Cross Listing

Cross listing of shares is when a firm lists its equity shares on one or more foreign stock exchange in addition to its domestic exchange. Examples include: American Deposit Receipts (ADR), European Depositary Receipts (EDR), International Depositary Receipt (IDR) and Global Registered Shares (GRS).

The traditional argument within the academic literature to cross-list abroad in addition to a listing in the domestic country is that firms seek such opportunities to benefit from a lower cost of capital that arises because their shares become more accessible to global investors whose access would otherwise be restricted because of international investment barriers. Cross-listing may also be driven by marketing considerations; for example, to increase visibility with customers by broadening product identification, and to improve labour relations in foreign countries by introducing share and option plans for foreign employees. There are, however, also disadvantages in deciding to cross-list: increased pressure on executives due to closer public scrutiny; increased reporting and disclosure requirements and additional listing fees.

A questionnaire asking managers of international companies has shown that firms cross-list in the US mainly because of specific US business reasons (for instance US acquisitions, US business expansion and publicity), liquidity and status of US capital markets, and industry specific reasons (listing of competitors, benefits of financial analysts). Meeting SEC disclosure requirements and preparing US-GAAP reconciliations were cited as the most important disadvantages. Officials of ADR companies without an official listing (Level I and Rule 144A ADR’s) perceived the expansion of the US shareholder base as the principal benefit followed by specific US business reasons. On the question what deters them from an official US listing, they mentioned the time-consuming and expensive US-GAAP reconciliations as well as listing fees as the hardest impediments. Additional disclosure requirements were cited as less difficult to overcome.

Recently, there is a growing academic literature about an alternative motivation for cross-listing, the so-called “bonding” explanation. Bonding is the costs or liabilities an agent or entrepreneur incurs in order to assure investors that he will perform as promised. According to this view, cross-listings towards the US act as a bonding mechanism used by firms that are incorporated in a jurisdiction with poor investor protection and enforcement systems to commit themselves voluntarily to higher standards of corporate governance. In this way, firms attract investors who would otherwise be reluctant to invest. This premium existed definitively until recently, since a US listing reduced the extent to which controlling shareholders could engage in expropriation and thereby increases the firm’s ability to take advantage of growth opportunities. Interestingly, this premium was higher for companies domiciled in countries with relative weak investor protection, suggesting that controlling shareholders from countries with poorer minority shareholders rights give up more when they commit themselves to the high corporate governance standards in the US than controlling shareholders from countries with shareholder protection closer to the US standards. Also notable is the finding that the premium was more than twice as large for companies listed at official US stock exchanges (Level II and III ADR programs) than for over-the-counter listings (Level I ADR program) and private placements (Rule 144A ADR’s). Very recent evidence, see www.crosslisting.com [http://www.crosslisting.com] , shows that the listing premium for crosslisting has evaporated, due to new US regulations and competition from other exchanges.

References

*Lubberink and Huijgen, Earnings conservatism and equity raisings of cross-listed firms. Unpublished working paper, http://ssrn.com/abstract=952221.