International Financial Management 2nd Edition by Geert Bekaert ,Robert Hodrick

Exercise 5

The following table shows how average share prices jump (in percentage) after the announcement that the stocks will be cross-listed (see Miller, 2000). The price response should be interpreted as corrected for risk and market movements that happened on the same day:
Although these numbers appear small, it is important to realize that announcements of domestic equity issues, which by definition raise capital, lead to an average negative return response of 2% to 3%. The main reason is that capital-raising equity issues are viewed as a signal by the managers that the firm may be overvalued in the stock market.
Given what you learned in this chapter, answer the following:
a. Why is there a positive price response when a company's shares are cross-listed
b. Why might the response for emerging-market firms be larger than for developed-market firms
c. Without knowing that equity issues in a domestic context are associated with negative price responses, is the difference between capitalraising and non-capital-raising ADRs a surprise Why or why not