of the new controlling shareholders did

not hold any stakes. The bottom rows of Panel B show that the original controlling shareholders held

average voting rights (cash flow rights) of 32% (23%), while the new controlling shareholders hold an

average of 39% (28%) of the voting rights (cash flow rights). The average is higher for new controlling

shareholders because nine of the new controlling shareholders owned some stakes prior to acquiring the

control stake.

Dyck and Zingales (2004) show that control premiums are lower for cross-listed firms that are

from countries with weak investor protection. Therefore, it would be useful to compute control

premiums for the control transfers in this sample and compare them to the estimates in Dyck and

Zingales. For example, in 1996, Banco Bilbao Vizcaya (Spain) purchased 30% of Banco Frances del

Rio del la Plata’s (Argentina) from the Monsegur family at premium of 6% over the share price two

days after the transaction was announced. Multiplying 30% by 6% gives an estimate of private benefits

as a percentage of equity of 1.8%. In comparison, Dyck and Zingales estimate that private benefits are

about 20% on average in Argentina. Unfortunately, this calculation is not possible in many of the cases

which prevents a more detailed comparison. In 1997, Claridge Israel, an investment company

controlled by Charles Bronfman (Canada), purchased a 20% control stake in Koor Industries (Israel)

25

from the Shamrock Group (U.S.). In the initial stage of the transaction, Claridge purchased 10% of

Shamrock’s stake with an option to buy another 10% within 90 days (which Claridge eventually

exercised). Claridge also purchased about 1.6% of Koor from two institutions and there was

speculation in the press that Claridge might purchase Bank Leumi’s 6% stake. An article in the The

Jerusalem Report on August 21, 1997 (Headline: A very big deal) estimates that Claridge paid a

premium of 12% – multiplying by 21.6% gives an estimate of private benefits of 2.6%. However, it

would be difficult to compare this estimate to the calculations in Dyck and Zingales given that the

multi-stage nature of this transaction and the use of options are not consistent with the criteria Dyck

and Zingales use to identify transactions from which to estimate control premiums.

When control changes, ownership concentration typically does not change by much, but the

identity of the controlling shareholder does change. To evaluate the market’s assessment of the effect

on firm value when control changes, I conduct an event study. The evidence in Table 7 suggests that

acquiring control to consume private benefits is not the primary motivation and the event study

provides additional evidence on this issue.18 If the control acquisition is predominantly motivated by

private benefits we would expect to see a negative stock price reaction, while a positive stock price

reaction indicates a relative increase in the shared benefits of control (Barclay and Holderness, 1992).

The analysis is conducted using the standard event study methodology outlined in Brown and

Warner (1985). I include all control changes except the two special cases where the state controlled a

sample firm through an intermediate corporation and when the state sold its control stakes in the

intermediate corporation, the intermediate corporation became a widely held public corporation. To

find the announcement date for each transaction, I search Lexis Nexis and Factiva for the first available

press release indicating that a control change was being considered. I also require that the press release

identify the parties involved in the transaction. I conduct the analysis using both the returns on firms’

ADRs trading on U.S. exchanges and on returns on the underlying shares trading on the local

exchanges. The ADR returns are from CRSP and the underlying share returns are from Datastream. I

estimate the market model from days -276 to -26 and require that firms have at least 100 observations

in the estimation period. Patro (2000) finds that returns on ADRs have significant risk exposures to

18 It would also be useful to look at the change in the voting premium for firms with dual class shares at: 1) the announcement of the ADR program to test if the market anticipates the change in the ownership structure and incorporates this information in the share price, and 2) the announcement of the control change. Unfortunately, very few of the firms involved in control changes have dual-class shares and for those that do have dual-class shares, in most cases only one share class is publicly traded.

26

both the world market index and their home market index. Therefore, I use Datastream’s world and

local indices to adjust for general movements in stock prices. I did several robustness checks to make

sure that the results are not sensitive to any of these choices. For example, I checked the results using

different estimation periods, I included the CRSP value-weighted index to control for movements in the

U.S. market, and I tried using various combinations of the benchmark indices. Finally, I note that the

results with the ADR returns and local share returns are qualitatively similar and I report only the

results for the ADR returns.

Table 8 reports cumulative abnormal returns over days -5 to +1 and -1 to +1. As is common in

international studies, the event window is slightly longer than normal to account for differences in time

zones and possible information leakage. The results are similar so the discussion focuses on the -1 to

+1 window. Significance of average CARs is based on t-statistics that account for cross-sectional

dependence; statistical significance of median CARs is based on the Wilcoxon signed-ranks test. For

all control changes, 70% of the abnormal returns are positive and the average (median) CAR is 6.31%

(3.67%) and is statistically significant. Therefore, when a control change is announced, the market

views the change as a positive event, which is inconsistent with the view that the control changes are

motivated by private benefits and is consistent with the view that they are motivated by shared benefits.

