The cross listing decision.pdf

7/28/2019 The cross listing decision.pdf

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THE CROSS-LISTING DECISION

BY: MARK C. WILLIAMSON1

I. INTRODUCTION

A. VOLUME AND TRENDS- FOREIGN LISTINGS

As of 2006, 334 foreign firms had listed their shares on the London Stock Exchange

(LSE) resulting in market capitalization of 2.2 billion. 453 foreign firms had listed

their shares on the New York Stock Exchange (NYSE), with market capitalization

totaling $7.1 trillion. 335 foreign firms had listed their shares on the Nasdaq.2

At the end of 1995, the LSE had 531 foreign firms with listings of shares, which

represented 54.4% of its total average daily volume of $4.58 billion. The NYSE had 247

foreign firm listings comprising 8.5% of its total average daily turnover of $12.23 billion.

The Nasdaq had 362 such listings, which represented 3.4% of its total average daily

turnover of $9.52 billion. The next three largest exchanges in terms of number of foreign

firms listed include the Frankfort Stock Exchange with 235, Zurich Stock Exchange with

233 and Paris Stock Exchange with 194.3

The number of cross-listings of shares on all stock exchanges has grown from 1,550 in

1986 to 2,100 in 1995 or 35%. The number of foreign firm listings on the NYSE

increased over 3 times from 59 in 1986 to 247 in 1995. The Nasdaq experienced a 48%

Mark C. Williamson, 2001-2009 All rights reserved.1

Mark C. Williamson is CEO of Washington Alliance International, LLCs (international law corporations),is an Attorney & Counselor at Law (NY & CA), is a Solicitor (England & Wales), is a Certified PublicAccountant (CA & OR) (inactive), has degrees in law from Cambridge University (UK) (B.A. (J.D.equivalent) & M.A. Law) and Northwestern University School of Law (Chicago) (LL.M.) and has abusiness degree from the University of Michigan, Ross School of Business (Ann Arbor) (B.B.A.).2 The London Stock Exchange list of overseas firms as of January 13, 2006 (available May 5, 2006), NewYork Stock Exchange list of non-US companies as of May 5, 2006 and Nasdaq list of non-US companies asof May 5, 2006.3 Karolyi, What Happens to Stocks that List Shares Abroad? A survey of the Evidence and its ManagerialImplications, 1996, p 7 and Table 1.


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increase in the number of foreign firm listings from 244 in 1986 to 362 in 1995.

However, the number of foreign firm listings on the LSE decreased 9% from 584 in 1986

to 531 in 1995.4

In terms of depository receipts, LSE experienced a one-hundred fold increase in

foreign firm listings of Global Depository Receipts (GDRs) to $5.5 billion in 1995,

since their first issuance in London in 1990. In the U.S., American Depository Receipts

(ADRs) increased to 677 unlisted on the Over-the Counter exchange, 171 on the

NYSE, 130 on the Nasdaq and 7 on the American Stock Exchange (Amex) by the end

of 1995.

5

The U.S. and U.K. together had in their capital markets emerging markets listings

that traded around $180 billion in 1996, which comprised more than 10% of local total

turnover of all emerging markets. The U.S. capital markets alone experienced an

increase in the number of ADRs listed from 15 emerging market firms to 100 such firms

between 1990 and June 1996.6

All this information suggests a significant and increasing degree of

internationalization of capital markets. Foreign firms are increasingly listing their

securities in host markets. The growth trend includes GDRs listings and ADRs listings.

Foreign firms from emerging markets also fuel the growth in listings abroad.

B. THE CROSS-LISTING DECISION- THESIS

The purpose of this paper is to summarize the factors, as identified from the current

literature, that foreign firms seem to consider in making the cross-listing decision. In

4 Karolyi, What Happens to Stocks that List Shares Abroad? A survey of the Evidence and its ManagerialImplications, 1996, p 7 and Table 1.5 Karolyi, What Happens to Stocks that List Shares Abroad? A Survey of the Evidence and its ManagerialImplications, 1996, p 8 and Table 2.6 Serra, The Valuation Impact of Dual-Listing on International Exchanges: The Case of EmergingMarketsStocks, 1997, p 4.


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addition, this paper identifies other factors that foreign firms should consider in making

the cross-listing decision. Cross-listing refers to the process of listing on an exchange

in a host market by a firm already listed on an exchange, which is usually located in its

home market. Consequently, foreign firm refers to the cross-listing firm with respect

to the host market. Unfortunately, the literature does not reveal a consensus as to a

complete list of the factors that influence foreign firms in making the cross-listing

decision. Items that one author identifies as a factor may be consider an indirect

factor by another author or an implication by yet another author. The items identified

in this paper are considered to be factors as they either do or should influence the

decision making process of foreign firms engaged in cross-listings, regardless of whether

certain authors may label these items indirect factors or implications. At the same

time, this paper does not intend to provide a comprehensive list of every factor that

foreign firms do or should consider in the cross-listing decision.

C. AUDIENCE

This paper should be of interest to foreign firms considering cross-listing their

securities and to their advisers. The choice of a host market involves comparing the

benefits and costs of cross-listing of each potential destination and then choosing that

destination which provides the greatest net benefit to the foreign firm. The cross-listing

process is inherently legal intensive in terms of the filing requirements of the host market

exchanges. Consequently, managers of the foreign firms engaged in making the cross-

listing decision are more likely to place their first call for help to their attorneys than to

other professional advisers.


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Many of the factors that influence the decision to cross-list in a particular destination

are, consequently, many of the same factors on which stock exchanges compete for new

listings. This paper may be relevant to the stock exchanges to the extent that such stock

exchanges may align their regulatory scheme with foreign firms desire to increased

benefits or reduced costs of the cross-listing process.

II. FACTORS FIRMS SEEM TO CONSIDER- CROSS-LISTING DECISION

A. COST OF CAPITAL

In making decisions whether to list abroad, foreign firms seek lower costs of capital

abroad than is available listing in the domestic market and, as such, lower cost of capital

is a major motivation for cross-listing securities.7

Sarkissian and Schill (2000) attempt to explain whether, in practice, foreign firms that

list abroad are indeed motivated by the pursuit of lower cost of capital.8 The economic

model is designed, in part, to predict whether international diversification is a primary

motivation for the cross-listing decision. The model simply compares the number of

cross-listings where the home and host markets have a high correlation to those that have

a low correlation. The low correlation markets are associated with lower capital costs.

They find cross-listed firms do not prefer foreign markets with low correlation to the

7 In Particular, listing shares abroad changes the risk character of those shares, which in turn can change thelisted firms cost of capital. Risk is measured in market betas. Cost of capital is assessed using asset-pricing models (e.g. Capital Assets Pricing Model or Arbitrage Pricing Theory). Generally a directrelationship exists between risk and the cost of capital. As risk increases, the cost of capital also increases.8 Sarkissian and Schill applied the model of partial integration of Errunza and Losq (1985) and pair 2,367listings from 44 home countries on 26 host markets.


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home market and, as such, would result in a reduction in capital costs.9In short, they find

that lower cost of capital is not a major motivation for the cross-listing decision.

Karolyi (1996) summarizes other relevant research studies including U.S. listings

abroad, Canadian listings in the U.S. and foreign listings in the U.S.

