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UP College of Business Administration Discussion Papers

DP No. 1004 March 2010

International Listing and Philippine Stock Prices

by Daniel Vincent Borja*

* Assistant Professor, UP College of Business Administration

INTERNATIONAL LISTING AND PHILIPPINE STOCK PRICES

by

Daniel Vincent Borja Assistant Professor, UP College of Business Administration

Abstract

This study examines the empirical evidence about the effects on the local share price of dual listing in an international exchange by local companies already listed in the Philippine Stock Exchange. It investigates the information content of an international listing by determining if local shares experience abnormal returns around the listing date of its counterpart depositary receipts. It also identifies the one-year performance of the local stock after its dual listing abroad to detect return patterns that could generate superior results. Moreover, it also determines whether the impact of dual listing on abnormal returns is temporary or permanent.

Using a restricted market model, abnormal returns are determined by computing

for the “market-adjusted returns” of an eight-stock portfolio. Stationarity is tested to verify whether the abnormal returns are temporary or permanent. The results reveal significant cumulative abnormal returns days before the listing date supporting the information content hypothesis. Longer-term performance shows insignificant abnormal returns suggesting long-run efficiency of the market. Unit root tests indicate that the impact on cumulative abnormal returns is permanent.

The findings of the study imply that international listings convey information

about the prospects of the firm and should be given consideration in the formulation of the financing policies of the company. Correspondence:

Daniel Vincent Borja Tel +63 2 928 4571 College of Business Administration Fax +63 2 920 7990 University of the Philippines E–mail [email protected] Diliman, Quezon City 1101, Philippines

International Listing and Philippine Stock Prices

Introduction

With the assumption of asymmetric information between the management of firms and its stockholders, companies provide “signals” to the investing public that convey information regarding the financial prospects of their firms. “Signals” are manifested in different ways ranging from specific news announcements on earnings and dividends to adoption of particular policies related to the company’s capital structure, acquisition strategy, advertising, etc. Numerous studies focused on the information content of these events and decisions announced and/or adopted by management.

A possible mechanism of conveying these “good news” is by establishing a global presence. Various modes of foreign involvement are available to the firm ranging from simply exporting, producing abroad, licensing, entering into a joint venture and the acquisition of a foreign enterprise (Eiteman, et al., 2004). Foreign involvement may convey additional growth opportunities for the firm and management’s confidence of the transferability of its competitive advantage locally to markets abroad. The establishment of a global presence is not restricted to investment decisions made by firms. Alternatively, companies can adopt financing policies that consider accessing foreign capital markets. A popular method using this mechanism is the creation of depositary receipts listed on a foreign exchange. This allows firms, though already listed in a local exchange, to dually list their stocks abroad. First to evolve are American Depositary Receipts (ADRs) which are “US dollar denominated negotiable instruments issued in the US by a depositary bank, representing ownership in non-US securities, usually referred to as the underlying ordinary shares” (Deutsche Bank AG, 2003). Lately, companies have also dually-listed their stocks in European exchanges such as London and Luxembourg in the form of European Depositary Receipts (EDRs). Global Depositary Receipts, on the other hand, accessed two or more markets usually the US (ADRs) market and the European (EDRs) market (Deutsche Bank AG, 2003). The Depositary Receipts Handbook by Deutsche Bank AG (2003) listed some advantages to a corporation of initiating a Depositary Receipts (DR) program:

• A DR program provides a simple means of diversifying the company's shareholder base and of tapping the global capital markets. • It allows capital raising on a scale which might prove impossible in the local market. • It increases the issuer's visibility and name recognition in the international markets, which may enhance knowledge of its products and ease the path of future capital raising exercises.

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Likewise, Boubakri, et al. (2007) mentioned that firms dual-list “to simultaneously raise capital, improve their stock liquidity, broaden their shareholder base, and to commit themselves to improving their disclosure and governance standards”. This study does not aim to dissect these advantages nor determine their relative importance. Rather, it focuses on the “information value” related to the decision of the local firm to lists its shares internationally. Alexander, et al. (1988) posed that issuing a depositary receipt can be interpreted as “reflecting management’s confidence in its future ability to meet the minimum listing requirement of the foreign stock exchange”. For example, foreign stock exchanges imposed disclosure and governance standards that compound the requirements mandated by local exchanges. Management would not risk the consequences of being unable to fulfill these requirements and its probable negative effect on firm value. Listing then “signals” management confidence to investors that it is capable of compliance. Management would then expect that communicating this “positive signal” can push up the prices of their local shares.