The second and third columns focus on the changing identity of the controlling shareholders.

As noted earlier, many of the sellers are local families and partnerships and most of the buyers are

foreigners, often corporations. Therefore, I split the sample into two groups: 1) transactions where

control changed from a local family or partnership to a foreign corporation, and 2) all other

transactions, which include sales by the state and by families to other families. When control changes

from a local family to a foreign corporation, the average (median) CAR is 11.55% (7.09%) compared

to the average (median) CAR of 4.46% (1.88%) for all other transactions. The difference in average

returns of about 7% is significant, which indicates that firm value increases more when local families

sell control to foreign corporations compared to other transactions. This result is consistent with the

valuation results in Claessens et al. (2002) and is consistent with the argument that control is shifting

from controlling shareholders who value private benefits more to controlling shareholders who value

private benefits less and that shared benefits play a role in determining ownership structures.

27

6. Conclusions.

This paper analyzes the ownership and control of firms from emerging markets that cross-list

their shares on a U.S. stock exchange. The main results are 1) that controlling shareholders of firms that

do their IPO in the U.S. significantly reduce their holdings after listing, while the controlling

shareholders of most other firms do not, and 2) there is a significant number of control changes that

result in a change in ownership composition and a positive reaction from the market. Overall, these

results contribute to two different literatures. The cross-listing literature has identified a number of

reasons for why firms list and how they benefit from listing. This paper shows that most firms do not

list so that controlling shareholders can diversify their holdings by selling shares to diffuse

shareholders. However, many controlling shareholders do sell their control stakes after listing, which

represents a potentially important aspect of cross-listing that has not been recognized in the literature.

In the ownership literature, there are few papers that study the dynamic nature of corporate

ownership for U.S. firms and even fewer papers that study non-U.S. firms. In fact, this is one of the

first papers to analyze time series ownership data for non-U.S firms – the analysis of ownership around

firms’ U.S. listing dates provides an opportunity to better understand the roles of the disclosure and

regulatory environment and private benefits in determining firms’ ownership structures. There is some

weak evidence of a link between private benefits and ownership concentration for firms that do their

IPOs when they cross-list. However, many controlling shareholders do not reduce their holdings after

listing, despite the fact private benefits are lower. This suggests that there must be reasons other than

expropriation for holding a large block when private benefits are low. One explanation is that large

shareholders are also motivated by the share benefits of control and an examination of post-listing

control changes provides some empirical evidence that is consistent with this explanation. There is a

significant change in ownership composition leading to a decrease in the number of firms that are

controlled by families, partnerships, and management, and an increase in the number of firms that are

controlled by other public corporations. The majority of control changes are accompanied by a change

in top management, the majority of new controlling shareholders are foreigners, and the average stock

price reaction upon announcement of a control change is positive. Overall, the evidence suggests that

ownership shifts to controlling shareholders that place a lower value on private control benefits.

28

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32

Table 1. Distribution of sample firms by year and by country. The sample includes firms from emerging markets that list their shares on the NYSE or Nasdaq via a Level 2 or Level 3 ADR program from 1990 to 1997. Information on foreign firms that list their shares in the U.S. is from the Bank of New York and from the NYSE and Nasdaq web sites. Panel A shows summary statistics for each year. Capital raising equals one if a firm raised equity capital with its initial U.S. listing (Level 3 ADR program). IPO equals one for Level 3 ADR programs if a firm was not publicly traded in any market prior to cross-listing. Secondary ADR offering equals one if a firm raised equity capital via ADRs in years subsequent to the initial listing. Delisted equals one if a firm’s ADRs are delisted from the NYSE or Nasdaq. Panel B shows summary statistics for each country. Age is measured from the year of a firm’s incorporation to the year it cross-listed.

Details of listing type

# of sample firms listing in the U.S.

Level 2 ADRs

Level 3 ADRs: Capital raising IPO Secondary

ADR offering Delisted Age

Panel A. By listing year.

1990 1 0 1 0 0 0 . 1991 3 1 2 0 0 0 . 1992 8 1 7 3 1 0 . 1993 19 1 18 8 0 0 . 1994 27 7 20 4 4 0 . 1995 10 2 8 4 4 0 . 1996 14 3 11 4 7 0 . 1997 19 5 14 6 6 1 . 1998 . . . . 4 1 . 1999 . . . . 5 4 .

Total 101 20 81 29 31 6 .

Panel B. By country.

