Sunday, October 21, 2007
Lemon Signaling in Cross-Listing, by MICHAL BARZUZA, University of Virginia - School of Law, was recently posted on SSRN. Here is the abstract:
This paper develops a model of signaling of private benefits of control and applies it to the decision to cross-list. It suggests that cross-listing signals that a manager or a controlling shareholder can not extract large amounts of private benefits.
This signaling effect creates opposite incentives for managers and controlling shareholders. While the opportunity to bond and signal limited extraction encourages managers to cross-list, it discourages controlling shareholders from cross-listing, since such a signal decreases the control premium they receive if they sell their control block.
The paper derives implications for the cross-listing market, the desirability of international regulation and the likelihood of international convergence of corporate law and structures.
Since this paper is the first to develop a signaling model of private benefits, it also has implications for other issues in corporate law and corporate finance such as the desirability of mandatory corporate law and dividend distribution.