Regarding U.S. listings abroad, most studies included in the Karolyi (1996) summary

covering 1965 through 1987, indicate that such cross-listings resulted in reduced costs of

capital.10 However, no overall capital cost reduction was noted when Rothman (1995)

used Fama and Frenchs (1995) three-factor model to measure market risk.11

Interestingly, Rothman found an increase in the home market betas coupled with

reductions in size and book-to-market risk factors.12 In short, U.S. listings abroad either

reduced the cost of capital or had no impact on such cost.

Concerning Canadian firms listing in the U.S. as included in Karolyi (1996) summary,

the related firms either experienced a reduction in the cost of capital or a reduction in the

9 Sakissian and Schill, The Overseas Listing Decision: New Evidence of Proximity Preference, 2000, pp4-6 and 12-13.10 Howe & Madura (1990) found no decrease in the cost of capital for U.S. listings in Europe or Japanusing a sample of 68 stocks in 1969- 1984. Torabzadeh et al. (1992) found a betas drop of 1.10 to .93 andan expected decrease in the cost of capital, using a sample of 92 stocks involving U.S. listings in London orTokyo during 19801986. Varela and Lee (1993) computed a 240 basis points reduction in the cost ofcapital from a sample of 168 U.S. companies listing in London during 1965- 1987.11 The sample included 265 U.S. listings in London or Tokyo during 1965- 1993.12 Karolyi, What Happens to Stocks that List Shares Abroad? A Survey of the Evidence and its ManagerialImplications, 1996, pp 14-19. pricing models (e.g. Capital Assets Pricing Model or Arbitrage PricingTheory). Generally a direct relationship exists between risk and the cost of capital. As risk increases, thecost of capital also increases.12

Sarkissian and Schill applied the model of partial integration of Errunza and Losq (1985) and pair 2,367listings from 44 home countries on 26 host markets.12 Sakissian and Schill, The Overseas Listing Decision: New Evidence of Proximity Preference, 2000, pp4-6 and 12-13.12 Howe & Madura (1990) found no decrease in the cost of capital for U.S. listings in Europe or Japanusing a sample of 68 stocks in 1969- 1984. Torabzadeh et al. (1992) found a betas drop of 1.10 to .93 andan expected decrease in the cost of capital, using a sample of 92 stocks involving U.S. listings in London orTokyo during 19801986. Varela and Lee (1993) computed a 240 basis points reduction in the cost ofcapital from a sample of 168 U.S. companies listing in London during 1965- 1987.12 The sample included 265 U.S. listings in London or Tokyo during 1965- 1993.


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home market betas, implying a reduced capital cost.13 This means that in making the

cross-listing decision Canadian firms will experience reduced capital costs by choosing to

list securities in the U.S. In quantifying of the effect of the cost of capital reduction for

Canadian firms listing in the U.S., Karolyi (1996) finds a reduction of 101 basis points.14

For Non-Canadian listings in the U.S. as included in the Karolyi (1996) summary,

Jayaraman Shartri and Tandon (1993) found the U.S. market betas increase while the

home market risk and implied capital costs decreased.15 This means that while U.S.

market risks increased after ADR listings, home market risk decreased. One other study

found an inverse relationship between the required return and simple cash flow, which

implied a capital cost reduction.16 In quantifying the effect of the cost of capital

reduction for foreign listings in the U.S., Karolyi (1996) finds that Australian firms,

European firms, Asian firms and UK firms should experience capital cost reductions of

82 basis points, 49 basis points, 144 basis points and 292 basis points, respectively. The

average lower cost of capital, including Canadian firms, is approximately 114 basis

points.17 This means those non-Canadian firms that are seeking to cross-list into the U.S.

market should anticipate a lower cost of capital as a result of the cross-listing decision.

The above research concerning U.S. listings in London or Tokyo yields mixed results.

Increased integration should decrease the opportunity for capital cost reductions resulting

13 Switzer (1986) sampled 25 such firms that decided to list shares either on the NYSE or Amex during

1962- 1983 and found a reduction in capital costs. Foerster & Karolyi (1993) implied similar results byobserving a reduction in home market betas from 1.23 to 1.11 using a sample of 56 Canadian listings in theU.S. during 1976- 1992.14 Karolyi, What Happens to Stocks that List Shares Abroad? A Survey of the Evidence and its ManagerialImplications, 1996, pp 14-19.15 The sample included 95 foreign listings of ADRs in the U.S. during 1983- 198816 Sundaram and Logue (1996) used Fama and Frenchs (1995) model to measure capital costs changes of76 ADRs listed in the U.S. during 1982- 1992.17 Karolyi, What Happens to Stocks that List Shares Abroad? A Survey of the Evidence and itsManagerial Implications, 1996, pp 14-19.


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from cross-listing activities. In terms of the cross-listing decision, capital cost reductions

is a factor that foreign firms listing in the U.S. should consider but this factor is expected

to lose its significant due to convergence.

B. INCREASED ACCESS TO CAPITAL

In making the cross-listing decision, foreign firms seek to increase their access to

capital outside the home market. Lins et al. (2000) used three methodologies to

investigate the effect of foreign firms access to capital, subsequent to such firms listing

level II or level III ADRs on either the NYSE or Nasdaq during 1986- 1996.18 The

second and third methods are of particular relevance to enhanced access to capital. In the

second method, Lins et al. reviews F-6 and 20F filings to identify whether improved

access to capital is a stated factor in the cross-listing decision. In their sample of 107

firms, they found over 60% of such firms in both developed and emerging markets

explicitly stated the need of increased access to external capital markets, with more

frequent statements by emerging market firms. Concerning the third method, Lins et al.

reviewed the frequency and level of capital raised around the ADR listing. Lins et al.

noticed an increase in equity offerings firms from 9% to 29% in the foreign market

within two years of the foreign firms ADR listing. In U.S. dollar amounts, the increase

18 The sample included a total of 107 such firms including 82 from developed markets and 25 fromemerging markets.


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per firm is from $112.5 million to $234.5 million.19 The increased use of external capital

markets following the ADR listing is more pronounced in emerging market firms.20

Lins et al. (2000) believe their results from the second methodology (i.e. review of F-6

and 20F filings by foreign firms issuing ADRs) are understated. First, managers may not

discuss the need for external capital to preclude competitors from knowing this

information. Second, their search may have been less than perfect. Third, information

for smaller firms, in which the need for external capital may be greater, is more difficult

to obtain. Fourth, managers may have already anticipated the ADR issue and, as such,

lack concern about capital constraints. Consequently, the actual percentage of foreign

firms listing ADRs based upon the need for enhanced access to capital may well exceed

60%.21

Another weakness of the second methodology, not identified by Lins et al. (2000), is

that emerging market firms are more likely to state the importance of external capital

markets access to accomplish the firms growth and investment objectives than

developed market firms. Consequently, the sample may be improperly understated. In

addition, filing documents and related statements are often the product of boilerplate

statements. As such, the specific statement that the purpose of the filing is to increase

access to capital may lack the importance given to it by the study.