Argentina 12 3 9 3 3 2 26 Brazil 7 3 4 0 1 0 43 Chile 20 0 20 1 6 0 44 China 6 0 6 6 0 0 14 Colombia 2 1 1 0 0 0 44 Hungary 1 0 1 1 0 0 7 Indonesia 2 0 2 2 0 0 24 Israel 11 5 6 4 3 2 9 Korea 3 0 3 0 6 0 13 Mexico 20 2 18 8 6 2 38 Peru 4 1 3 0 1 0 47 Portugal 4 0 4 2 5 0 8 Singapore 1 0 1 1 0 0 9 South Africa 3 3 0 0 0 0 46 Taiwan 2 0 2 0 0 0 9 Venezuela 3 2 1 1 0 0 48

Total 101 20 81 29 31 6 Median 30

33

Table 2. Identity of controlling shareholders in the year prior to listing in the U.S. This table reports the number of firms that do not have a controlling shareholder vs. those that have a controlling shareholder in the year before a firm lists in the U.S. A firm is classified as having a controlling shareholder if it has an ultimate owner that controls at least 10% of the firm’s votes; otherwise, the firm is classified as not having a controlling shareholder. Ultimate owners are the entities that control the votes held by the direct (first-level) blockholders. If a firm has more than one ultimate owner, the ultimate owner with the most voting rights is classified as the controlling shareholder. For firms that have a controlling shareholder, the distribution of the identity of controlling shareholders is also reported using a modified version of the classifications in La Porta et al. (1999). The sample includes firms from emerging markets that list their shares on the NYSE or Nasdaq via a Level 2 or 3 ADR program from 1990 to 1997. Information on foreign firms that list their shares in the U.S. is from the Bank of New York and from the NYSE and Nasdaq web sites. Ownership data is hand collected from various sources listed in section 3.

Identity of controlling shareholder

N No controlling Shareholder

Controlling shareholder

> 1 ultimate owner Family State Public

corporation Miscellaneous

Argentina 12 0 12 5 6 3 1 2 Brazil 7 0 7 4 4 2 0 1 Chile 20 1 19 6 12 1 0 6 China 6 0 6 0 0 6 0 0 Colombia 2 0 2 0 0 0 1 1 Hungary 1 0 1 1 0 0 1 0 Indonesia 2 0 2 0 0 2 0 0 Israel 11 0 11 1 6 0 0 5 Korea 3 0 3 1 1 2 0 0 Mexico 20 0 20 3 19 0 0 1 Peru 4 0 4 2 3 1 0 0 Portugal 4 0 4 0 2 2 0 0 Singapore 1 0 1 0 1 0 0 0 South Africa 3 0 3 1 3 0 0 0 Taiwan 2 1 1 1 0 0 1 0 Venezuela 3 0 3 1 2 0 1 0

Totals 101 2 99 26 59 19 5 16

34

Table 3. Controlling shareholders’ voting rights and cash flow rights prior to listing in the U.S. Panel A presents summary statistics for the voting rights, cash flow rights, and the ratio of cash flow to voting rights (C/V) of controlling shareholders in the year before a firm lists in the U.S. (year –1). Results are presented for all controlling shareholders and by type of controlling shareholder. The sample includes firms from emerging markets that list their shares on the NYSE or Nasdaq via a Level 2 or 3 ADR program from 1990 to 1997. Information on foreign firms that list their shares in the U.S. is from the Bank of New York and from the NYSE and Nasdaq web sites. Ownership data is hand collected from various sources listed in section 3. Firms that do not have a controlling shareholder are excluded (two firms) in this table. Four firms do not have year –1 data and year 0 data is used instead. Panel B documents how controlling shareholders enhance their control rights. It shows the number of firms that use shares with low voting rights, pyramid structures, and cross-holdings. I define a dummy variable that equals one if a firm has a controlling shareholder (CS) that has more 50% of the votes, irrespective of the presence of any other ultimate owners. I define a second dummy that equals one if a firm has a controlling shareholder that has at least 10% of the votes and there is no second ultimate owner that has at least 10% of the votes. Top Management equals one if the CEO, Chairman, Vice-chairman, or President is directly affiliated with the controlling shareholder. a indicates that C/V is significantly different from one at the 5% level.

Identity of controlling shareholder

All controlling shareholders Family State Public

corporation Miscellaneous

Panel A. Voting rights, cash flow rights, and the ratio of cash flow-to-voting rights.

Sample size 99 59 19 5 16

Voting Rights (%) Mean 57.9 54.0 77.9 39.9 51.8 Median 52.7 50.0 100.0 46.5 48.2

Cash flow rights (%) Mean 48.7 44.4 70.3 29.1 44.8 Median 42.5 39.9 100.0 30.8 43.1

Ratio: C/V (%) Mean 0.79a 0.77a 0.83a 0.78 0.83a Median 1.00 0.96 1.00 0.74 1.00

Panel B. Enhancing control.

