Research On The Cost Of Capital Effect Of Chinese Cross-Listed Corporations

With the development of economic globalization and financial integration, information technology utilizes widely in financial markets, cross-border flow of international capital becomes more and more frequently, conveniently and quickly. After 30-year execution of the policy of reforming and opening-up, China has become more involved in the global economy system, and started to seek more international investment to help develop the economy. With the limited capital supporting capability of domestic capital markets, more and more Chinese companies started to enter the international stock markets for capital raising. At the same time, with the rapid development of China's economy and great expansion of mainland's stock market in recent years, many of Chinese oversea-listed companies have become gone back to list in domestic market. Cross-listing is becoming an increasingly important strategic issue for companies and a noticeable phenomenon in the current development of China's securities market. The increasing interest in cross-listing has heightened the need for studying in this regime.Cost of capital is the investor's required rate of return, it's a very important concept in the modern financial theory. Cost of capital effects of cross listings are the core research field of cross-listings from the point of corporate finance. Market segmentation hypothesis, liquidity hypothesis, investor recognition hypothesis and bonding hypothesis are four important theories to interpret the cost of capital effects of cross-listings. Western scholars have made many theory development and empirical tests using event-study and equity cost of capital model in recent ten years, but calculating the cost of capital on the world capital market is such an important and difficult issue that there has not been a same opinion on the cost of capital effect of cross-listings by now.This thesis first reviews literatures of the cost of capital effects of cross-listings from the point of the theoretical hypothesis, empirical tests, and calculating methods, then construct theoretical model, International Capital Asset Pricing Model (ICAPM), for the investigation of cost of capital effects of Chinese cross-listed firms. This paper empirically tests and multiple regression analyzes the cost of capital effects of Chinese companies that issued both domestic A shares in mainland China and foreign H shares on the Hong Kong Stock Exchange during the period from July 1993 to December 2008. However, my samples suffer from a survivorship bias. The empirical findings and conclusions are as follows:1. Chinese cross-listed firms have lower cost of capital in the A+H cross-listing markets.2. Chinese firms can achieve a greater liquidity from cross-listings, and a lower cost of capital, these two variables are significantly negative.3. Chinese firms can enlarge investors' recognition from cross-listings, and decrease cost of capital, but these two variables are not significantly relative.4. Chinese firms can increase the level of investor protection from cross-listings, and decrease cost of capital, these two variables are significantly negative.These results contrast with the conventional wisdom that firms cross list overseas to benefit from a greater liquidity, a broader investor recognition, a higher investor protection and a lower cost of capital. They suggest that it is an interesting area for future research to examine the benefit and the impact of cross-listing for Chinese companies.This study makes several contributions. First, I use ICAPM approach to estimate the cost of capital effects of Chinese cross-listings, complementing and extending the relatively limited prior findings. Second, I document that cross-listings on HK exchange have cost of capital effects and provide evidence on them. Third, my analysis is based on one of the largest possible samples of HK cross-listings, although my samples suffer from some survivorship bias like most other studies of cross listings.