Some Philippine companies have taken advantage of this form of multiple listing facilities. Major industry players listed in the Philippine Stock Exchange have depositary receipts trade like regulars stocks on the New York Stock Exchange, in the case of the Philippine Long Distance Telephone Co. (PLDT), and the London Stock Exchange for Banco de Oro Unibank, Inc.

It is noticeable that an “elite” group of firms have dual-listed their shares. This group includes firms that dominate their industry and/or possessed market power. Listing then may convey information that a locally listed company has attained a level of performance and stature similar to “giants” such as San Miguel Corporation and Meralco. These arguments may support the contention that the decision to internationally list the shares contains information.

It would also be interesting to note, how fast the market would respond to such information. Market efficiency issues will also be explored in order to establish if superior returns can be achieved. Aftermarket performance is also analyzed to broaden the discussion of these efficiency issues. Research Objectives

This study examines the empirical evidence about the effects on the local share price of dual listing in an international exchange by local companies already listed in the Philippine Stock Exchange. The investigation focuses on three major objectives:

First, is to examine the information content of an international listing by determining if local shares experience abnormal returns around the listing date of it’s counterpart depositary receipts.

Second, is to identify the long-run performance of the local stock after its dual listing abroad and detect return patterns that could generate superior results.

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Third, is to determine whether the effect of an international listing on the local share price is simply temporary or if its impact persists in the long term.

The results of the study have possible implications in the policies adopted by the issuing firm as well as the trading strategies of the investing public. Based on the results, financial managers of locally listed firms will be guided on whether to provide serious deliberation in including an international listing in its financing policies and consider the attractiveness of an international listing in signaling to stockholders, current and prospective, the prospects of the company.

Investors will also be guided in their investment approach to newly dual-listed

stocks based on the historical under/over performance of the related local shares of the internationally listed firms included in the study. Also, it provides guidance to investors on whether efforts should be expended in identifying locally listed firms that are planning to list abroad or are potential candidates for dual listing in order to take advantage of the prospective shock, temporary or permanent, on excess returns. Review of Literature Studies done abroad showed conflicting findings on the relationship between depositary receipts and their underlying stock. Chen, et al. (2002) studied twenty-one sponsored DRs issued by Taiwan listing companies from October 8, 1997 to May 31, 2000. They examined the price transmission effect between ADRs or GDRs and the local stock. Their results revealed unidirectional causality from Taiwan’s capital market to foreign markets with the domestic market playing a more dominant role. Kadapakkam, et al. (2003), on the other hand, considered the role of London GDRs for Indian stocks. Their study revealed a bidirectional flow between the markets aiding domestic price discovery. Errunza and Miller (2000) acknowledged that the benefits to depositary receipts are difficult to quantify. They attempted to establish the economic benefits by examining a sample of 126 firms from 32 countries. They documented a significant decline of 42% in the cost of capital. Foerster and Karolyi (2000) mentioned that firms issuing equity globally should experience a net positive valuation effect in the long run, if not in the short run. Their earlier studies (Foerster and Karolyi, 1999) offered results of “positive short-run share price reactions but they are typically small, both economically and statistically”.

Alexander, et al. (1988) studied the behavior of local stock returns surrounding the international listing of 34 firms. Their sample includes 13 Canadian firms, 10 Japanese firms, 7 Australian firms, 2 South African firms and one firm each from Denmark and the United Kingdom, which dual-listed their shares in the U.S. market. Their results are consistent with their market segmentation hypothesis that “international listing should lead to a decline in the expected return on the firm’s common stock if capital markets were either completely or mildly segmented”. To detect abnormal

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returns, they performed a residual analysis using the Mean-Adjusted Returns technique of Brown and Warner (1980) with an event window of – 72 months to + 36 months of the listing date. Cumulative average residuals were likewise determined. They also tested for the presence of liquidity-signaling effects and selection bias using a Capital Asset Pricing Model (CAPM)-based return-generating process. They mentioned that an in-depth investigation on the topic of international listing would involve concentrating on the experience of firms in a single country.

