Essays on institutions, international cross-listings and stock price reactions around earnings announcements

I analyze the relationship between institutions, international cross-listings and stock price reactions around earnings announcements across countries. Coffee (1999) and Stulz (1999) claim that foreign firms cross-list shares on U.S. exchanges---by issuing American Depositary Receipts (ADRs)---to enhance investor protection and pre-commit to reduce shareholder expropriation, given that ADRs force them to adhere to the stricter U.S. institutions and enforcement mechanisms. In chapter 1 and chapter 2, I test the hypothesis that ADR listings affect stock price behavior, possibly due to a reduction in illegal insider trading. Prices may anticipate corporate announcements through informed trading, especially in countries where insider trading is pervasive. Hence, tougher corporate governance practices associated to ADR listings may significantly reduce news anticipation in stock prices. Bhattacharya et al. (2000) conclude that prices in the Mexican Stock Exchange do not react to corporate announcements, because they fully anticipate relevant news through widespread insider trading. However, chapter 1 shows that the latter result applies only to stock prices of non-US-listed firms. Based on an event study of a representative sample of Mexican firms I show that prices of non-US-listed firms almost fully incorporate earnings news 31 days ahead of public releases. In contrast, prices of US-listed Mexican firms react strongly on announcement dates, but they gradually incorporate earnings news starting 10 days prior to release dates and continue strongly thereafter. The asymmetries hold in a sub-sample of US-listed and non-US-listed Mexican firms with the same insiders, suggesting a change in insiders' behavior following ADR listings. Chapter 2 analyzes a sample of 338 non-U.S. firms from 40 countries before and after issuing ADRs, and shows that prices systematically anticipate earnings announcements in the pre-ADR period, but not afterwards. Moreover, the reduction in news anticipation following ADR listings is greater in firms from countries with weaker investor protection. Overall, these results show that ADRs affect price responses around earnings news and improve investor protection. Finally, chapter 3 studies stock price reactions of U.S. firms and finds no evidence of widespread information leakages into prices ahead of earnings announcements. Moreover, this result holds for two sub-periods before and after Regulation Fair Disclosure, implemented in October 2000. Consistent with chapter 1 and 2, the empirical evidence supports the view that U.S. financial regulation effectively limits illegal insider trading, even prior to Reg. FD.