19

For emerging market firms only, the number of debt or equity issues with in the two-year periodincreased from 0.74 to 1.67, while the percentage of market value raised increased from 3.75% to 14.58%of value. In U.S. dollar amounts, the increase per firm is from $207.6 million to $383.8 million. In thedeveloped capital markets, the number of firms issuing debt or equity with in the two-year period increasedfrom 0.47 to 0.86. As a percentage of market value, the external capital raised was not significant. In U.S.dollar amounts, the increase per firm is from $83.5 million to $189.0 million.20 Lins, Strictland and Zenner, Do Non-U.S. Firms Issue Equity on U.S. Stock Exchanges to Relax CapitalConstraints?, 2000, pp 4, 17-19 and 22-24.21 Lins, Strictland and Zenner, Do Non-U.S. Firms Issue Equity on U.S. Stock Exchanges to Relax CapitalConstraints?, 2000, p 19.


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Although the second methodology has significant weaknesses, it is not entirely

without merit and provides some support to the proposition that foreign firms seek to

increase their access to capital in making the cross-listing decision.

Lins et al. (2000) also find foreign firms of emerging markets that cross-list through

ADRs became less dependent on internally generated cash flow as a means of

investment. They use a reasonable methodology, which is the measurement of the

decline in investment to cash flow sensitivity. Such finding also supports the proposition

that in making the cross-listing decision, foreign firms benefit from increased access to

capital.

C. LIQUIDITY

1. SURVEYS AND EMPIRICAL RESEARCH

Foreign firms consider liquidity of the host market in making the cross-listing

decision. Concerning foreign firms listed in the U.S., 23% of those surveyed stated

industry-specific reasons for the listing, including liquidity (50%).22 Liquidity was not

cited as a primary reason for establishing an unlisted ADR program nor would it be.23

Karolyi (1996) surveys literature to determine whether cross-listing improves liquidity

and, accordingly, is attributable to the increase in share price associated with the cross-

listing. In terms of Canadian foreign firms listing in the U.S., Foerster & Karolyi (1996a)

find that such firms experience increased liquidity, in terms of increased trading volume

in Canada and the U.S. for 29% of stocks. However, 20 of the 52 sampled stocks that

were listed during 1981- 1990 experienced large increases in trading volume on the

22 Fanto and Karmel (1997) surveyed either the chief financial officers or shareholder relations executivesof 88 foreign firms with U.S. listing on either the NYSE or Nasdaq or with U.S. unlisted ADR programsduring 1995- 1996.23 Fanto and Karmel, A Report on the Attitudes of Foreign Companies Regarding a U.S. Listing,Stanford Journal of Law, Business and Finance, 1997, pp 9-10 and 13.


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Toronto Stock Exchange (TSE), whereas trading volume on the TSE for the remaining

32 sampled stocks declined. They explain the observation that spreads drop for Canadian

firms with increase volume on the TSE, while spreads increase for the remaining firms as

action by domestic market makers competing with greater liquidity of the U.S. market.

They also find a more pronounced increase in liquidity for such Canadian firms that

capture an increased proportion of the total trading volume in the U.S.

In the context of U.S. firms cross-listing abroad as included in the Karolyi (1996)

summary, Karolyi (1996) cites Noronha (1996) finding that U.S. firms listing in either

London or Tokyo increased their liquidity, as measured by the depth of bid and ask prices

in the U.S.24 Chan et al. (1995) find that U.S. firms with NYSE listings increase their

liquidity upon listing in either London or Tokyo.25

In short, foreign firms increase their total trading volume (combined host and home

market) and decrease home-market spreads after the cross-listing due partly to

competition from the new market. The proportion of total trading volume of the new

market captures and trading restrictions in the home market influence the degree of

enhanced liquidity.26

2. LIMITATION OF LIQUIDITY

Pagano et al. (1999) identifies market fragmentation as a limitation on liquidity

resulting from the cross-listing decision. Pagano et. al (1999) cites Domowitz et al.

(1998) finding that poor inter-market information linkages reduce liquidity in both the

24 The sample included 126 U.S. firms listing abroad during 1983-1989.25 The sample included 46 such listing during 1988- 1992.26 Karolyi, What Happens to Stocks that List Shares Abroad? A Survey of the Evidence and its ManagerialImplications, 1996, pp 26-27.


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home and host markets, using a evidence from their sample of Mexican firms listing

ADRs in the U.S.27

3. LIQUIDITY AND U.S. CAPITAL MARKETS- A CLOSER LOOK

LIQUIDITY AND HIGH DISCLOSURE & GOVERNANCE STANDARDS

An exchange or capital market with a commitment to high disclosure and corporate

governance standards may create strong public confidence and support by participation in

the capital market. This in turn leads to high levels of liquidity. This means that in

making the cross-listing decision, foreign firms may choice those host markets with high

disclosure and corporate governance standards in anticipation of higher liquidity for their

securities.

Silkenat (1994), former Chairman of the American Bar Association, stated in a speech

at a Fordham Symposium that foreign firms coming to the U.S. capital markets because

the U.S. legal and regulatory system is no longer scaring foreign firms away. In

support of this proposition, Silkenat (1994) cites three acticles that discuss the issues and

hurdles of entering the U.S. capital markets, the flexibility of the SEC in evaluating and

accommodating non-U.S. firms entering the U.S. and in assisting non-U.S. firms with

accounting and disclosure issues. Silkenat (1994) agrees that the U.S. capital markets

have responded to the changes in international finance by maintaining confidence in the

market through the principles of full disclosure and investor protection. Silkenat (1994)

27 Pagano, Roell and Zechner, The Geography of Equity Listing: Why Do European Companies ListAbroad?, Center for Studies in Economics and Finance Working Paper No. 28, 1999, p 13.


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concludes that foreign firms are willing, in part, to accept the disclosure, regulatory and

accounting requirements to access the liquidity of the U.S. capital markets.28

Huddart (1999) studies the relationship between listing decision and disclosure

requirements using a rational expectations model. Huddart (1999) finds that, instead of a

race to the bottom, exchanges choose stringent disclosure rules in a race to the top to

benefit from trading volume and the resulting lower trading costs. Huddart (1999) finds

that firms making cross-listing decisions are willing to comply with the disclosure rules

to gain access to capital markets with greater liquidity.

This research suggests that foreign firms involved in the cross-listing decision are

likely to choose an exchange with more stringent disclosure rules where that exchange

also provides more liquidity. However, managers in making the cross-listing decision

should compare the benefits of liquidity to higher disclosure costs to ensure the benefits

exceed the related costs. In terms of the U.S. capital markets, this research supports the

observations of Breeden (1994) and Silkenet (1994).

PRIVATIZATION

Silkenat (1994), former Chairman of the American Bar Association, stated that foreign

firms are coming to the U.S. capital markets, in part, because this is where the money

is. Silkenat (1994) identifies one factor as increased privatizations and the related lack

of liquidity in foreign capital markets to absorb privatizations along with their traditional

corporate financing needs.29

28 Silkenat, Overview of U.S. Securities Markets and Foreign Issuers, Symposium: Entering the U.S.Securities Markets: Opportunities and Risks for Foreign Companies, Fordham International Law Journal,1994, pp 2-3.29 Silkenat, Overview of U.S. Securities Markets and Foreign Issuers, Symposium: Entering the U.S.Securities Markets: Opportunities and Risks for Foreign Companies, Fordham International Law Journal,1994, pp 1-3.