Foerster and Karolyi (1999) provided evidence consistent with this market segmentation hypothesis and gave additional possible explanations for the abnormal return patterns. They posed that abnormal returns are related to the larger shareholder base created and the greater liquidity due to the international listing. This supported the investor recognition hypothesis (Merton, 1997), which states that expected returns decrease with the size of the firm’s investor base. Their sample consisted of 153 firms from 11 countries including 11 Asian companies (10 from Japan, one from Hong Kong) that listed in the U.S from 1976 to 1992. They tested for abnormal returns around both the announcement and listing dates. Announcement dates were represented by the earliest press release related to the planned listing. Abnormal returns were computed using an event window of -100 days to +250 days. Results revealed “cumulative abnormal returns of 19 percent during the year before listing, and an additional 1.2 percent during the listing week, but incur losses of 14 percent during the year following listing”.

It can be noted that the major studies on international listing and local share prices did not include Philippine stocks in their sample. Methodology Data

Returns were computed using daily and monthly stock prices of the local stocks and the proxies for the market index. The Composite Index of the Philippine Stock Exchange was used as the market proxy for periods before November 1996. The All Shares Index was used for periods on and after November 1996. Daily and monthly return were computed from closing local stock prices and index levels.

International listings covered by the study pertain to a convenient sample, which includes the following corporations listed in the Philippine Stock Exchange as shown in Table 1. The industry and the effective date of international listing are also presented.

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Table 1

DR ISSUE INDUSTRY EFF. DATE Banco de Oro Unibank Inc. Banks 20-Jan-06 Benpres Holdings Construct. & Materials 3-Nov-94

First Philippine Holdings Electricity 26-Feb-99 Manila Electric-Meralco Electricity 12-Jan-94 Philippine Long Distance Telephone

Fixed Line Telecom. 10-Feb-03

RFM Corporation Food Producers 6-Nov-95 San Miguel Corp. Beverages 1-Jul-91 United Paragon Mining Mining 1-Apr-96

The eight companies included in the sample have a total market capitalization of

P 863 billion as of the end of September 2008. This accounts for 26 % of total domestic market capitalization as of end-September 2008. Six companies are also included in the Philippine Stock Exchange Index (PSEi) accounting for 39% of the index capitalization as of end September 2008.

Table 2 Company Name Symbol Market Capitalization FIRST PHILIPPINE HOLDINGS CORPORATION FPH 11,950,706,304.00 MANILA ELECTRIC COMPANY MER 62,977,266,390.00 SAN MIGUEL CORPORATION SMC 184,305,400,088.00 PHILIPPINE LONG DISTANCE TELEPHONE COMPANY TEL 506,831,801,400.00 BANCO DE ORO UNIBANK, INC. BDO 87,477,241,118 BENPRES HOLDINGS CORP. BPC 6,047,638,619 RFM CORPORATION RFM 1,200,953,469 UNITED PARAGON MINING CORPORATION UPM 2,351,833,174 Total 863,142,840,562.00

The group of local stocks included in the study represents a portfolio that is fairly

diversified enough to represent the market. It accounts for a significant portion of total market capitalization. Moreover, the stocks included represent companies from various sectors of the market. Model Specification

Information content will be determined by detecting abnormal returns on and around the listing date. The listing date is the firm-specific event from which price changes are analyzed. The methodology of this study is no different from event studies that address three basic questions (Peirson, et al., 2003):

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What is the new information? When was it announced? Were there abnormal returns associated with its announcement?

What is the new information?

The listing of a locally listed stock in an international exchange is designated as the new information. The value of the information is expected to be reflected in the share price as this information is released. When was it announced?

As the announcement date of the international listing cannot be easily ascertained, the listing date is designated as the relevant event date. Listings are usually announced formally less than a month before its effective listing date. Were there abnormal returns associated with its announcement?

Brown and Warner (1980) used alternative models to estimate abnormal returns. Essentially, “normal returns” are determined based on a particular model and the difference between the actual return and the expected return is deemed “abnormal”. Most local and international studies made used of a market model in determining the normal rate of return of a security or portfolio. Peirson, et al., (2003) specified a standard market model based on the relationship between the returns of a security or portfolio and the returns of the market (Campbell, Lo, MacKinley, 1997) as follows: Rit = i + iRmt +uit where Rit = rate of return on security i at time t Rmt = rate of return on market m at time t E [uit ] = 0 Var [uit ] = uit

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The term Rmt captures the effect of market-wide factors and the excess return is

attributed to firm-specific factors such as the release of new information, i.e. dividend announcements, etc.

In particular, this study will use the “market-adjusted returns” model based on the study by Brown and Warner (1980). A restricted version of this model was used by Ybanez (1996) to study stock price adjustments to stock dividends on ex-date and by Cayanan (2001) to investigate the effects of stock dividend declarations on share prices on and around the announcement dates for Philippine stocks. Similarly, Manuela (2003)

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utilized a similar model to test if the free-rider problem can exist for bank mergers by comparing the returns of the Phisix with a five-bank portfolio.