Sample size 99 59 19 5 16

Low voting shares 30 19 5 3 3 Pyramid structure 36 27 4 3 2 Cross holdings 5 5 0 0 0 CS > 50% votes 52 29 14 1 8 CS is alone 73 42 16 0 14 Top Management 89 55 19 1 14

35

Table 4. Changes in controlling shareholders’ voting rights. This table shows controlling shareholders’ voting rights in the year prior to listing in the U.S. to up to five years after listing, where year 0 is the listing year. The sample of U.S. listed firms includes firms from emerging markets that list their shares on the NYSE or Nasdaq via a Level 2 or 3 ADR program from 1990 to 1997. Information on foreign firms that list their shares in the U.S. is from the Bank of New York and from the NYSE and Nasdaq web sites. Ownership data is hand collected from various sources listed in section 3. Each firms’ ownership structure is tracked from the year before it lists in the U.S. through 1999. Firms that do not have a controlling shareholder in year -1 are excluded (two firms). Panel A shows results from the year prior to listing to two years after listing using the full sample (N=99) and panel B shows results from the year prior to listing to five years after listing using the firms that listed in 1994 or earlier (N=57). Each year, for each firm, the controlling shareholder is identified and voting rights are tabulated, regardless of any shifts in the identity of a firm’s controlling shareholder. Results are presented for all firms and by type of listing: a Level 2 ADR program (listing only), Level 3 ADRs that were not IPOs (capital raising firms), and Level 3 ADR programs where it was also the firm’s IPO. A t-test is used to test the hypothesis that mean change in voting rights is zero and the Wilcoxon signed rank test is used to test the hypothesis that the median change in voting rights is zero. ***, **, and, * indicate statistical significance at the 1%, 5%, and 10% levels.

All firms Level 2 ADR Level 3 ADR Level 3 ADR: IPO

Mean Median Mean Median Mean Median Mean Median

Panel A. Controlling shareholders’ voting rights (%): year -1 to year 2.

Year -1 57.9 53.3 39.9 32.5 49.6 45.3 83.3 99.5 Year 0 47.9 46.5 40.3 37.3 42.7 39.3 62.0 61.6 Year 1 47.7 45.7 40.0 34.8 43.8 39.3 59.4 61.1 Year 2 47.3 45.7 40.4 37.3 44.0 39.3 57.6 60.5 Change: -1 to +2 -10.6*** -7.6*** 0.5 4.8* -5.6 -4.2*** -25.7*** -39.0*** Change: 0 to +2 -0.6 0.2 0.1 0.0 1.3 0.0 -4.4 -1.1*

Panel B. Controlling shareholders’ voting rights (%): year -1 to year 5.

Year -1 54.6 49.1 47.0 37.3 46.6 43.7 78.4 82.1 Year 0 46.4 46.5 48.5 37.3 41.1 38.3 57.0 59.5 Year 1 46.5 45.3 48.2 37.3 42.2 38.2 55.0 53.0 Year 2 46.1 45.5 50.2 44.6 41.5 38.4 54.0 54.6 Year 3 45.5 45.9 49.1 50.0 42.3 40.0 50.1 51.5 Year 4 45.3 50.0 47.1 49.1 42.3 42.5 50.4 51.5 Year 5 46.4 50.0 50.0 50.0 44.3 42.7 48.5 51.5 Change -1 to +5 -8.5** 0.9 3.0 12.7 -2.3 -1.0 -29.9*** -30.6*** Change: 0 to +5 -0.3 3.5 1.5 12.7 3.2 4.4 -8.5* -8.0**

36

Table 5. Changes in the original controlling shareholders’ voting rights after listing in the U.S. This table shows changes in the original controlling shareholders’ voting rights, where the original controlling shareholder is defined as a firm’s controlling shareholder in the year before listing in the U.S. (year –1). The sample includes firms from emerging markets that list their shares on the NYSE or Nasdaq via a Level 2 or 3 ADR program from 1990 to 1997. Information on foreign firms that list their shares in the U.S. is from the Bank of New York and from the NYSE and Nasdaq web sites. Ownership data is hand collected from various sources listed in Section 3. Each firms’ ownership structure is tracked from the year before it lists in the U.S. through 1999. Firms that do not have a controlling shareholder are excluded (two firms). Panel A shows the total change in the original controlling shareholders’ voting rights from the year the firm listed in the U.S. (year 0) to two years after listing in the U.S. (year 2), conditional on the original controlling shareholder decreasing (increasing) its stake in the firm. The total change in voting rights is computed as the difference in the original controlling shareholders’ voting rights from year 0 to year 2. Results are shown for all firms and by type of original controlling shareholder. If a firm becomes widely held, delists from the U.S. exchange, or the original controlling shareholder sells its control stake, the total change is computed from year 0 to the year when such an events occurs. Panel B shows the total change in the original controlling shareholders’ voting rights from year 0 to year 5. These results are only available for firms that listed in the U.S. in 1994 or earlier. A t-test is used to test the hypothesis that mean change in voting rights is zero and the Wilcoxon signed rank test is used to test the hypothesis that the median change in voting rights is zero. ***, **, and, * indicate statistical significance at the 1%, 5%, and 10% levels.