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D. GROWTH VIA MERGERS AND ACQUISITIONS

Foreign firm may pursue a cross-listing to facilitate growth from mergers and

acquisitions that are funded by such cross-listings. Fanto and Karmel (1997) surveyed

either the chief financial officers or shareholder relations executives.30 The

methodology used by Fanto and Karmel (1997), included form letters regarding the

cross-listing decision and, as such, it appears reasonable. Additional credibility may be

given to their results due to the assurance of confidentiality given to the chief financial

officers or shareholder relations executives. Concerning foreign firms cross-listing in

the U.S., U.S. acquisition was sited as a major reason for the U.S. listing (25% of those

citing specific U.S. business reasons). For foreign firms involved in unlisted ADR

programs, officers and executives indicated specific U.S. business reasons for the

program at the 23% level, including U.S. acquisitions.31

Pagano et al. (1999) states that a company seeking to expand by mergers or

acquisitions of foreign companies may chose to use the bidders shares as consideration.

However, before such shares may be acceptable in a share for share exchange, the

bidders shares may need to be listed on the exchange in the target companys home

market. In anticipation of share for share acquisitions, listing abroad may also help

establish contacts and a reputation in the financial community. Identification of potential

target companies may be easier for foreign firms after the cross-listing occurs.32 Pagano

et al. (1999) provides no specific support for these assertions. However, the author was

formerly associated with a very large multinational French company that recently began

30 The survey included 88 foreign firms with U.S. listing on either the NYSE or Nasdaq or with U.S.unlisted ADR programs during 1995- 1996.31 Fanto and Karmel, A Report on the Attitudes of Foreign Companies Regarding a U.S. Listing,Stanford Journal of Law, Business & Finance, 1997, pp 6-7, 9-10 and 13.32 Pagano, Roell and Zechner, The Geography of Equity Listing: Why Do European Companies ListAbroad?, Center for Studies in Economics and Finance Working Paper No. 28, 1999, p 9.


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an ADR program with this strategy in mind. Consequently, the assertions appear

reasonable.

E. DIRECT COSTS OF LISTING ABROAD

A foreign firm that is in the process of making a cross-listing decision will consider

the related costs. Management should determine that those cross-listing factors

generating benefits to the foreign firm exceed the cross-listing costs before deciding in

favor of cross-listing. Direct listing costs that foreign firm consider in the cross-listing

decision include, among others, the listing charges and the costs of compliance with

Securities and Exchange Commission (SEC) disclosure rules and U.S. Generally

Accepted Accounting Principles (GAAP). The cost of compliance with U.S. GAAP is

relevant for foreign firms that cross-list in the U.S. and U.K. However, for foreign firms

that cross-list in the U.K., compliance with U.S. GAAP is optional.

1. LISTING CHARGES

Foreign firms consider the listing charges in making the cross-listing decision. The

initial listing fee in the U.S. ranges from a minimum on the NYSE, Amex and Nasdaq of

$100,000, $5,000 and $5,000, respectively, to a maximum of $125,000, $30,000 and

$50,000, respectively.33 The annual listing fee in the U.S. ranges from a minimum on the

NYSE, Amex and Nasdaq of $16,000, $6,500 and $2,500, respectively to a maximum of

$30,000, $14,500 and $8,000, respectively.34 The LSE admissions and annual fees

distinguish between UK companies and international companies. International

companies are companies incorporated outside the United Kingdom. As such, the

33 Serra, The Valuation Impact of Dual-Listing on International Exchanges: The Case of EmergingMarket Stocks, 1997, Table A1.34 Serra, The Valuation Impact of Dual-Listing on International Exchanges: The Case of EmergingMarket Stocks, 1997, Table A1.


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admissions and annual fees for international companies are the relevant fees for foreign

companies seeking to cross list shares on the LSE. The initial listing fee of the LSE for

international companies issuing certificates representing share ranges from a minimum of

2,000 pounds or $1,398 to a maximum of 4,000 pounds or $2,796, coupled with an

application fee of 3,000 pounds or $2,097.35 The related annual fee is 2,500 pounds or

$1,748.36

Listing fees associated with foreign firms listing on the NYSE are significantly higher

than those for foreign firms listing on LSE. However, the difference becomes less

pronounced when offering proceeds increase and other direct costs, such as the gross

spread, overshadow the listing fees.

The registration fee for listing of U.S. securities pursuant to the Securities Act of 1933

is an additional costs and is computed based upon the Table of Calculation of

Registration Fee per Rule 457.

2. COMPLIANCE COSTS- SEC DISCLOSURE & U.S. GAAP

SURVEY AND EMPIRICAL RESEARCH

In making the cross-listing decision, foreign firms contemplate the cost of complying

with the regulatory regime of the host market. Concerning foreign firms listed in the

U.S., Fanto and Karmel (1997) find that SEC disclosure other than the U.S. GAAP

reconciliation was sited by 54% of the survey participants as a difficulty in their U.S.

listing.37 In order of response rate, Managements Discussion and Analysis of Financial

Condition and Results of Operations (MD&A), forward-looking statements or

35 London Stock Exchange, Admission and Annual Fees, April 2000.36 London Stock Exchange, Admission and Annual Fees, April 2000.37 Fanto and Karmel (1997) surveyed either the chief financial officers or shareholder relations executivesof 88 foreign firms with U.S. listing on either the NYSE or Nasdaq or with U.S. unlisted ADR programsduring 1995- 1996.


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company risk factors, business segment information, material contracts, corporate

governance and the English language represented particular difficulties relating to SEC

disclosure.38

The most significant cost for foreign firms listing in the U.S. is that of preparation of

the U.S. GAAP reconciliation. 51% of the foreign firms listed in the U.S. cited the U.S.

GAAP reconciliation as a significant difficulty experienced in their U.S. listing. Turning

to unlisted foreign firms with U.S. ADR programs (i.e. level I), 55% of such firms

identified the U.S. GAAP reconciliation as the primary deterrent from taking the next

step of listing in the U.S. The majority of respondents indicated that the U.S. GAAP

reconciliation was too time-consuming and costly. Two German respondents complained

that by accepting U.S. disclosure standards they would have no voice in shaping

standards and they would be giving up the role they currently have in international

advisory bodies.39

On the other hand, In January 1994, Daimler-Benz AG filed a registration statement

with the SEC relating to a secondary offering of ADRs. The U.S. GAAP reconciliation

footnote to the Daimler-Benz AG interim financial statements indicates, among others,

reconciling items of a workforce reduction accrual of $2.6 million, goodwill and business

acquisitions reduction of $0.2 million, pension and other postretirement benefits accrual

of $0.2 million and a deferred tax assets of $1.5 million for the nine months ended

September 30, 1993.40 These adjustments may involve, among other accounting

pronouncements, Statement of Financial Accounting Standards No. (SFAS) 5,

38 Fanto and Karmel, A Report on the Attitude of Foreign Companies Regarding a U.S. Listing, StanfordJournal of Law, Business and Finance, 1997, pp 10-11.39 Fanto and Karmel, A Report on the Attitude of Foreign Companies Regarding a U.S. Listing, StanfordJournal of Law, Business and Finance, 1997, pp 10-15 and footnote 62.40 Hicks, International Securities Regulation, 2001, pp 6-30 (F-41).


