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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 Receipt (ADR), European Depositary Receipt (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 product and labor market considerations; for example, to increase visibility with customers by broadening product identification, to provide improved information disclosures to potential customers and suppliers by accepting higher levels of disclosure standards by adopting standards like U.S. GAAP, and to improve labour relations in foreign countries by introducing share and option plans for foreign employees.^[1] There are, however, also disadvantages in deciding to cross-list: increased pressure on executives due to closer public scrutiny; increased reporting and disclosure requirements; additional scrutiny by analysts in advanced market economices, 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.^[2]

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[1], shows that the listing premium for crosslisting has evaporated, due to new US regulations and competition from other exchanges. Some recent academic research finds that smaller foreign firms seeking cross listing venues may be opting for U.K. exchanges over U.S. exchanges due to the costs imposed by the Sarbanes-Oxley Act. On the other hand, larger firms seeking "bonding" benefits from a U.S. listing continue to seek a U.S. exchange listing.^[3]

[edit] References

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 Unpublished working paper, http://ssrn.com/abstract=952221.

• Piotroski, Joseph D. and Srinivasan, Suraj,Regulation and Bonding: The Sarbanes-Oxley Act and the Flow of International Listings(January 2008). Available at SSRN: http://ssrn.com/abstract=956987

• Khanna, Tarun, Palepu, Krishna and Srinivasan, Suraj,Disclosure Practices of Foreign Companies Interacting with U.S. Markets(December 2003). Harvard Business School Strategy Unit Working Paper No. 03-081 Available at SSRN: http://ssrn.com/abstract=408621 or DOI: 10.2139/ssrn.408621

• Doidge, Craig Andrew, Karolyi, George Andrew and Stulz, Rene M.,Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices over Time(July 2007). ECGI - Finance Working Paper No. 173/2007 Available at SSRN: http://ssrn.com/abstract=982193