RDP 2003-06: The Characteristics and Trading Behaviour of Dual-Listed Companies 8. Conclusion

The results of this paper bolster the findings of Froot and Dabora (1999) by showing that price divergences between DLC twins and excess comovement in market valuation are pervasive phenomena in a larger sample of DLC cases. An innovation of the paper has been to study cases where DLC structures are abandoned in favour of a more conventional unified share structure. Even though the fundamentals of the combined firm should not have changed, we find that the market exposures of the combined firm do change, and in the direction that would be implied by models of trading-based comovement. Our results are consistent with recent work by Barberis, Shleifer and Wurgler (2002), Sosner and Greenwood (2002), and Chan, Hameed and Lau (2003) who study how the covariance of returns changes due to changes in the index composition or trading location. Together with the excess comovement finding, these results all point to a model where asset prices are determined by more than fundamentals and are influenced by the location of trade, the investors who trade them, and the manner by which trading occurs.

Our survey of DLC structures (shown in Table 1) and the recent evidence – including the two Anglo-Australian DLCs formed in 2001, the Anglo-South African Investec DLC implemented in 2002, and the DLC arrangements proposed recently by both US bidders for UK-listed P&O Princess Cruises PLC – suggests that there may well be further instances of the DLC structure as the process of corporate international expansion continues.^[33] However, the survey also indicates that many of the DLC arrangements put in place over the last 15 years have been replaced by more conventional unified share structures. Subject to the caveat of the small sample and confounding events, our event study of unification announcements suggests that there is little evidence that unifying a DLC – when this occurs on the market that trades at a premium – has a substantial effect on overall combined firm value. This result suggests that there are at least some cases where markets see the choice between a DLC arrangement and a conventional merger as having little impact on firm value. It is unlikely of course that markets are always indifferent between the two structures, so most mergers will no doubt continue to be conventional ones.

Footnote

Hancock, Gray and Sommelet (2002) also suggest that DLC arrangements may become more frequent and involve companies from a wider range of countries than has hitherto been seen. [33]