The same restricted model will be used in this study. Ybanez (1996) indicated that this restricted market model assumes I and I are constrained to be equal to zero and one respectively. This requires that the portfolio under study should approximate the market in order to assume a systematic risk equal to 1 by creating a group of stocks that is well diversified (Brown and Warner, 1980). Given the pre-specified coefficients of the model, Cayanan (2001), in his study of stock dividends, provided support for this argument by including in his portfolio 19 indexed stocks accounting for 85.6% of the market capitalization of the Phisix.

It is assumed by this study that the portfolio consisting of the eight companies included in the sample characterize a diversified group whose nature and size well represents the market. With this assumption, the returns of the portfolio should be no different from the returns of the market proxy (All Shares Index or the Composite Index of the Philippine Stock Exchange). Any difference in the returns will be deemed to be “abnormal”. Brown and Warner (1985) defined the variables as follows1: Ait = Rit - Rmt i= 1, 2,2,…..n where Ait = excess return of stock i at time t Rit = [(Pit - Pit-1) / Pit-1] Rmt = [(Imt - Imt-1) / Imt-1] Pit = closing price of stock i at time t Imt = closing level of the market proxy at time t The average “market-adjusted” return on the eight-company portfolio at time t is:

Apt = [ i=1Rit] / n The t-stat is computed by dividing the average “market-adjusted” return by the standard deviation as shown below: t-stat = Apt / S (Apt) where

S (Apt) = { [ i=1 (Ait - Apt)] / (n – 1)}1/2

1 Cayanan (2001) and Manuela (2004) adopted the same definitions of the variables in the Brown and Warner (1985) study.

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Cumulative Abnormal Returns are also computed to determine if prices slowly

adjust to the new information before the listing date and the period after. Just like the “market-adjusted returns”, the cumulative excess returns are computed 29 days before and 30 days after the listing date, as well as 11 months before and 12 months after the listing date to check for any gradual changes in the returns.2

Cayanan (2001) and Manuela (2004) computed for the cumulative adjusted returns and its test statistic based on Ritter’s (1991) study:

CARpt , k = [ i=1Apt] k = 1, 2….k

t-stat = [(CARpt)(nt)1/2 ] / csdt

where csdt = [t x var + 2(t-1) x cov]1/2 t = the ith time in the event window n = number of stocks var = average cross-sectional variance over the interval cov = first order auto-covariance of the returns series

Unit-root tests are applied to all time series included in the study. Unit root tests are performed to formally test for stationarity, whether the stochastic properties of the series remain unchanged over time as explained by Danao (2005). This is to determine whether the time series has a transitory component or a permanent component. Hayashi (2000) discussed that a series with a permanent component, also called a stochastic trend, would have values whose “every change seems to have a permanent effect on its future values so that the best predictor of future values is its current value”. Hayashi (2000) further emphasized that unlike if the time series is stationary, “the current value has a permanent effect on the forecast for all forecast horizons”.

Manuela (2004) explained “using the equation Yt = + Yt-1 + ut, which is called a

random walk with drift, where is called an intercept or drift term, the AR(1) process is said to have a unit root when = 1.” The presence of a unit root implies that the series is nonstationary. In practice, Danao (2005) stated that a drift term and a linear time trend is included for testing if the series appears to have a trend.

The Dickey-Fuller Unit Root Test is employed to test the hypothesis that the

series has a unit root. The (tau) statistic is compared to the MacKinnon (1991) critical values for hypothesis testing. If the absolute value of the statistic is less than the

2 Event windows of (- 29 days, + 30 days) and (- 11 months, + 12 months) were primarily used for the study although other event windows were also tested (-/+ 60 days, -/+ 100 days, -/+ 300 days).

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absolute value of the MacKinnon critical value at a specific level of significance, the hypothesis that the series has a unit root or is nonstationary is not rejected; otherwise, reject the hypothesis that the series is nonstationary (Danao, 2005). Test of Hypotheses

If dual listing on an international exchange has no information content, then the average market adjusted returns on and around the listing date should not be significantly different from zero. Therefore the following hypotheses are posed in order to address the three major research objectives of the study: First, in order to determine the information content of international listing, our null hypothesis is that, Null Hypothesis: The daily and cumulative abnormal returns of the portfolio of local stocks on and around the listing day must be zero. Second, in order to test whether price patterns are present after listing, our null hypothesis is that, Null Hypothesis: The monthly and cumulative abnormal returns of the portfolio of local stocks on or months after the listing date must be statistically indistinguishable from zero.