Identity of original controlling shareholder

All firms Family State Public corporation Miscellaneous

N Mean (%)

Median(%) N Mean

(%)Median

(%) N Mean (%)

Median(%) N Mean

(%)Median

(%) N Mean (%)

Median(%)

Panel A. Changes in original controlling shareholders’ voting rights from year 0 to year 2.

Sample size 99 -2.0** 0.0 59 -2.2 0.0 19 -3.9 0.0 5 1.2 0.0 16 -2.8 0.0 No change in voting rights 32 0.0 0.0 16 0.0 0.0 10 0.0 0.0 2 0.0 0.0 4 0.0 0.0 Decrease in voting rights 39 -10.3*** -4.3*** 24 -10.5*** -5.8*** 8 -10.3 -3.2** 1 -1.9 -1.9 6 -10.5 -4.8** Increase in voting rights 28 5.7*** 3.3*** 19 6.6*** 3.6*** 1 7.3 7.3 2 3.9 3.9 6 3.1** 2.5**

Panel B. Changes in original controlling shareholders’ voting rights from year 0 to year 5.

Sample size 57 -8.7*** -4.3*** 36 -7.3** -1.7** 9 -9.6 -5.5** 1 13.7 13.7 11 -14.9** -7.3** No change in voting rights 6 0.0 0.0 4 0.0 0.0 2 0.0 0.0 0 0.0 0.0 0 0.0 0.0 Decrease in voting rights 33 -19.7*** -17.7*** 18 -20.5*** -22.0*** 6 -17.3** -16.3** 0 . . 9 -19.7** -9.6*** Increase in voting rights 18 8.4*** 5.5*** 14 7.7*** 2.7*** 1 17.5 17.5 1 13.7 13.7 2 6.7 6.7

37

Table 6. Changes in control and ownership composition. Panel A shows the number of firms that experienced a change in control for U.S. listed firms. The sample includes firms from emerging markets that list their shares on the NYSE or Nasdaq via a Level 2 or 3 ADR program from 1990 to 1997. Information on foreign firms that list their shares in the U.S. is from the Bank of New York and from the NYSE and Nasdaq web sites. Ownership data is hand collected from various sources listed in section 3. Each firms’ ownership structure is tracked from the year before it lists in the U.S. through 1999. Control changes for U.S. listed firms are tabulated from the initial listing year to 1999. The controlling shareholder exits when it no longer controls any voting rights. A replacement control change occurs when a controlling shareholder sells some of its stake so that a second ultimate owner acquires greater voting control after the sale. The controlling shareholder remains as an ultimate owner, but is no longer the controlling shareholder. Panel B shows how the ownership composition of U.S. listed firms changes from the year prior to listing in the U.S. to 1999. Six firms delisted from the U.S. exchange between the initial listing year and 1999 (†). A Pearson χ2 test is used to test the hypothesis that the distribution of the identity of controlling shareholders is the same in the year prior to listing in the U.S. and in 1999. ** indicates statistical significance at the 5% level.

Identity of controlling shareholder

N No controlling shareholder Family State Public

corporation Miscellaneous Total

Panel A. Control changes in U.S. listed firms

U.S. listed firms 101 2 Controlling shareholder exits 9 2 0 7 18 Replacement control change 7 1 0 0 8 Total number of control changes 16 3 0 7 26

Panel B. Ownership composition of U.S. listed firms prior to listing in the U.S. and in 1999.

Sample in the year before U.S. listing 101 2 59 19 5 16 99 Sample in 1999† 95 4 48 15 17 11 91 Pearson χ2 8.75**

38

Table 7. Changes in control and the identity of the controlling shareholders after listing in the U.S. Panel A shows the total number of firms that experienced a change in control after listing in the U.S. and identifies the type of the original controlling shareholders that exit and the type of controlling shareholders that replace them. The sample includes firms from emerging markets that list their shares on the NYSE or Nasdaq via a Level 2 or 3 ADR program from 1990 to 1997. Information on foreign firms that list their shares in the U.S. is from the Bank of New York and from the NYSE and Nasdaq web sites. Ownership data is hand collected from various sources listed in section 3. Each firms’ ownership structure is tracked from the year before it lists in the U.S. through 1999. Firms that do not have a controlling shareholder prior to listing in the U.S. are excluded and six firms delisted from the U.S. exchange during the sample period. Other (†) is a special case where the state controlled a sample firm through an intermediate corporation and when the state sold its control stakes in the intermediate corporation, the intermediate corporation became a widely held firm. The exiting controlling shareholder is the state and the new controlling shareholder is a widely held firm, although not because the widely held firm purchased a control stake. Panel B compares the characteristics of the original controlling shareholders to the new controlling shareholders. Foreign equals one if the controlling shareholder resides, or is incorporated outside the country where the sample firm is incorporated. Top Management equals one if the CEO, Chairman, Vice-chairman, or President is directly affiliated with the controlling shareholder. Pyramid structure equals one if the controlling shareholder controls the firm through a pyramid structure. New controlling shareholder is existing owner equals one if the new controlling shareholder was an ultimate owner prior to becoming the controlling shareholder; it equals zero if it the new controlling shareholder did not own a stake in the firm prior to becoming the controlling shareholder. For original controlling shareholders, voting rights (cash flow) is for the last year they control the firm. For new controlling shareholders, voting rights (cash flow) is for the first year they control the firm.