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Accounting Principles Bulletin (APB) No. 16, SFAS 106 and SFAS 109, respectively.

The application of APB 16 and SFAS 109 can be particularly challenging and costly in

the international context, based upon the authors experience.

Saudagaran and Biddle (1995) also studied the impact of financial disclosure level on

the decision to cross-list securities.41 They find that foreign firms are more likely to

cross-list on an exchange with lower financial disclosure levels than that of their home

market.42

Saudagaran and Biddle point out several important limitations to their finding using a

univariate test. First, other factors may have influenced the cross-listing choice,

including industry and geographic locale. Second, the degree of difference in disclosure

levels between a foreign exchange and home market exchange was not considered.43

Two other weaknesses were not identified by Saudagaran and Biddle. First, none of

the German or Swiss foreign firms that were included in the sample were also cross-listed

in the U.S. This suggests that the sample may not be representative. Second, voluntary

disclosures that market participants expect were included in defining the financial

disclosure levels. Voluntary disclosures may be too subjective to be included in

definition of the financial disclosure levels.

While these weaknesses may be significant, the Saudagran and Biddle study seems

valid in explain the impact of financial disclosure levels on the cross-listing decision.

41 The sample of 459 firms representing 8 countries with at least one foreign listing on one of 9 exchangesas of year-end 1992. A survey of 142 accounting and securities professional was employed to rank thedisclosure levels of the 8 countries.42 Saudagaran and Biddle, Foreign Listing Location: A Study of MNCs and Stock Exchanges in EightCountries, Journal of International Business Studies, 1995, pp 4-5.43 Saudagaran and Biddle, Foreign Listing Location: A Study of MNCs and Stock Exchanges in EightCountries, Journal of International Studies, 1995, p 20.


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As the United Kingdom received a lower disclosure level rating than the U.S., this

research helps to explain the reason London has 956 foreign firm listings compared to

only 289 foreign firm listings on the NYSE and Amex combined as of year-end 1992.44

These results clearly support the above findings. However, since the U.S. received the

highest disclosure level rating, Saudagaran and Biddle do not add to our understanding of

the influence that relative disclosure levels have on the cross-listing decision of U.S.

firms.

CHALLENGES OF FOREIGN ISSUERS U.S. LISTING v U.K. LISTING

In terms of the cross-listing choice between the U.S. and U.K., Hansen (1995)

identifies two major issues that may be quite costly relating to information disclosure

required of foreign firms engaged in cross-listings. First, availability of information

relates to the ability of foreign firms to gather the information required for disclosure.

Concerning U.S. listings, Hansen (1995) emphasizes that to prepare the U.S. GAAP

reconciliation as required foreign firms must invest in new accounting systems and either

hire or train accountants.45 Big Four accounting firms have the technical capability to

identify the U.S. GAAP reconciling items and to assist in the proper measurement of such

items. Alternatively, where the foreign firm already has U.S. operations prior to the U.S.

listings, in-house Certified Public Accountants (CPAs) may be capable performing this

difficult task. Hiring Big Four accountants is typically more expensive than using in-

house CPAs.

44 Saudagaran and Biddle, Foreign Listing Location: A Study of MNCs and Stock Exchanges in EightCountries, Journal of International Business Studies, 1995, pp 4-5.45 Hansen, London Calling?: A Comparison of London and U.S. Stock Exchange Listing RequirementsFor Foreign Equity Securities, Duke Journal of Comparative and International Law, 1995, p 6.


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Regarding listings on the LSE, availability of information may also be a significant

issue as foreign firms seek to complete a prospectus or listing particulars that comply

with the Stock Exchange Listing Rules (Yellow Book). Foreign issuers seeking to list

actual shares on the official list of the LSE have more flexibility in the accounting

reconciliation requirement. The Yellow Book generally allows such foreign issuers to

present their financial statements using U.K. GAAP, U.S. GAAP or International

Accounting Standards (IAS). In these cases, no accounting reconciliation is required

pursuant to the Yellow Book.46

The second major challenge facing foreign issuers is the disclosure of sensitive

information and the resulting cost of diminished competitive advantage. For foreign

firms listing in the U.S., Hansen (1997) identifies hidden reserves, unfunded pension

liabilities and liabilities for retirement health benefits as potential sensitive areas that

must be disclosed in the U.S. GAAP reconciliation. Hidden reserves typically relate to

recorded reserves accounted for during a more profitable year that may be relieved into

income during a less profitable year, as permitted under German GAAP.

For foreign firms listing actual shares in the U.K., hidden reserves would likely be

similarly disclosed in the U.K. GAAP reconciliation.47 Thus in terms of the cross-listing

decision, a foreign firm with hidden reserves would have the same disclosure of sensitive

information and the same potential loss of competitive advantage, regardless whether the

cross-listing takes place in the U.S. or U.K.

46 Hansen, London Calling?: A Comparison of London and U.S. Stock Exchange Listing RequirementsFor Foreign Equity Securities, Duke Journal of Comparative and International Law, 1995, pp 10-11 and13.47 English Financial Reporting Standard 12 Provisions, Contingent Liabilities and Contingent Assets issimilar to Statement of Financial Accounting Standard (SFAS) No 5 in that liabilities may only berecorded when it is probable that a transfer of economic benefits will be required to settle the obligationand a reliable estimate can be made of the amount of the obligation.


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Concerning the pension accrual, similar disclosure of sensitive information is required

pursuant to both U.S. and U.K. GAAP, although the accrual measurements may differ.48

In terms of the postretirement benefit accrual, the same disclosure of sensitive

information is required under both U.S. and U.K. GAAP, although the measurement of

the postretirement benefit accrual may either differ or be the same.49 This means the

same potential loss of a competitive advantage may result from a cross-listing decision

with a destination of the U.S. or U.K.

Geiger (1998) notes an area of deregulatory changes that impact the disclosure of

sensitive information and may result in the potential loss of a competitive advantage. For

foreign firms listing in the U.S., segments information is not required provided such firms

are not engaged in a public offering.50 Specifically, Geiger states that Item 17 of Form

20-F allows such firms the option not to include segment information if they provide the

breakdown of total sales and revenues during the past three years by category of activity

and into geographic markets.51 On the other hand, foreign firms listing in the U.K.,

English accounting standards require disclosure of segment information including

turnover (sales), results (profit or loss before tax, minority interest and extraordinary

48 As of 1993, Statement of Standard Accounting Practice (SSAP) 24 for pension costs of the U.K.provides a choice in measuring pension liabilities between the accrued benefits method and projectedbenefits methods, while the U.S. SFAS 87 only allows the accrued benefits method. The projected benefitsmethod allows the pension accrual to be designed as a level percentage of payroll costs.49 The Urgent Issues Task Force (UITF) (a subsidiary committee of the Accounting Principles Board)published an Abstract on this topic in November 1992. The UITF Abstract provides that the principles of

SSAP 24 may be applied to the measurement of the postretirement benefit accrual, which would providemore choice in methodology than SFAS 106 the U.S. counterpart. The liability resulting fromimplementing an accrual for postretirement benefits may be treated as a prior period adjustment, spreadforward over the expected service lives of current employees or spread forward over 20 year, while SFAS106 only permits the last option. Interestingly, the UITF Abstract states that measurement of thepostretirement benefit accrual in accordance with SFAS 106 is deemed to satisfy SSAP 24 principles.50 Geiger, The Case for the Harmonization of Securities Disclosure Rules in the Global Market, 1998, p11.51 Green, Beller, Cohen, Hudson and Rosen, U.S. Regulation of the International Securities andDerivatives Markets, Aspen Law and Business, 4th Edition, 1998, pp 2-81 and 2-82.


