Some non-American companies benefit from a US-listing and others do not even cross-list in the US. Several empirical studies show that foreign companies, which are listed in the US, are worth more. However, less than one out of 10 large public non-American companies float their shares in the US (Doidge et al., 2004). Why is cross-listing beneficial to some companies and not to others? In 1997 more than 4,700 companies were internationally cross-listed. But, during the past several years this number decreased significantly by 50% to 2,300 (end of 2002) companies (Karolyi, 2004). Today more and more foreign companies acknowledge that they cannot cross-list in the US. Moreover, some companies admit that they are no longer even willing to cross-list, because of the high costs and strict requirements (Economist, 2005). Still, there must be a benefit for some to cross-list. A number of studies point out that the benefits regarding cross-listing include a lower cost of capital, access to foreign capital markets, an extended global shareholder base, greater liquidity in the trading of shares, publicity, visibility and prestige. On the other hand, these companies face costs, which might erode the benefits. Typical costs associated with a US-listing are the SECreporting, reconciliation of financial statements with home and foreign standards, direct listing costs, compliance requirements, exposure to legal liabilities, taxes and various trading frictions as well as investment banking fees (Karolyi, 2004 and Doidge et al., 2004). This essay aims to examine the empirical evidence regarding the merit of cross-listing shares on foreign equity markets, especially listing shares in the US. First, it critically reviews the conventional wisdom. Secondly, it examines the new approach of the cross-listing premium. Finally, it ends with a summary of this project and my own opinions.
Table of Contents
1. Introduction
2. Critical Review of the Conventional Wisdom
2.1. Global Risk-Sharing
2.2. Access To More Developed Capital Markets
2.3. Information Disclosure
2.4. Bonding and Monitoring
3. A New Research Initiative: The cross-listing premium
3.1. The Model
3.2. Data and Hypothesises of the Model
3.3. Results
4. Conclusion
Research Objectives and Key Topics
This paper examines the empirical evidence regarding the economic merit of companies cross-listing their shares on foreign equity markets, with a specific focus on the U.S. market. It addresses the central research question of why cross-listing is considered beneficial for some companies while remaining costly or inaccessible for others, despite the potential for a lower cost of capital and increased shareholder value.
- Theoretical perspectives on global risk-sharing and market integration.
- The impact of information disclosure and investor recognition on firm valuation.
- Corporate governance and the "bonding hypothesis" in international listings.
- Analysis of the "cross-listing premium" using Tobin’s q ratio.
- Evaluation of controlling shareholder motivations and growth opportunities.
Excerpt from the Publication
2.4. Bonding and Monitoring
‘The American governance environment is out for rent. Foreign firms wishing to enjoy the benefits of being subject to the American regime can readily do so by cross-listing their securities on an American market …’ (Licht, 2004).
Licht (2004) mentioned that Black (2001) described this fact as "piggybacking". Black states, that cross-listing serves as a bonding mechanism to commit trustworthily to a better governance regime. Therefore, cross-listing causes an improvement of governance regimes all over the world.
Coffee (1999, 2002), Stulz (1999), and Reese and Weisbach (2002) argue that cross-listing in countries with strict regulation and disclosure requirements (like the US) attract new investors especially if these cross-listed companies are from countries with inadequate supervision. US listing improves the protection of the companies’ investors and, therefore, reduces the agency costs of controlling shareholders. This is because compared to the rest of the world, investors are extremely well protected in the US. This notion is broadly know as the bonding hypothesis (Stulz, 1999).
Summary of Chapters
1. Introduction: This chapter introduces the phenomenon of international cross-listing and outlines the cost-benefit trade-offs, such as increased liquidity versus strict regulatory requirements.
2. Critical Review of the Conventional Wisdom: This section evaluates established financial theories, including global risk-sharing, access to developed markets, information disclosure, and the bonding hypothesis.
3. A New Research Initiative: The cross-listing premium: This chapter analyzes the specific theory regarding why firms with valuable growth opportunities choose to cross-list to overcome local governance constraints.
4. Conclusion: The final chapter summarizes the reviewed hypotheses and highlights the importance of corporate governance as a decisive factor for the valuation of cross-listed companies.
Keywords
Cross-listing, Foreign equity markets, Cost of capital, Global risk-sharing, Information disclosure, Bonding hypothesis, Corporate governance, Tobin’s q, Market valuation, Agency costs, Investor protection, Financial standards, Growth opportunities.
Frequently Asked Questions
What is the core focus of this research paper?
The paper evaluates the empirical merits and strategic motivations for companies choosing to cross-list their shares on foreign stock exchanges, particularly within the United States.
What are the primary theoretical frameworks discussed?
The study centers on four main concepts: the global risk-sharing hypothesis, access to developed capital markets, information disclosure standards, and the bonding/monitoring hypothesis.
What is the central goal of the author’s investigation?
The goal is to determine why some companies benefit significantly from cross-listing—gaining higher valuation—while others avoid it due to prohibitive costs and strict compliance requirements.
Which methodology does the paper employ?
The paper provides a critical literature review and builds upon the research of Doidge et al. (2004) to discuss the "cross-listing premium" theory and empirical results involving Tobin’s q ratio.
What topics are covered in the main section?
The main part analyzes the trade-offs between disclosure costs and benefits, the role of controlling shareholders, and the impact of the U.S. regulatory environment on firm performance.
Which keywords best characterize this work?
Key concepts include Cross-listing, Corporate Governance, Bonding Hypothesis, Tobin’s q, and Cost of Capital.
How does the "bonding hypothesis" relate to cross-listing?
It suggests that by listing on a U.S. exchange, a foreign firm commits to stricter governance standards, effectively "renting" the U.S. legal environment to protect shareholders and improve firm value.
What role does Tobin’s q play in the model?
Tobin’s q is used as a proxy to measure firm valuation; the research finds that firms cross-listed in the U.S. often exhibit a higher q ratio, indicating a "cross-listing premium."
Why are controlling shareholders a key factor in the cross-listing decision?
The paper explains that cross-listing limits the ability of controlling shareholders to extract private benefits, making it an attractive decision only for firms with significant growth opportunities that outweigh these costs.
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- Matthias Hilgert (Autor:in), 2005, Discussion of the empirical evidence regarding the merit of companies cross-listing their shares on foreign equity markets, München, GRIN Verlag, https://www.grin.com/document/38178