New controlling shareholder

Original controlling shareholder

Total # of control changes

Family State Public corporation Miscellaneous Other†

Firm has no controlling shareholder

Panel A. Transition matrix of controlling shareholder types.

Family 17 7 0 7 2 0 1 State 3 0 0 0 1 2 0 Corporation 0 0 0 0 0 0 0 Miscellaneous 6 2 2 1 0 0 1

Total 26 9 2 8 3 2 2

Original controlling shareholders

New controlling shareholders

Panel B. Characteristics of original controlling shareholders vs. new controlling shareholders.

Number of controlling shareholders 26 24 Foreign controlling shareholder 3 19 Top Management 21 18 Pyramid structure used to control sample firm 9 16 New controlling shareholder is not existing owner . 15 New controlling shareholder is existing owner . 9

Mean (median) voting rights (%) 32.3 (31.3) 38.5 (35.5) Mean (median) cash flow rights (%) 22.8 (21.7) 27.6 (27.6)

39

Table 8. Abnormal returns associated with control change announcements. This table shows the average and median CARs for 24 control change announcements. The sample includes firms from emerging markets that list their shares on the NYSE or Nasdaq via a Level 2 or 3 ADR program from 1990 to 1997. Information on foreign firms that list their shares in the U.S. is from the Bank of New York and from the NYSE and Nasdaq web sites. Returns on firms’ ADRs are adjusted using a two-factor market model (Datastream local and world market indices). Market model parameters are estimated over the period from day -275 to -26. ADR returns are from CRSP and returns on the local and world market indexes are from Datastream. All returns are in U$. Ownership data is hand collected from various sources listed in section 3. Each firms’ ownership structure is tracked from the year before it lists in the U.S. through 1999. Two special cases are excluded: the state controlled a sample firm through an intermediate corporation and when the state sold its control stakes in the intermediate corporation, the intermediate corporation became a widely held firm. The exiting controlling shareholder is the state and the new controlling shareholder is a widely held firm, although not because the widely held firm purchased a control stake. Significance of average CARs is based on t-statistics that account for cross-sectional dependence; statistical significance of median CARs is based on the Wilcoxon signed-ranks test. The p-value indicates statistical significance for the difference in means for transactions where control goes from a family or miscellaneous group to a foreign corporation versus all other transactions. *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels respectively.

All control changes Family or miscellaneous to a foreign corporation All other transactions p-value (difference)

Event window: -5, +1

Average (%) 8.83*** 14.7*** 6.77** 0.001 Median (%) 5.73*** 8.76** 1.93* Percent positive 74 100 65 N 24 8 16

Event window: -1, +1

Average (%) 6.31*** 11.55*** 4.46** 0.001 Median (%) 3.67*** 7.09** 1.88* Percent positive 70 83 65 N 24 8 16

40

Appendix A. This appendix provides a list of quotations from various sources covered by Factiva (Dow Jones Reuters Business Interactive). In cases where clarification is required, words in italics are added. Date Source Quote

03/07/91 Business Times Singapore

Besides legal claims arising out of acts or omissions that a director may commit during his tenure in a company, Chubb (Chubb Pacific Underwriting Management Services) officials said there were other legal mine-fields. American Depositary Receipts (ADRs), which several Asian and Australian companies had floated in the US market in recent years, are a prime example. Mr McClure (Pacific zone manager of executive protection with Chubb) said that ADRs open companies and directors up to US class action suits. "If the share price of a company falls sharply, ADR holders might decide to take legal action against the company or its directors," he said.

01/07/94 Risk Management

Many if not most Europeans still consider directors' and officers' liability to be a U.S. problem. This is no longer true. ... Non-U.S. directors and officers can be drawn into D&O claims in the United States under a variety of circumstances. Naturally, the directors and officers of non-U.S. companies that access U.S. capital markets are subject to U.S. securities laws, a prevalent basis for shareholder claims against directors and officers.

17/08/95 The Wall Street Journal Europe

Pushed by U.S. hunger for information, such companies (companies with ADRs) can be particularly investor friendly, analysts say. In Italy, for example, Mr. Cortes says companies that have ADR's seem to be leading the way toward a climate that is friendlier to shareholders.