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items) and net assets (non-interest bearing operating assets less non-interest bearing

operating liabilities) by class of business and by geographical segment.52Consequently,

U.S. GAAP (i.e. SFAS 14) may require less disclosure than U.K. GAAP (i.e. SSAP 25)

for segment reporting. This means foreign firms involved in the cross-listing decision

may prefer the U.S. over the U.K. as the host market due to the differing accounting

treatment of segment reporting.

THE INTERNATIONAL ACCOUNTING STANDARDS DEBATE- U.S. GAAP v IAS

The NYSE seeks to eliminate or reduce the burden posed to foreign firms engaged in

cross-listings into the U.S. resulting from the U.S. GAAP reconciliation requirement.

Cochrane (1994), Senior Vice President and Chief Economist of NYSE, stated, in a

speech at a Fordham Symposium, that the NYSEs number one priority was to find a

solution to the U.S. GAAP reconciliation requirement, so that an issuer like Nestle would

upgrade from an over-the-counter electronic bulletin or pink sheet market to a listing on

NYSE, Nasdaq or Amex. He estimated that the NYSE would list approximately 40

foreign firms during 1994, but that number is minuscule relative to the 2,000 foreign

firms eligible for a NYSE listing now were it not for the U.S. GAAP reconciliation

requirement. Cochrane (1994) presents three policy arguments for a compromise. First,

exempting foreign issuers from U.S. GAAP reconciliation will not harm U.S. investors,

given current trading practices. Institutional investors purchasing shares in Nestle, for

instance, typically either purchase in the foreign firms home market or in London and

employ management advisors to understand the accounting and other related issues.

Retail customers typically purchase such shares on the electronic bulletin or pink sheet

52 SSAP No. 25, (English) Accounting Standards Board, issued June 1990.


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market. Neither of these groups of investors currently makes investment decisions using

the U.S. GAAP reconciliation. Second, an increasing number of what Cochrane

described as experts think that filing U.S. GAAP reconciliation after home country

documents are made public has no material impact on the share price. U.S. investment

analysts typically rely on financial statements based on home country accounting and, as

such, the U.S. share price reflects home country financial information even where foreign

firms prepare the U.S. GAAP reconciliation. Third, the issue of parity for the U.S.

issuers should not preclude an exemption from the U.S. GAAP reconciliation for foreign

issuers.

Cochrane (1994) contends that based upon two years of going to focus groups that a

large percentage of chief executive officers are objective and prepared to accept the

exemption to help keep U.S. capital markets strong. In addition, U.S. firms listing abroad

currently have access to most major capital markets without having to conform to foreign

financial, disclosure and accounting rules.

Cochrane (1994) offers three potential compromises as the way forward. First, world

class foreign firms would be exempted. Second, foreign issuers would be placed on a

separate list. Investors eligible to purchase from the separate list would be restricted to

Qualified Institutional Buyers (as defined in Rule 144A). Third, accounting changes

may involve emerging markets voluntary acceptance of U.S. GAAP, the SEC providing

exemptions on a case-by-case basis, mutual recognition of national accounting and

disclosure statements (similar to the Multijurisdictional Disclosure System ) or the SEC


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adoption of IAS. Cochrane (1994) suggest that the floodgates of European firms listing

in the U.S. will open upon the SECs adoption of IAS.53

As stated by Breeden (1994) former Chairman of the SEC, the SEC thinks the objectives of

the U.S. GAAP reconciliation justify the burden imposed on foreign firms. In a speech at

Fordham Symposium, Breeden (1994) stated three fundamental objectives of the U.S. GAAP

reconciliation. First, the issue of parity for U.S. issuers ensures that U.S. firms are not placed

at a competitive disadvantage by disclosing more than foreign firms engaged in U.S. cross-

listings.54

Breeden illustrates the point by comparing Daimler-Benz AG and Ford Motor

Company. The disadvantage may take the form of disclosure costs associated with the

availability and sensitivity of information. Few discrepancies relating to the sensitivity

of information exists between disclosure rules in the U.S. and U.K.

Second, the U.S. GAAP reconciliation supports the policy of efficient markets by

facilitating investor comparisons. Breeden (1994) rebuts the growing consensus of

experts that U.S. GAAP reconciliation does not impact U.S. share prices by presenting

two additional factors. First, certain foreign firm listings have greater trading volume in

the U.S. than the trading volume in the related home market. Second, the U.S. GAAP

reconciliation is also disclosed in the home market, which facilitates better pricing in the

home market and abroad.55

53 Cochrane, Are U.S. Regulatory Requirements for Foreign Firms Appropriate?, Symposium: Enteringthe U.S. Securities Markets: Opportunities and Risks for Foreign Companies, Fordham International LawJournal, 1994, pp 3-5.54 Breeden, Foreign Companies and U.S. Securities Markets in a Time of Economic Transformation,Symposium: Entering the U.S. Securities Markets: Opportunities and Risks for Foreign Companies,Fordham International Law Journal, 1994, p 9.55 Breeden, Foreign Companies and U.S. Securities Markets in a Time of Economic Transformation,Symposium: Entering the U.S. Securities Markets: Opportunities and Risks for Foreign Companies,Fordham International Law Journal, 1994, p 9.


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Third, the most fundamental objective of the U.S. GAAP reconciliation is the pursuit

of investor protection through transparent financial reporting and full and complete

disclosure.56 It should be noted that even with the preparation of the U.S. GAAP

reconciliation other factors, such as the selection of alternative accounting methods under

U.S. GAAP and undisclosed one-time revenues or expenses, may preclude meaningful

comparisons. As such, the U.S. GAAP reconciliation does not ensure achievement of the

stated objective.