Significant abnormal returns leading to the rejection of the null hypotheses above may aid the argument that international listing have informational content and that superior returns may be achieved from the local stock after an international listing. The t-test will be used to determine the statistical significance of the abnormal returns. Third, in order to test whether the impact of the dual listing on abnormal and cumulative abnormal returns is temporary or permanent, our null hypothesis is that, Null Hypothesis: The series of abnormal and cumulative abnormal returns is nonstationary. The presence of unit roots will lead to the non-rejection of the null hypothesis and may support the case that the effect of the dual listing on abnormal and cumulative abnormal returns is permanent. This result will encourage investors to anticipate the international listing and simply execute the purchase of the local shares prior to the international listing in order to take advantage of positive wealth effects, if any. Results Table 3 shows the abnormal returns, the related standard deviation, cumulative abnormal return and the computed t-statistics for the days around the listing date. The abnormal returns and the cumulative abnormal returns are also illustrated in Chart 1. The daily market-adjusted returns are for 29 days prior and 30 days subsequent to the listing date.

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Table 3

Abnormal Returns Around the Listing Date (Days) t AR STDAR t-stat CAR t-stat

-29 0.0043 0.0229 0.1885 0.0043 0.4559 -28 -0.0006 0.0139 -0.0408 0.0037 0.2816 -27 0.0000 0.0098 -0.0045 0.0037 0.2277 -26 0.0085 0.0190 0.4489 0.0122 0.6528 -25 0.0070 0.0158 0.4428 0.0192 0.9177 -24 0.0026 0.0163 0.1590 0.0218 0.9510 -23 0.0074 0.0178 0.4155 0.0292 1.1801 -22 0.0125 0.0181 0.6910 0.0417 1.5770 -21 0.0102 0.0301 0.3387 0.0519 1.8502 -20 0.0085 0.0221 0.3860 0.0604 2.0436 -19 -0.0021 0.0103 -0.2009 0.0583 1.8819 -18 0.0017 0.0120 0.1397 0.0600 1.8538 -17 0.0036 0.0181 0.1970 0.0636 1.8870 -16 0.0117 0.0264 0.4416 0.0752 2.1517 -15 0.0062 0.0217 0.2866 0.0815 2.2511 -14 0.0019 0.0231 0.0837 0.0834 2.2315 -13 -0.0002 0.0126 -0.0163 0.0832 2.1597 -12 -0.0036 0.0437 -0.0821 0.0796 2.0084 -11 0.0169 0.0295 0.5744 0.0965 2.3704 -10 -0.0033 0.0108 -0.3042 0.0932 2.2315 -9 -0.0022 0.0048 -0.4585 0.0910 2.1263 -8 0.0034 0.0158 0.2165 0.0945 2.1555 -7 -0.0012 0.0119 -0.1045 0.0932 2.0804 -6 0.0015 0.0070 0.2070 0.0947 2.0684 -5 0.0017 0.0140 0.1192 0.0963 2.0624 -4 -0.0125 0.0249 -0.5007 0.0838 1.7602 -3 0.0004 0.0107 0.0353 0.0842 1.7351 -2 0.0058 0.0131 0.4419 0.0900 1.8207 -1 -0.0217 0.0391 -0.5559 0.0683 1.3574 0 0.0031 0.0123 0.2495 0.0713 1.3946 1 -0.0001 0.0373 -0.0016 0.0713 1.3708 2 0.0117 0.0318 0.3667 0.0830 1.5701 3 0.0139 0.0136 1.0217 0.0968 1.8045 4 -0.0020 0.0249 -0.0797 0.0948 1.7414 5 -0.0035 0.0219 -0.1582 0.0914 1.6536 6 0.0070 0.0214 0.3295 0.0984 1.7562 7 -0.0056 0.0359 -0.1568 0.0928 1.6332 8 -0.0054 0.0071 -0.7664 0.0873 1.5171 9 -0.0047 0.0116 -0.4063 0.0826 1.4165

