What’s your opinion about cross-listing of shares in different stock exchanges? Do you think cross-listing provides higher shareholders value? Conventional wisdom has long held that companies cross-listing their shares on exchanges in London, Tokyo, and the United States buy access to more investors, greater liquidity, a higher share price, and a lower cost of capital.
In the eighties & nineties lots of companies in the developed world duly cross-listed their share and they achieved lot of advantages as at that time markets were not interrelated which provides less volatility and reduces risk. However in the recent years we have seen great decline in cross-listing of shares. Companies are delisting from exchanges and new cross-listing has also declined. In the recent years European company like Ahold, Air France, Bayer, British Airways, Danone, and Fiat, terminated their cross listings on stock exchanges in New York as the requirements for deregistering from US markets became less stringent.
In 1998 Foreign Listing of Developed Market companies on London International Main Market (IMM) was more than 500 however in the year 2007 it has declined to less then 400 companies.
What is the major reason for decline in cross-listing of shares?
Decline in Liquidity Benefit
As per the survey by top consulting firm European companies in the United States typically account for less than 3 percent of these companies’ total trading volumes. For Australian and Japanese companies, the percentage is even lower.
Broader Shareholder Base
In an age when electronic trading provides easy access to foreign markets, the argument that foreign listings can give companies a broader shareholder base no longer holds. Furthermore, a foreign listing is not even a condition, let alone a guarantee, for attracting foreign shareholders. It may improve access to private investors, but as capital markets become increasingly global, institutional investors typically invest in stocks they find attractive, no matter where those stocks are listed. One large US investor—CalPERS—has an international equity portfolio of around 2,400 companies, for example, but less than 10 percent of them have a US cross-listing. In fact, because of better trading liquidity in the home market, institutional investors often prefer to buy a stock there rather than the cross-listed security.
Better Corporate Governance
In 80’s and 90’s US & UK capital market have higher corporate governance as compare to other countries. Those higher standards enhances cross-listing benefits as companies applying for cross-listings in the United Kingdom or the United States would inevitably disclose more and better information, give shareholders greater influence, and protect minority shareholders — thereby improving these companies’ ability to create value for shareholders. However in the recent years other developed economies, such as the continental member states of the European Union, have radically improved their own corporate-governance requirements. As a result, the governance advantages once derived from a second listing in the United Kingdom or the United States hardly exist today for companies based in developed countries.
Increase in Volatility
In 80’s and 90’s global stock market was not interrelated and it provides an opportunity to shareholders to mitigate risk by investing in cross-listing shares as occurrence of event in one market makes very less impact on other market however in the age of internet it has become reverse as every markets are interrelated and small news in one market creates great impact on other market that makes shares more volatile and increases risk.
Access to Capital
Companies go for foreign listing when they can’t attract large amount of capital in their home country. Earlier it was true for European Union & Japanese companies to go for foreign listing in US and UK region to attract capital as they can’t generate huge capital in their home market but today situation has changed, local stock market in European Union & Japan has provided a sufficient supply of equity capital. Now US and UK listing is no more attractive for them.
Negative returns from Cross-listing
Maintaining an additional listing generates extra service costs—for example, fees for the stock exchanges—and additional reporting requirements, such as 20-F statements for ADRs. Although these service costs tend to be minor compared with the cost of compliance (particularly with US regulations such as Sarbanes–Oxley), they have grown enormously over the last few years. British Airways and Air France, which both recently announced their delisting from US exchanges, estimate that they will save around $20 million each in annual service and compliance costs.
However cross-listing doesn’t promote creation of value in any material way. As per analysis market doesn’t respond with -ve share price on announcement by companies opted for voluntary delisting. On the other hand when cross-listed companies were compared with comparable without foreign listing companies it was found that the key drivers of valuation are growth and return on invested capital (ROIC), together with sector and region. A cross-listing has no impact.
Situation is very different for Emerging Market as these markets require huge amount of capital to sustain their growth which is very difficult to generate in their home country. Foreign-listing provides solution for this. Lot of emerging market company in India & China has opted for foreign-listing to generate required capital.
Foreign-listing represents as a third of total trading volume of emerging market companies and compliance with more stringent UK or US corporate governance requirements and stock market regulations could generate real benefits for shareholders.
In the coming years emerging market will really benefit from foreign-listing but companies from developed economies with well-functioning, globalize capital markets have little to gain from cross-listings and they should reconsider their approach towards cross-listing.