02/09/95 International Herald Tribune

Corporations issuing ADRs have to conform to U.S. accounting rules. That alone is of enormous worth to those separated from their assets by maybe thousands of miles. ... The demands made on corporations issuing ADRs gives investors from developed countries the kind of corporate governance methods they understand. Moreover, ADRs are traded in dollars on the New York Stock Exchange both as listed investments and over-the-counter, giving them the formidable back-up of regulation by the U.S. Securities and Exchange Commission.

01/02/96 Financial Times

The gains (from listing in the U.S.) are not without costs. The price non-US entities pay for getting access to the world's largest capital market is a readiness to conform to US investors' expectations. Disclosure is the most obvious area. Reporting requirements in the US are often very different from those in an issuer's home country, and some are unwilling to release the required information. While there has been some easing of regulations, many US investors prefer to see companies accounts drawn up using US standards. ... Mr Bill Jenks of Broadgate adds that respondents (of a survey of US institutional investors' attitudes to investing abroad by Broadgate Consultants) indicated that they like non-US companies to have an American depositary receipt facility, even if they buy shares in local stock markets rather than ADRs themselves. He says an ADR facility demonstrates a commitment to US investors on the part of a company.

28/07/96 Mondaq Business Briefing

The risk of litigation against Directors increases still further when the Company accesses international capital markets, particularly in the USA, by means of ... Public Offerings: Here the dangers of litigation increase dramatically whether the Company is seeking a full US exchange listing, or arranging a sponsored ADR programme, or an unsponsored ADR programme. All of these transactions require the Directors and Officers to comply with the full registration and reporting procedures imposed by The Securities Act of 1933 and The Securities and Exchange Act of 1934. The obligations imposed by these Acts are extremely onerous. The legal environment surrounding such transactions is characterised by a very high duty of care imposed on the Directors and Officers - a minimal burden of proof for litigants - the common occurrence of costly class actions being brought by professional plaintiff attorneys. ... To further compound the dangers of litigation to Directors of Companies subject to SEC regulations a recent court ruling allowed a European Company to be sued in the USA by another European Company simply because the defendant Company had arranged an ADR programme in the USA. The litigation was successful despite the fact that the litigant had acquired their equity not through such ADR programme, but directly on a local non-USA stock exchange.

41

Appendix A, continued.

Date Source Quote

24/02/97 Investor Relations Digest

With the popularity of ADRs with U.S. investors comes more scrutiny. Previously, many U.S. pension funds were prohibited from making investments in foreign companies but increasingly, these funds are holding ADRs and are beginning to make corporate governance demands.

20/11/97 The Moscow Times

The Russian subsidiary (RUS AIG) of global insurance giant American International Group is targeting the firms which, it says, face an increased risk of legal action as they enter litigious international markets. "[Being] publicly traded in the United States means big exposure," AIG Europe vice president Michael Sherman said Wednesday at a conference. "Companies that offer American Depositary Receipts or have business dealings in North America are vulnerable to litigation from shareholders, employees, government agencies or competitors," he said.

15/05/98 Asia Insurance Review

The use of American Depositary Receipts (ADRs) to raise funds in the US has exposed Asian companies and their management to lawsuits by more litigious American investors. ... Mr Khoo (associate with the Hong Kong office of UK law firm Barlow, Lyde, and Gilbert) said US judgments can be enforced abroad. Coupled with contingency fees for legal representation and the possible imposition of punitive damages, securities litigation in the form of class action suits and derivative actions have become particularly popular in the US. Securities litigation has become so profitable that there are so-called "professional plaintiffs" in the US who own just a single share of ADR which provides them with sufficient legal standing to commence a class action suit. By far the most common ground for action is the failure to disclose material information in the SEC filings or, when doing so, misrepresenting such disclosures.

17/03/99 The Hindu

The latest milestone crossed by one of India's most admired software companies does not by itself establish the wholesome advantages of an international listing. Nor is it simply a matter of mobilising capital on a grand scale. It is even less certain that after perceiving its benefits, many other Indian companies can immediately follow suit. For, ultimately, a global listing such as the one obtained by Infosys is as much predicated on corporate governance as it is on financial performance.

17/12/01 Business Wire

The purposes of this listing (ADRs on the NYSE) are as follows: To clearly demonstrate in Japan and overseas that our (Nomura Holdings) goal is to become a globally competitive Japanese financial services group, To enhance information disclosure conforming to the spirit of fair disclosure, To expand our strategic options, To strengthen corporate governance.

10/04/02 Business News Americas

(Banco) Itau’s recent ADR listing on the New York Stock Exchange will also support protection of minority shareholders.

24/07/02 Reuters News

"Despite all the cynical comments, listed ADRs have a level of accounting transparency that is not matched by many markets. In the short term, some issuers might balk because of the uncertainties in U.S. markets, but in the long term, demand for good governance from non-U.S. companies bodes well for the ADR market," Tse said (Kenneth Tse, a Hong Kong-based vice president with JPMorgan).