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10 -0.0033 0.0216 -0.1541 0.0793 1.3425 11 -0.0039 0.0159 -0.2427 0.0754 1.2615 12 0.0049 0.0142 0.3427 0.0803 1.3268 13 0.0516 0.1224 0.4216 0.1319 2.1537 14 -0.0191 0.0446 -0.4294 0.1128 1.8203 15 -0.0054 0.0119 -0.4510 0.1074 1.7142 16 0.0034 0.0088 0.3923 0.1108 1.7497 17 -0.0134 0.0226 -0.5922 0.0974 1.5217 18 0.0086 0.0320 0.2696 0.1061 1.6391 19 -0.0125 0.0301 -0.4158 0.0936 1.4311 20 -0.0004 0.0161 -0.0256 0.0931 1.4104 21 -0.0033 0.0139 -0.2346 0.0899 1.3476 22 -0.0070 0.0157 -0.4434 0.0829 1.2312 23 -0.0005 0.0196 -0.0238 0.0824 1.2127 24 0.0015 0.0063 0.2373 0.0840 1.2233 25 -0.0031 0.0146 -0.2106 0.0809 1.1678 26 -0.0037 0.0103 -0.3576 0.0772 1.1047 27 -0.0124 0.0344 -0.3603 0.0648 0.9192 28 0.0011 0.0164 0.0700 0.0660 0.9274 29 0.0066 0.0345 0.1915 0.0726 1.0115 30 0.0156 0.0185 0.8439 0.0881 1.2185

Chart 1

ABNORMAL RETURNS

-0.04

-0.02

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

-29-2

7-2

5-2

3-2

1-1

9-1

7-1

5-1

3-1

1 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

DAYS AROUND THE LISTING DATE

AR CAR

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The daily abnormal returns are not statistically significant. On the other hand, the

cumulative abnormal returns from the period 20 days before up to 5 days before the listing date show statistical significance. Cumulative abnormal returns range from 6.04% on the 20th day before listing up to a peak of 9.65% on the 11th day before listing. The cumulative abnormal returns for the said period are statistically significant at a 10% critical level (except for the 19th, 18th and 17th day before listing), given a critical t-value of t (7,10%) = 1.895. The cumulative abnormal returns for the 11th day before listing (9.65%) is even statistically significant at a 5% critical level, given a critical t-value of t (7,5%) = 2.365.3

With these results, we can reject the null hypothesis that the cumulative abnormal returns around the listing date equal zero. The results lead to the acceptance of the hypothesis that an international listing does convey positive information about dually listed firms.

It is not startling that the abnormal returns at the listing date are not significant. It was mentioned earlier that the announcement date might be a more appropriate event date. Previous studies acknowledged the difficulty of pinpointing the exact date of these announcements. Alexander, et al. (2003) mentioned that foreign investors become aware of a U.S. listing, five to six weeks for listings in the NYSE and AMEX, and one to two weeks for a NASDAQ listing. Foerster and Karolyi (1999) computed a mean difference of 70 days and a median difference of 44 days between the announcement date (defined as the earliest related press release) and the listing date. The significance of the cumulative abnormal returns during the period starting with the 20th day before listing presents support that a run-up in prices is experienced as information related to the listing is disseminated.

The varying levels of information received by investors may explain the staggered price effect. This could come in the form of a mere intent to list stretching to the actual approval from the relevant exchange (Foerster and Karolyi, 1999).

The excess returns from an international listing may not be attributed to an increase in the systematic risk of the stocks. On the other hand, Foerster and Karolyi (1999) even computed a dramatic decline in the market beta of their sample relative to a local index.

The findings of Ybanez (1996) and Cayanan (2001) on the announcement of stock dividends and its effect on stock price “suggests a competitive market that quickly responds to opportunities for abnormal returns”. With the results of this study, market efficiency may be limited to certain type of announcements. It seems that the cumulative abnormal returns of the local stocks in this study are large enough that even when transaction costs are considered, the net returns will still be economically significant.

3 The cumulative abnormal returns of the 13th day after listing are statistically significant at a 10% level but no economic explanation can be gleaned from this result.

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Aquino (2002) concluded in his study of the informational efficiency of the Philippine Stock Market that the market is not semistrong-form efficient. Table 4 shows the abnormal returns, the related standard deviation, cumulative abnormal return and the computed t-statistics for the months around the listing date. The abnormal returns and the cumulative abnormal returns are also illustrated in Chart 2. The daily market-adjusted returns are for 11 months prior and 12 months subsequent to the listing date.4

