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

• Published in: Journal of banking & finance Vol. 37; no. 11; pp. 4449 - 4464
• Main Authors: Chang, Eric C., Luo, Yan, Ren, Jinjuan
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.11.2013; Elsevier Sequoia S.A
• Subjects: Anchoring; Capital market; China; Cost of capital; Cross-listing; Heuristic; Heuristics; IPO underpricing; Market segments; Mathematical models; Pricing; Segmented market; Stock prices; Stocks; Studies; Uncertainty; Valuation; China; Segmented market; G24; G12; IPO underpricing; G15; G14; Cross-listing; Anchoring
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/j.jbankfin.2012.12.018

► First-issued share is a reference in pricing the second share of cross-listed firms. ► We examine Chinese firms that issued foreign shares first and then issued A-shares. ► The anchoring role by the foreign share price contributes to A-share underpricing. ► A-share underpricing is found to be associated with differences in cost of capital. ► This association is found to be weaker when people are less subject to anchoring. 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 A-share 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.