This paper analyzes the cost of capital of firms with foreign equity listings. Our purpose is to shed light on the question whether international and domestic asset pricing models yield a different estimate of the cost of capital for cross-listed stocks. We distinguish between (i) the multifactor ICAPM of Solnik (1983) and Sercu (1980) including both the global market portfolio and exchange rate risk premia, and (ii) the single factor domestic CAPM. We test for the significance of the cost of capital differential in a sample of 336 cross-listed stocks from nine countries in the period 1980-1999. Our hypothesis is that the cost of capital differential is substantial for firms with international listings, as these are often large multinationals with a strong international orientation. We find that the asset pricing models yield a significantly different estimate of the cost of capital for only 12 percent of the cross-listed companies. The size of the cost of capital differential is around 50 basis points for the U.S., 80 basis points for the U.K., and 100 basis points for France.

Cross-listings, cost of equity capital, foreign exchange exposure
Foreign Exchange (jel F31), International Financial Markets (jel G15), Corporate Finance and Governance (jel G3), Capital Budgeting; Investment Policy (jel G31), Business Administration and Business Economics; Marketing; Accounting (jel M), Accounting (jel M41)
Erasmus Research Institute of Management
hdl.handle.net/1765/250
ERIM Report Series Research in Management
Copyright 2002, C.G. Koedijk, M.A. Van Dijk, This report in the ERIM Report Series Research in Management is intended as a means to communicate the results of recent research to academic colleagues and other interested parties. All reports are considered as preliminary and subject to possibly major revisions. This applies equally to opinions expressed, theories developed, and data used. Therefore, comments and suggestions are welcome and should be directed to the authors.
Erasmus Research Institute of Management

Koedijk, C.G, & van Dijk, M.A. (2002). The Cost of Capital of Cross-Listed Firms (No. ERS-2002-99-F&A). ERIM Report Series Research in Management. Erasmus Research Institute of Management. Retrieved from http://hdl.handle.net/1765/250