Table 4 Abnormal Returns Around the Listing Date (Months)

t AR STDAR t-stat CAR t-stat -11 -0.0424 0.4050 -0.1048 -0.0424 -0.7378 -10 -0.0272 0.1234 -0.2206 -0.0696 -0.8534 -9 -0.0114 0.0982 -0.1161 -0.0810 -0.8098 -8 0.0254 0.1274 0.1991 -0.0557 -0.4815 -7 -0.0764 0.1234 -0.6188 -0.1320 -1.0210 -6 -0.0532 0.1139 -0.4674 -0.1853 -1.3075 -5 -0.0086 0.0992 -0.0871 -0.1939 -1.2668 -4 -0.0169 0.1272 -0.1325 -0.2108 -1.2878 -3 0.0266 0.1080 0.2464 -0.1842 -1.0608 -2 0.0224 0.0847 0.2648 -0.1617 -0.8837 -1 0.0585 0.1742 0.3360 -0.1032 -0.5377 0 0.0084 0.0879 0.0957 -0.0948 -0.4728 1 -0.0286 0.1376 -0.2081 -0.1234 -0.5914 2 0.0577 0.1431 0.4034 -0.0657 -0.3033 3 0.0652 0.1436 0.4539 -0.0005 -0.0024 4 -0.0395 0.1637 -0.2412 -0.0400 -0.1729 5 0.0116 0.1150 0.1007 -0.0285 -0.1192 6 -0.0235 0.0804 -0.2920 -0.0520 -0.2115 7 0.0406 0.1766 0.2299 -0.0113 -0.0450 8 -0.0194 0.0756 -0.2562 -0.0307 -0.1186 9 0.0051 0.1406 0.0365 -0.0256 -0.0964

10 0.1748 0.3607 0.4846 0.1492 0.5495 11 0.0158 0.1143 0.1385 0.1651 0.5944 12 -0.0126 0.1102 -0.1144 0.1524 0.5374

4 Other event windows gave similar insignificant results as the -11 months, +12 months event window.

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Chart 2

ABNORMAL RETURNS

-0.2500

-0.2000

-0.1500

-0.1000

-0.0500

0.0000

0.0500

0.1000

0.1500

0.2000

-12

-11

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11

MONTHS AROUND LISTING DATE

AR CAR

The monthly and cumulative abnormal returns over a longer time period are

statistically insignificant. Even if the abnormal returns showed extremely negative and positive returns, these lost its significance because of the significant volatility of the returns. A large increase in abnormal returns happened in month 10 because of the effect of the performance of United Paragon Mining’s stocks. This happened in early 1997 when mining stocks were relatively activated traded compared to the inert market as a whole. Nevertheless, this did not produce statistically significant results.

Our second null hypothesis that monthly and cumulative abnormal returns of the portfolio of local stocks on or months after the listing date are statistically indistinguishable from zero cannot be rejected. Thus, longer-term aftermarket performance of the local stock/portfolio is fairly efficient.

Table 5 presents the results of the Augmented Dickey-Fuller Test applied on the time series of the daily market-adjusted returns for 29 days prior and 30 days subsequent to the listing date. Table 5 provides the computed test statistic and the critical values at different significance levels.

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Table 5

Unit Root Test: Daily Abnormal Returns (-29 days, + 30 days event window)

Null Hypothesis: AR30 has a unit root Exogenous: Constant, Linear Trend Lag Length: 0 (Fixed)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -8.346623 0.0000 Test critical values: 1% level -4.121303

5% level -3.487845 10% level -3.172314

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation Dependent Variable: D(AR30) Method: Least Squares Sample (adjusted): 2 60 Included observations: 59 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

AR30(-1) -1.136172 0.136124 -8.346623 0.0000C 0.005280 0.002787 1.894675 0.0633

@TREND(1) -0.000123 8.02E-05 -1.534554 0.1305

R-squared 0.554889 Mean dependent var 0.000191Adjusted R-squared 0.538992 S.D. dependent var 0.015039

S.E. of regression 0.010211 Akaike info criterion-

6.281206

Sum squared resid 0.005839 Schwarz criterion -

6.175568Log likelihood 188.2956 F-statistic 34.90561Durbin-Watson stat 1.969318 Prob(F-statistic) 0.000000

The results presented support the rejection of the null hypothesis that the -29 days, + 30 days series has a unit root. This means that the series of daily abnormal returns is stationary. Aside from the findings that the daily abnormal returns are insignificant (based on Table 3), the results of Table 5 imply that the effect of the international listing on daily abnormal returns is temporary.

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Table 6 presents the results of the Augmented Dickey-Fuller Test applied on the time series of the cumulative abnormal returns for 29 days prior and 30 days subsequent to the listing date.

