Paquita Y. Davis-Friday
University of Notre Dame
Thomas J. Frecka
University of Notre Dame
Abstract: This study provides evidence that Mexican firms that choose to trade in the U.S. as exchange-listed American Depositary Receipts (ADRs) have significantly weaker financial performance subsequent to cross listing than Mexican firms that are eligible to list in the U.S., but do not. We show that on average, Mexican cross-listed firms are smaller, more highly levered and less profitable than non-crosslisted firms. While supplemental tests of earnings quality suggest that non-crosslisted firms exhibit nominally smoother earnings, that evidence is not sufficient to explain the stronger reported financial performance of those firms relative to cross-listed firms. Finally, our tests of value relevance, using book value and earnings to explain price, show significantly higher explanatory power for the cross-listed firms. The value-relevance results suggest that benefits from U.S. regulation exist for investors in Mexican cross-listed firms and that reported market inefficiency in Mexico may result in low demand for the financial statements of non-crosslisted firms.
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