Two areas exist in which the SEC has relaxed the U.S. GAAP reconciliation

requirement for foreign issuers. First, the SEC permits foreign firms to use a cash flow

statement prepared in accordance with IAS No. 7 Cash Flow Statements, as amended,

without reconciliation with U.S. GAAP. Second, in SEC Release No. 33-7119 (Dec. 13,

1994), the SEC eliminates the requirement to reconcile to U.S. GAAP certain differences

attributable to the method of accounting for business combinations or the amortization

period of goodwill and negative goodwill, provided that the financial statements comply

with IAS No. 22 Business Combinations, as amended, in relation to those items.57

Clearly, the adoption of IAS by the SEC would significantly reduce the cost of foreign

firms cross-listing into the U.S., as many countries have now adopted IAS.58

56 Breeden, Foreign Companies and U.S. Securities Markets in a Time of Economic Transformation,Symposium: Entering the U.S. Securities Markets: Opportunities and Risks for Foreign Companies,Fordham International Law Journal, 1994, p 10.57 Green, Beller, Cohen, Hudson and Rosen, U.S. Regulation of the International Securities and Derivatives

Markets, 4th

Edition, 1998, pp 2-81.58 In the European Union (EU), EU directives do not prevent companies from using IAS and amendmentsto EU directives which conflict with IAS were being considered by the EU Commission in 1997. France,Germany, Italy and Belgium are preparing legislation to allow both foreign and domestic companies toprepare their consolidated financial statements using IAS. Swiss multinationals are currently permitted touse IAS in their domestic reporting. The Arab Society of Certified Accountants, comprising 22 Arabnations, adopted IAS as the national accounting standard in all its member countries. Canada is debatingthe harmonization approach. The Malaysian Accounting Standards Board had adopted a policy ofharmonization with IAS. Many African countries either use IAS directly or as a basis for their nationalaccounting standards (e.g. Kenya). South African Accounting Practices Board decided their GAAP should


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VOLUNTARY COMPLIANCE WITH IAS or U.S. GAAP

In making the cross-listing decision, certain firms voluntarily adopt IAS or U.S.

GAAP in connection with selection of the host market. Ashbaugh (2000) studies foreign

firms decision to adopt more stringent accounting and disclosure standards of either IAS

or U.S. GAAP than domestic GAAP.59 In the context of IAS or U.S. GAAP compared to

domestic GAAP, Ashbaugh (2000) finds foreign firms are more likely to disclose IAS or

U.S. GAAP financial data than domestic GAAP when their shares are traded in more

foreign equity markets and when foreign firms are seeking to raise relatively more equity

capital. In term of the cross-listing decision, a positive relationship exists between the

number of disclosure changes and accounting measurement restrictions under IAS

relative to domestic GAAP and, as such, Ashbaugh (2000) concludes that foreign firms

use IAS or U.S. GAAP to disseminate financial information to diverse users.60 This

means foreign firms cross-listing securities, in these circumstances, find that the adoption

of either IAS or U.S. GAAP provides more benefits than costs.

The proxies for the benefits of voluntary adoption of IAS or U.S. GAAP are three-

fold. The first benefit is to communicate with foreign financial information users. The

related hypothesis associates disclosure of IAS or U.S. GAAP to the number of foreign

equity markets in which the foreign firm is listed. The second benefit is to facilitate

be based upon IAS. Several former Soviet Union countries have adopted IAS as their national accounting

standard, including Moldova and Kazakhstan, while others are considering adoption of IAS. On the otherhand, the Ministry of Finance of Japan has not yet adopted IAS. However, the founder of Tohmatsu & Co.(part of Deloitte Touche Tohmatsu worldwide) has warned that failure to adopt IAS will cause foreigninvestors to feel uncomfortable about investing in Japan. The U.K. Accounting Standards Board hasannounced a policy of trying to make its own standards consistent with those of International AccountingStandards Committee.59 Ashbaugh (2000) reviewed and ran regression analysis on the annual reports of 211 Non-U.S. firms listedon the LSE and quoted on SEAQ-I as of March 31, 1994. Excluded were foreign firms where IAS is thebasis for domestic GAAP (such as, Italian and South African firms).60 Ashbaugh, Non-U.S. Firms Accounting Standard Choices, 2000, pp 3 and 13.


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raising equity capital. The related hypothesis associates disclosure of IAS or U.S. GAAP

to the issuance of equity capital. The third benefit is to provide more standard financial

information in the annual financial reports. The related hypothesis associates disclosure

of IAS or U.S. GAAP to financial reporting requirements, including the number of

disclosure requirements and accounting method restriction when comparing IAS or U.S.

GAAP with domestic GAAP. The above proxies and related hypothesis appear

reasonable.

When comparing IAS and domestic GAAP, Ashbaugh (2000) additionally finds

foreign firms with domestic GAAP that is less stringent are more likely to use IAS to

disseminate more standardized financial information.61 Concerning the cross-listing

decision, the standardized financial reporting that results from selection of IAS over

domestic GAAP is more economical.

Ashbaugh (2000) studies the firm characteristics of foreign firms selecting IAS and

U.S. GAAP. The majority of foreign firms listed in the U.S. chose U.S. GAAP. The

requirement to use U.S. GAAP to file a Form 20-F impacts the decision to select IAS or

U.S. GAAP but that requirement is not conclusive to the decision.62

SARBANES-OXLEY COMPLIANCE IMPACT

In 2005, 335 Initial Public Offerings were registered on the Londons Alternative

Investment Market (AIM), as compared to 126 IPOs which were registered on the

Nasdaq (representing a 65% decline from 2000). Compliance costs under Sarbanes-

Oxley are estimated at $2 million, as compared to $500,000 for a listing on the AIM. The

AIM listing fee is merely $7,600 (as opposed to $100,000). The Sarbanes-Oxley related

61 Ashbaugh, Non-U.S. Firms Accounting Standard Choices, 2000, pp 3-4 and 14-15.62 Ashbaugh, Non-U.S. Firms Accounting Standard Choices, 2000, pp 4 and 17-18.


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compliance costs include, among others, improved accounting practices (including

internal accounting controls), new executives with the Board of Directors dominated by

outsiders and earnings reports issued quarterly, as opposed to bi-annually under the AIM.

For large firms, the compliance costs amount to 0.1% of revenues. However, for small

firms (i.e. those with revenues less than or equal to $100 million), the compliance costs

amount to 2% of revenues. With small firms representing 50% of the 3,000 firms listed

on the Nasdaq, an increased number of U.S. small firms have opted out of Sarbanes-

Oxley in favor of the AIM. The AIM rules are also considered simple and short. Oren

Zeev of Apax Partners in Menlo Park, California has taken 7 firms public in London,

Milan, Frankfurt or Vienna in the past 2 years.63

F. RISK OF LIABILITY RELATING TO REGISTRATION STATEMENTS

In making the cross-listing decision into the U.S., foreign firms consider the risk of

liability relating to the registration statement. Fanto and Karmel (1997) find that 26% of

the sampled chief financial officers or shareholder relations executives from foreign firms

listed on either the NYSE or Nasdaq express fear of liability as a significant difficulty in

the cross-listing decision. The liability feared is lawsuits from material misstatement or

material omission in the registration statement, in the MD&A, forward-looking

statements and company risk factors are the areas more likely to expose foreign issuers to

litigation. One U.K. respondent referred to the amazing degree of fear concerning

liability issues displayed by all members of the participants in the offering process. A

Dutch company respondent stated that it increased its directors and officers liability

insurance coverage. For unlisted foreign firms (level I ADR programs), 38% of the

63 Forbes.com, London Calling, May 8, 2006.


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respondents stated that fear of liability was a major deterrent to upgrading to a listing on

either the NYSE or Nasdaq.64

As noted above, the respondents of both groups stated difficulties with MD&A and

forward-looking statements or company risk factors. The SEC rules do not distinguish

between foreign firms and domestic issuers in the areas of MD&A and forward-looking

statements. The Private Securities Litigation Reform Act 1995 provides a safe harbor for

any forward-looking statement.65 Interestingly, the Fanto and Karmel (1997) sample

comprehended U.S. listing in 1995 and 1996. This suggests that the respondent may

have been aware of the new law but discounted its legal protection. The Report to the

President and the Congress on the First Year of Practice Under the Private Securities

Litigation Reform Act of 1995 indicated that registrants, as whole, had not been more

willing to include forward-looking disclosures in SEC filings due to uncertainty with the

some definitions and to difficulties with its interpretation and application.66

G. SHARE PRICE IMPACT

1. DEVELOPED MARKETS

In making the decision whether to cross-list securities, foreign firms may seek a

short-term increase in the companys stock market value resulting from an increased

share price. Karolyi (1996) prepares a summary literature review of the economic

implications of the decision to cross- list shares, including the impact on share prices.