Table 6

Unit Root Test: Cumulative Abnormal Returns (-29 days, + 30 days event window)

Null Hypothesis: CAR30 has a unit root Exogenous: Constant, Linear Trend Lag Length: 0 (Fixed)

t-Statistic Prob.*


5% level -3.487845 10% level -3.172314


Augmented Dickey-Fuller Test Equation Dependent Variable: D(CAR30) Method: Least Squares Sample (adjusted): 2 60 Included observations: 59 after adjustments


CAR30(-1) -0.138487 0.059396 -2.331602 0.0233C 0.010866 0.003746 2.900325 0.0053

@TREND(1) 3.55E-05 9.63E-05 0.368534 0.7139



6.356144



The test statistic is less than the critical values supporting the hypothesis that the

series of cumulative abnormal returns has a unit root cannot be rejected. This may indicate nonstationarity implying that the impact of the international listing on the series of cumulative abnormal returns is permanent.

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Tables 7 and 8 present the results of unit root tests applied on monthly data.

Table 7 Unit Root Test: Monthly Abnormal Returns (-11 months, + 12 months event

window) Null Hypothesis: AR12 has a unit root Exogenous: Constant, Linear Trend Lag Length: 0 (Fixed)

t-Statistic Prob.*


5% level -3.622033 10% level -3.248592


Augmented Dickey-Fuller Test Equation Dependent Variable: D(AR12) Method: Least Squares Sample (adjusted): 2 24 Included observations: 23 after adjustments


AR12(-1) -1.106762 0.229316 -4.826361 0.0001C -0.027830 0.022851 -1.217887 0.2374

@TREND(1) 0.003089 0.001756 1.758809 0.0939



3.047154



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Table 8 Unit Root Test: Cumulative Abnormal Returns (-11 months, + 12 months event

window) Null Hypothesis: CAR12 has a unit root Exogenous: Constant, Linear Trend Lag Length: 0 (Fixed)

t-Statistic Prob.*


5% level -3.622033 10% level -3.248592


Augmented Dickey-Fuller Test Equation Dependent Variable: D(CAR12) Method: Least Squares Sample (adjusted): 2 24 Included observations: 23 after adjustments


CAR12(-1) -0.256634 0.134430 -1.909050 0.0707C -0.069234 0.030830 -2.245663 0.0362

@TREND(1) 0.005008 0.001878 2.667041 0.0148



3.203772



The results of Tables 7 and 85 are consistent with the findings applied on daily

and cumulative abnormal returns. The null hypothesis that the series of daily/monthly abnormal returns is nonstationary is rejected while the null hypothesis that the series of cumulative abnormal returns is nonststionary cannot be rejected. Based on both daily and

5 Similar results were generated for a -60,+60 days event window, -100, +100 days event window and-300, +300 days event window

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monthly data, the effect on daily/monthly abnormal returns of the international listing is temporary while the impact on cumulative abnormal returns is permanent. This supports the earlier claim of the staggered effect on the returns’ series. Even if the impact on daily abnormal returns diminishes, the gradual effect on the cumulative abnormal returns cannot be ignored. Concluding Comments

The study examines the performance of eight local stocks during the period when these companies listed their shares in a foreign market. The results reveal significant cumulative abnormal returns, which supports the hypothesis that listing in an international exchange, can convey positive signals to the local market about the prospects of the firm.

The significance of the cumulative abnormal returns over a one to four weeks’ trading period suggests the gradual adjustment of prices to this new information. A possible explanation could be the varying timing and level of information related to the listing received by the investing public. The short-term results support that listing internationally has information value. Yet, examining the returns over a longer period does not present significant excess returns.

The persistent effect on cumulative abnormal returns of an international listing may be seen as a testament that these companies have really attained the “elite level” and the formal process of dual listing is a validation of this stature. This also implies that investors may not be required to take a more active strategy in identifying specific dates related to the international listing in order to obtain positive wealth effects and instead take advantage of the gradual response of the market and focus on identifying stocks that are potential candidates for dual listing.

It would be interesting to examine the effect on local share prices of listing in a particular exchange, i.e. the US market as against London or Luxembourg. Companies also have the option of issuing different types of depositary receipts, each with a different listing requirement and capital-raising structure. The limited number of locally listed companies with depositary receipts listed abroad preclude this study from making a more in-depth examination of the varying information content of these alternatives. Nonetheless, it is comforting to note that efforts are currently made to investigate international listings of companies in emerging markets, given the considerably extensive research done with companies originally based in more developed markets such as the U.S. and Europe.

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