Cross-listing and stock risk: international evidence from ADRs

Purpose This study investigates the impact of American Depositary Receipt (ADR) cross-listing on stock return volatility and downside risk, measured by expected shortfall and the second-order lower partial moment. It also examines whether this effect is explained by reputational bonding, legal bonding or market segmentation hypotheses. Design/methodology/approach This paper uses OLS regressions with clustered standard errors and heteroskedasticity-adjusted t-statistics. Fama–MacBeth regressions with Newey–West corrected standard errors mitigate serial correlation, and WLS regression accounts for unequal country representation. To address endogeneity, propensity score matching and entropy balancing are employed. Findings Results show that US equity cross-listing reduces total volatility and downside risk, mainly in countries with strong political stability and investor protection, suggesting US legal bonding does not mitigate home-country institutional effects. Higher institutional ownership and analyst coverage are associated with higher volatility and downside risk, implying the decline in risk is not due to reputational bonding. OTC cross-listed stocks exhibit lower volatility and downside risk post cross-listing, while no significant change occurs for regulatory exchange listings. Overall, the benefit of cross-listing stems from reduced market segmentation. Research limitations/implications This study examined ADR cross-listing; researchers may consider other forms, such as Rule 144A and GDRs, and the effects of listing upgrades or downgrades. Practical implications Managers can use cross-listing as a strategic tool for risk mitigation. Policymakers in segmented markets could encourage cross-listing to promote greater risk-sharing. Investors may use cross-listed stocks to manage portfolio risk. Originality/value This study provides evidence on the mechanisms through which equity cross-listing influences downside risk.