Cross-listing and pricing efficiency: The informational and anchoring role played by the reference price

Abstract

When a firm cross-lists its shares in segmented markets, the price of the first issued share, as a reference, plays both an informational and anchoring role in pricing the second issued share. We develop a model illustrating the dual-role. Empirically, we examine a group of Chinese firms that first issue foreign shares and then domestic A-shares, for which the anchoring effect adds to the Ashare underpricing. Consistent with the model predictions, we find that the A-share underpricing is positively related to the difference in costs of capital in the two segmented markets, and that this positive association is weaker when participants are less likely to resort to the anchoring heuristic and when the A-share valuation involves less uncertainty.

How Do Investment Banks Price Initial Public Offerings? An Empirical Analysis of Emerging Market

“…A decision to raise equity capital through selling stock to general public is a significant event in the lifecycle of issuer firm. Chang et al (2013) argue that most firms decide to go public in hot-issue 1 market due to the several IPO stylized facts such as leave less money 2 on the 1 A situation when the number of new offerings gets listed with great pace than the usual number of new offerings in a certain time period. 2 Leave less money on the table means underwriters deliberately set offer price discount at the time of going public to compensate the market liquidity risk for more details see Ritter (1984Ritter ( , 1988 and Ritter and Welch (2002).…”

Ex-Day Returns of Stock Distributions: An Anchoring Explanation

“…Baker et al (2012) reveal that parties in merger and acquisition activities tend to anchor on the recent 52-week high to simplify the valuation and negotiation process. Chang et al (2013) find that in cross-listings, participants anchor on the price of the existing class of shares in valuating new shares. Dougal et al (2015) show that anchoring influences the borrowing rate of bank loans.…”

“…Second, our paper adds both theoretical and empirical evidence to the burgeoning literature on the impact of investors' anchoring bias on the financial markets. Our anchoring model could be applied to other corporate events, like cash dividend payments, seasoned equity offerings, mergers and acquisitions (Baker et al 2012), and cross-listings (Chang et al 2013). Third, by utilizing a special setting in which anchoring is highly likely to be elicited, we explore the initiation of the anchoring process and the impact of the moderator variables.…”

The Indirect Effects of Trading Restrictions: Evidence from a Quasi-Natural Experiment

“…There is also an extensive literature on short selling. A number of 6 studies suggest that short sellers are informed and short-sale constraints slow information discovery and decrease price efficiency (Cohen, Diether, and Malloy (2007), Bris, Goetzmann and Zhu (2007), Saffi and Sigurdsson (2011), Beber and Pagano (2013), Boehmer and Wu (2013), Chang, Luo, and Ren (2013), Curtis and Fargher (2014), Fang, Huang and Karpoff (2016), and Engelberg, Reed, and Ringgenberg (2017)). 3 Finally, and more broadly, our findings are related to the effects of trading restrictions on managerial compensation and corporate governance (e.g., Massa, Zhang, and Zhang (2014), Lin, Liu, and Sun (2018)).…”