30/09/02 Business Wire

KONAMI decided to list on the NYSE to expand its U.S. operations and global presence; provide added flexibility to management with respect to forming strategic alliances and gaining access to additional means of financing; strengthen its corporate governance; and increase its U.S. shareholder base.

42

Appendix A, continued.

Date Source Quote

30/10/02 Financial Times

The American Depositary Receipt may have been designed to bring overseas investment opportunities to US institutions and individuals, but it is proving equally attractive for non-US investors as well. About 15 per cent of ADR holders are from outside the US, according to Vincent Fitzpatrick, a managing director at the Bank of New York. Increased transparency and better execution are just a few of the reasons why they might buy ADRs instead of going to the primary market of a particular security. Of paramount importance is the fact that investors find comfort in the stricter corporate governance and disclosure requirements in the US and UK, where most ADRs and Global Depositary Receipts are listed, says Kate Cornish-Browned at Morgan Stanley Asset Management in London.

29/11/02 Comtex News

“The move represents an important milestone in our (Harmony Gold switched from a listing on Nasdaq to the NYSE) growth as an independent company. The listing reflects our commitment to the highest standards of corporate governance and accountability,” said Swanepoel (Harmony CEO, Bernard Swanepoel).

24/03/03 Financial Times

However, other portfolio managers say that they would only buy ADRs if they were at least as liquid as the primary shares, a case often seen in emerging markets. They do note that their decision is influenced by other criteria, such as corporate governance issues: ADRs offer the guarantee of a company’s compliance with US GAAP and all other regulations US companies have to obey.

23/09/03 Dow Jones International News

South Korea's Woori Finance Holdings Co. (Q.WFN) expects to list American Depositary Receipts on the New York Stock Exchange at the end of the month to improve corporate governance and accounting transparency, said the company Wednesday.

24/03/04 Latin America Digest

The Bank of New York has been selected as depositary for the ADRs of ISA ( www.isa.com.co). The Colombian company placed 27.6 pct of its capital in ADRs. The aim of the company is to obtain foreign assets through trading on the U.S. bourse, to make its assets more transparent and to strengthen its good governance practices, the manager of ISA, Javier Gutierrez, said.

02/04/04 Prime–TASS News

Level II ADRs are fully listed, and require reconciliation of company accounts to U.S. GAAP, and compliance with the Sarbanes-Oxley act, Keane (James Keane, head of EMEA Sales for JP Morgan Europe) said. "The advantage is that the listing provides you with a much higher profile, and it opens you up to other investors that can only hold listed securities. Investors are attracted by the better corporate governance and disclosure that a listing brings," he said. ... Keane added that the stricter rules for disclosure outlined in the 2002 Sarbanes-Oxley act can push up the price of companies' liabilities insurance and, initially some issuers were concerned about the extra resources needed to comply with the act. However, companies are realizing that the buy-side rewards good corporate governance and the lure of western capital should help any Russian equity issuers overcome such concerns.

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Appendix B. This table includes variables from La Porta et al. (1998). La Porta et al. do not provide data for China and Hungary so where available, it is taken from Allen et al. (2005) and Pistor et al. (2000). Common law and civil are dummy variables that describe the origin of a country’s legal system. Anti-director rights is an index (0 – 6), where higher scores indicate better protection) of six variables that measure how strongly the legal system favors minority shareholders against managers or dominant shareholders in the voting process. The next four variables are proxies for the quality of enforcement of shareholder rights. Rule of Law (0 – 10) indexes, where a higher scores indicate better enforcement, is an assessment of the law and order tradition in the country. Corruption is an index that ranges from 0 – 10, where lower scores indicate higher levels of corruption. Accounting standards is an index created by examining and rating companies’ annual reports on their inclusion or omission of 90 items. The mean and median in the last two rows do not include data for the U.S.

Common law Civil law Anti-director rights Rule of law Corruption Accounting

standards Argentina 0 1 4 5.35 6.02 45 Brazil 0 1 3 6.32 6.32 54 Chile 0 1 5 7.02 5.30 52 China . . 3 5.00 2.00 . Colombia 0 1 3 2.08 5.00 50 Hungary . . 3 8.61 . . Indonesia 0 1 2 3.98 2.15 65 Israel 1 0 3 4.82 8.33 64 Korea 0 1 2 5.35 5.30 62 Mexico 0 1 1 5.35 4.77 60 Peru 0 1 3 2.50 4.70 38 Portugal 0 1 3 8.68 7.38 36 Singapore 1 0 4 8.57 8.22 78 South Africa 1 0 5 4.42 8.92 70 Taiwan 0 1 3 8.52 6.85 65 Venezuela 0 1 1 6.37 4.70 40

U.S. 1 0 5 10.00 8.63 71

Total 3 11 Mean 3.00 5.81 5.73 55.64 Median 3.00 5.35 5.30 57