RDP 2003-06: The Characteristics and Trading Behaviour of Dual-Listed Companies 7. An Event Study of Announcements of DLC Unifications

In the final analysis of the paper, we conduct an event study into the performance of DLC twins around the time of announcements that the DLC structure would be discontinued and replaced by a more conventional single company structure. We do so using data for the six DLC arrangements listed in Table 5 that chose to unify their share structure companies over 1996–2001. Not surprisingly, the pricing of the twins converges substantially in these cases,[28] but it is of interest to ask if this occurred via an increase in the value of the company that was trading at a discount, or a fall in the share price of the twin that was trading at a premium. Alternatively, both share prices might have risen, or both might have fallen. Indeed, any evidence for systematic gains or losses in overall market value might provide some indication of how investors view DLC arrangements relative to more conventional unified share structures.

We define the day of the announcement that management is proposing to unify the share structure as our event day (t=0), and denote Inline Equation as the abnormal return of company j in DLC i for period t, which is given by:

where Inline Equation is the expected log return from the market model.

We estimate the market model for each company as:

where Inline Equation and Inline Equation are the log returns for markets a and b, and Inline Equation is the log change of the relevant exchange rate for period t. The market model is estimated over a 100-day window ending 20 days prior to the announcement of unification. We then tested whether announcement-window abnormal returns were significantly different from zero, looking both at the abnormal return on announcement day, and the cumulative abnormal return over a three-day period centred on the announcement day.

We also investigate if the value of the combined firm changes around the announcement of unification. We do this by replacing the individual company return Inline Equation in Equations (4) and (5) with the company return Inline Equation described in Equation (2).

One problem with the event study for the impact of DLC unification announcements is that four of the six announcements occurred in conjunction with other potentially value-relevant announcements.[29] These confounding events weaken our ability to single out the impact of the unification announcement on overall company value. However, these events should have no impact on the tests for the relative performance of the twins. An additional problem is that in some cases special payments were paid to shareholders in just one twin. Although these may impact on the relative valuation of the twins, they have no impact on the overall company value.[30]

The results of the event study are summarised in Table 7, which shows the excess returns for the six company pairs for both the announcement day and the 3-day announcement window. Three individual twins trading at a discount prior to the announcement (ABB AB, Merita and Dexia France) showed large positive abnormal returns (of 5 per cent or more) on the event day that were significant at the 1 per cent level. In addition, two companies trading at a premium (Dexia Belgium and Zurich Allied) showed significant negative abnormal returns (of around 4 per cent) on the day of announcement. On average, the companies trading at a discount rose by 3 per cent, while the premium companies fell by 1.6 per cent, with both of these averages being significantly different to zero at the 1 per cent level.

Table 7: Excess Returns to DLC Twins around Unification Announcements
Individual twin
  Difference between twins   Total company value
  1-day 3-day 1-day 3-day 1-day 3-day
  6.6*** 6.5**   4.8** 11.1***
Fortis (NL)(a)
Fortis (B)
  0.1 −1.1   0.4 −4.0
  5.9*** 5.8**   1.7 2.9
SmithKline Beecham(a)
SmithKline Beecham PLC
  0.5 0.1   −1.4* −2.9*
Allied Zurich(a)
Zurich Allied
  4.9*** 7.2**   −2.7* −4.3*
Dexia France(a)
Dexia Belgium
  9.8*** 9.4***   −0.2 3.7**
Average for discount companies
Average for premium companies
  4.6*** 4.7***   0.8 1.9*

Notes: This table shows the excess returns (based on a market model) of DLC twins around the date of the announcement of the unification of the DLC into a unified share structure. The 3-day returns are cumulated from one day before the event day (the unification announcement) to one day after. The results show log returns multiplied by 100. The statistics for the difference between the twins are for the performance of the company trading at a discount relative to the company trading at a premium. Significance at the 10, 5 and 1 per cent levels is denoted by *, ** and ***, respectively.
(a) Company previously trading at a discount.

In four cases we can reject the hypothesis that there was no difference in the relative performance of the twins, and not surprisingly, in each case it was the discount company that outperformed. The two cases where there is no significant difference in the performance of the twins (SmithKline Beecham and Fortis) are those DLCs with the smallest price differentials prior to the announcement. On average, the return differential for the four DLCs with a significant pre-announcement price differential (ABB, Merita Nordbanken, Allied Zurich, and Dexia) was around 5 per cent.[31]

Over the 3-day period the average cumulative abnormal return of the discount firms was 3.6 per cent, significant at the 1 per cent level. The average cumulative abnormal return for the premium companies was −1 per cent, but not significantly different to zero. Hence, the significance of the negative abnormal returns for the firms trading at a premium is dependent upon the length of the return window used.

In terms of total firm value, the average across all six cases was a small, but statistically insignificant, increase on the day of the announcement. Only one group, ABB, recorded a statistically significant positive return on the event day, but two groups showed weakly significant falls in market value. Thus, the overall picture on the announcement day is one of increases in the value of the twins trading at a discount being mostly offset by falls in the value of the twins trading at a discount. However, when the return horizon is increased to 3 days, we find an increase in average overall firm value over the 3-day window that is significant at the 10 per cent level. However, the problem of confounding events, mostly positive in nature, means that we cannot be too categorical in attributing it to the unification announcement.

At one level, the finding of modest gains should not be surprising given the way in which the unification has occurred. Unification typically involves the company announcing that its new single primary listing will be on the market that – at least at the time of the announcement – placed the higher valuation on the cash flows of the twin companies.[32] That is, management might be considered to be undertaking a form of arbitrage by closing out the dual listing on the market that attached a lower valuation and moving the entire listing to the market which valued the company more highly. However, given that these differences in valuations on different markets might be relatively transitory – as well as the confounding events – the finding of possibly modest gains in overall firm value presumably cannot be generalised to any strong conclusions about the way that markets value DLC structures versus unified share structures.


In several cases, the convergence at the time of the announcement is not complete, which is presumably due to the uncertainty as to whether shareholders will vote to approve management's plans to unify the share structure. [28]

This was the case for ABB (annual profit was US$1.305 billion relative to average expectation of US$1.23 billion), SmithKline Beecham (annual profit was £1.36 billion relative to average expectation of £1.33 billion), and Fortis (half-year net income was €1.56 billion relative to average expectation of €1.54 billion). Merita Nordbanken made its announcement in conjunction with the takeover of Christiania Bank. These data on earnings expectations are taken from stories in Bloomberg. [29]

There are payments in three such cases, mostly to shareholders in the twin losing the primary listing, but in one case to the twin trading at a premium and gaining the primary listing. [30]

Since this can be thought of as the excess return on a notional long-short position, it indicates that – at least at times of unification announcements – arbitrage positions in DLCs can be quite profitable. This suggests that it might be of interest to revisit the work of Rosenthal and Young (1990) with a much larger sample of DLCs and see whether arbitrage trading would have been profitable more generally (i.e., not just looking ex post at cases of unification). Gatev, Goetzmann and Rouwenhorst (1999) provide an example of an empirical study of ‘pairs trading’ based on the identification of highly correlated equities. [31]

The case of Fortis – where there was little discount or premium – is an exception, since the single share structure that eventuated did not have a single primary listing but had a dual primary listing on the Belgian and Amsterdam exchanges. [32]