The Value Creation Effect of Cross-Listing: An Event Study of Firms Listed on East African Securities Exchanges

1. Introduction

The globalization of financial markets has spurred a significant increase in cross-border listings, where firms list their shares on foreign exchanges beyond their domestic market. This phenomenon has attracted considerable scholarly attention, with research primarily focused on listings from emerging to developed markets (e.g., Doidge et al., 2004; Karolyi, 2006). The theoretical motivations for cross-listing are well-established, including overcoming market segmentation, lowering the cost of capital, enhancing stock liquidity, and using shares as a currency for acquisitions (Eun & Resnick, 2009).

In East Africa, the formal push for capital market integration began with a 1997 memorandum of understanding among Kenya, Uganda, and Tanzania, leading to the establishment of the East African Regulatory Authority. A key milestone was the cross-listing of East Africa Breweries Ltd. in 2001. While studies have examined cross-listing in developed and major emerging economies (e.g., Adelegan, 2009; Cetorelli & Peristiani, 2010), there is a scarcity of empirical evidence on its effects within regional African blocs like the EAC. This study addresses this gap by investigating the following research question: Does cross-listing of securities within the East African Securities Exchanges have a significant effect on firm value?

2. Literature Review

The foundational premise for cross-listing is that capital markets can be segmented. Moffett et al. (2003) define a segmented market as one where the required rate of return on securities differs from that of comparable securities in other markets. Cross-listing can break down these barriers, integrating the firm into a larger, more liquid global capital market and potentially leading to a lower cost of capital and a higher stock price (Eun & Resnick, 2009).

Prior research provides a mixed but generally positive outlook on the value effects of cross-listing. Doidge et al. (2004) found that foreign firms listed in the U.S. have higher valuations, attributing this to better investor protection and disclosure standards. In the African context, Adelegan (2009) reported a positive impact of regional cross-listings on firm value in Sub-Saharan Africa, highlighting the role of market integration. However, most event studies have focused on listings in major global financial centers. This study contributes by applying the established event study methodology to the unique context of regional integration within the EAC, a less-explored developing market bloc.

3. Methodology

This research employed an event study methodology, a standard technique in finance for measuring the impact of a specific event on security prices (MacKinlay, 1997).

3.1. Sample Selection and Data

The population was all 61 companies listed on the Nairobi Securities Exchange (NSE). A purposive sample of seven firms that had cross-listed their shares within the EAC was selected. The study utilized secondary daily share price data and the NSE 20 Share Index, collected from the NSE for the relevant periods.

3.2. Event and Estimation Windows

The event of interest was the official cross-listing date for each firm. The event window was defined as 41 days, spanning from 20 days before the event (t = -20) to 20 days after (t = +20). An estimation window of 120 days prior to the event window (t = -140 to t = -21) was used to model normal returns, avoiding contamination from the event itself.

3.3. Measuring Normal and Abnormal Returns

The market model was used to estimate normal returns, as it controls for market-wide movements and reduces the variance of abnormal returns (MacKinlay, 1997). The model is specified as:

R_it = α_i + β_i R_mt + ε_it

Where: R_it is the return on security i on day t, R_mt is the return on the market portfolio (NSE 20 Index) on day t, α_i and β_i are the market model parameters, and ε_it is the zero-mean disturbance term.

The parameters (α_i and β_i) were estimated for each security using Ordinary Least Squares (OLS) regression over the 120-day estimation window. The resulting market model equations are presented in Table 1.

Table 1. Market Model Parameters and Equation

Company	Intercept (Alpha)	Slope (Beta)	Market Model Equation
CENTUM	-0.00207	1.95354	R_it = -0.00207 + 1.95354R_mt
EABL	0.00001	0.44132	R_it = 0.00001 + 0.44132R_mt
EQUITY	-0.00321	2.99526	R_it = -0.00321 + 2.99526R_mt
JUBILEE	-0.03064	3.32320	R_it = -0.03064 + 3.32320R_mt
KCB	-0.00160	0.72254	R_it = -0.00160 + 0.72254R_mt
KQ	0.00095	1.17423	R_it = 0.00095 + 1.17423R_mt
NMG	0.00120	0.25638	R_it = 0.00120 + 0.25638R_mt

Abnormal Returns (AR) were calculated as the difference between the actual return and the expected (normal) return: AR_it = R_it - E(R_it). For each day in the event window, the Average Abnormal Return (AAR) was computed across all seven firms. The Cumulative Average Abnormal Return (CAAR) was then calculated by summing the AARs over the event window.

3.4. Hypothesis Testing

The null hypothesis was that the CAAR over the event window is equal to zero. A one-sample t-test was used to determine the statistical significance of the AAR and CAAR at the 5% significance level. Data analysis was performed using Microsoft Excel and SPSS.

4. Findings and Discussion

4.1. Abnormal Returns on the Event Day

On the cross-listing date (t=0), the Average Abnormal Return (AAR) was positive at 0.01117, representing a 207.6% increase from the previous day's AAR of -0.01038. While the AAR on the event day itself was not statistically significant at the 5% level (p-value = 0.276), the magnitude and direction indicate a strong positive market reaction.

Table 2. Abnormal Returns on the Event Day (t=0)

Company Name	Abnormal Returns
East Africa Breweries Ltd	-0.00182
Equity Bank	0.03743
Centum Investment	0.03206
Jubilee Insurance	0.04179
Kenya Commercial Bank	-0.00964
Kenya Airways	-0.01325
Nation Media Group	-0.00838
Average Abnormal Returns	0.01117

4.2. Cumulative Average Abnormal Returns (CAAR)

The analysis of the 41-day event window (-20, +20) revealed a positive and statistically significant Cumulative Average Abnormal Return (CAAR) of 0.0054 (p-value = 0.006).

Table 3. Test-Statistics for the Full Event Period (t = -20 to t = +20)

Test Value = 0	t	df	Sig. (2-tailed)	Mean Difference	95% Confidence Interval
CAAR	2.882	40	0.006	0.0054	[0.0016, 0.0092]

The positive and significant CAAR indicates that investors in the EAC region perceive cross-listing as a value-enhancing corporate action. This aligns with the theoretical benefits of market integration, such as increased liquidity, a broader investor base, and enhanced corporate visibility (Eun & Resnick, 2009). The sharp spike in AAR on the event day suggests that the market reacts swiftly to the new information, re-rating the firm's stock to reflect its expanded market potential.

5. Conclusion and Recommendations

This study provides robust empirical evidence that cross-listing within the East African Securities Exchanges creates significant value for firms. The positive and statistically significant cumulative abnormal returns confirm that investors reward companies that seek regional market integration.

Recommendations:

1. For Policymakers and Regulators: Accelerate the harmonization of listing requirements, trading rules, and settlement systems in the EAC to lower cross-listing costs and encourage participation.
2. For Firm Management: Actively consider cross-listing on neighboring exchanges as a strategic financial decision to enhance shareholder value, improve stock liquidity, and raise corporate profile.
3. For Investors: Monitor cross-listing announcements to leverage potential investment opportunities and the long-term growth potential of regionally expanding firms.

In conclusion, cross-listing is a potent tool for value creation in the EAC. Fostering a fully integrated regional capital market should be a priority for all stakeholders to unlock these benefits on a larger scale.