The Cross-listing Decision and the Home Bias in International Equity Investments

This paper examines the relation between the choice of the destination market for cross-listing and the home bias of investors. We use two measures of home bias, the domestic bias (the degree of overinvestment in the home market), and the foreign bias (the degree of over-/underinvestment in a foreign market). First, we find a strong relation between the domestic bias of investors and cross-listing decisions of firms. In particular, the level of cross-listing activity of firms from a particular market is negatively related to the domestic bias of the home market investors, while the level of cross-listing activity of firms towards a particular market is negatively related to the domestic bias of the host market investors. Second, we find a strong relation between the foreign bias and cross-listings. In particular, the level of cross-listing activity from one market to another is positively related to the foreign bias in investments allocation of the home market investors as well as of the host market investors. Overall, these results suggest that corporate managers, when making a cross-listing decision, may be prone to the same behavioral/familiarity bias as investors.