64 Fanto and Karmel, A Report on the Attitudes of Foreign Companies Regarding a U.S. Listing,Stanford Journal of Law, Business and Finance, 1997, pp 10 and 14 and footnote 58.65 The forward-looking statement must be identified as such and accompanied by meaningful cautionarystatements identifying important factors that could cause actual results to differ materially from those in theforward-looking statements in order to be included within the safe harbor.66 Green, Beller, Cohen, Hudson and Rosen, U.S. Regulation of the International Securities andDerivatives Markets, 4th Edition, 1998, pp 2-90.


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The relevant research studies as summarized by Karolyi (1996) are considered in the

order of U.S. listings abroad, Canadian listings in the U.S. and foreign listings in the U.S.

Concerning shares of U.S. firms listed abroad as included in the Karoyli (1996)

summary, no conclusive finding exists regarding the impact on share prices that result

from the cross-listing decision. Howe and Kelm (1987) found a negative 12.5%

annualized return during the first 40 days after listing.67 Several studies found no change

in share price within the first month of listing.68 On the other hand, Torbzadeh et al.

(1992) found a slightly positive share price reaction to U.S. firms listings in London or

Tokyo.

69

Interestingly, Lau et al. (1994) distinguished the period for market reaction to

U.S. listing abroad among the application date, acceptance date and first trading date.

Lau et al. (1994) found the first trading date to be most significant in terms of any share

price reaction. U.S. listings abroad experienced significant post-listing declines in share

prices as discussed below.70

In terms of Canadian listings in the U.S. as included in the Karoyli (1996) summary,

Foerster & Karolyi (1993) found abnormal share price increases of slightly more than

11%71. However, the share prices of such listings declined 11% over the year subsequent

67 The study involved a sample of 165 shares of U.S. firms listed in either Canada or Europe during 1962-

1985.68 Lee (1991) found no market reaction using a sample of 141 shares of U.S. firms listed in Toronto orLondon during 1962- 1986. Damordaran et al. (1992) noted a similar result using a sample of 276 shares ofU.S. firms listed in London or Tokyo during 1965- 1990. Varela and Lee (1993) focused on 168 U.S. firmslisting in London during 1965- 1987 and found no effect on share prices. Rothman (1995) also saw nochange in share price using a sample of 265 shares listed in London or Tokyo during 1965- 1993.69 The sample size was 92 during the period of 1980- 1986.70 Karolyi, What Happens to Stocks that List Shares Abroad? A Survey of the Evidence and its ManagerialImplications, 1996, pp 11-13.71 The sample of 56 listings of Canadian firms on the NYSE, Amex or Nasadaq during 1976- 1992.


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to the listing. The subsequent decline in share price was irrespective of the type of

listing (e.g. NYSE, Amex or Nasdaq).72

In regard to the foreign listings in U.S. as included in the Karoyli (1996) summary,

Alexander et al. (1988) found no significant change in share price within the first month

of listing, but the share price of non-Canadian listings declined by 38% over the next

three years.73 On the other hand, Foerster & Karolyi (1996b) noted significant pre-

listing share price increases of 15% coupled with another 1% increase during the listing.74

However, the share prices declined 10% over the first year.75

To explain the post-listing price declines, Sanger and McConnell (1986) argue that life

cycle bias and optimal timing of listings are the key contributing factors. The life cycle

bias argument is that essentially large, mature and non-growth-oriented companies are the

only ones that qualify for cross-listings. After the initial cross-listing, the mature and

non-growth nature of the newly listed firms causes the prices to decline. The optimal

timing argument suggests that management selects the time of their listings to follow

exceptionally good performance. After the listing, the newly listed firms return to normal

performance that is below market expectations. As such, share prices decline. Foerster

and Karolyi (1996b) provide evidence that the decline relates to such company-specific

factors such as the increase in shareholder base, industry group membership, ADR

depositary bank affiliations and type of ADR (level III or level II).76

72 Karolyi, What Happens to Stocks that List Shares Abroad? A Survey of the Evidence and its ManagerialImplications, 1996, pp 10-11.73 The sample was 34 listings (including 17 Canadian listings) foreign firms on the NYSE, Amex or Nasdaqduring 1962 1985.74 Their sample included 161 ADR listings by foreign firms in the U.S. during 1976- 1992.75 Karolyi, What Happens to Stocks that List Shares Abroad? A Survey of the Evidence and its ManagerialImplications, 1996, pp 10-11.76 Karolyi, What Happens to Stocks that List Shares Abroad? A Survey of the Evidence and itsManagerial Implications, 1996, pp 13-14.


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In short, share prices increase an annualized 12% during the first week for foreign

cross-listing in the U.S. Share prices decline significantly during the post cross-listing

period regardless of the country of origin.77Karolyis overall annualized 12% share price

increase must be tempered by the fact that the individual returns included in the

calculation are impacted by vacillation in the strength of the stock markets.

This research suggests that current shareholders of foreign firms who seek to sell out

quicker or through the U.S. listing may significantly increase their wealth by a

management decision to list shares as ADRs in the U.S. One example is governments

that are the divesting shareholders in privatizations. Pagano (1999) expects the newly

privatized company to have more incentive to cross-list than comparable companies.78

2. EMERGING MARKETS

For foreign firms from the emerging markets, Serra (1997) finds a positive impact

on share prices before the listing of 7% followed by a decline in returns during the first 5

weeks after the listing of 6%.79 The positive impact on share prices was not significantly

different among those emerging market firms that listed on the NYSE or Nasdaq in New

York or the Stock Exchange Automated Quotation International (SEAQ-I) in London.

Consequently, exchanges with more liquidity, better risk sharing and more stringent

disclosure rules did not provide better returns.80

Serra (1997) measured abnormal returns as the difference between the observed return

of the sample firms and the expected return resulting from a benchmark. Several

77 Karolyi, What Happens to Stocks that List Shares Abroad? A Survey of the Evidence and its ManagerialImplications, 1996, p 14.78 Pagano, Roell and Zechner, The Geography of Equity Listing: Why Do European Companies ListAbroad?, Center for Studies in Economics and Finance Working Paper No. 28, 1999, p 10.79 The sample includes 70 cross-listings from 10 emerging stock markets between 1991- 1995.80 Serra, The Valuation Impact of Dual-Listing on International Exchanges: The Case of Emerging MarketStocks, 1997, pp 25 and 32.


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weaknesses exist in this methodology. One bias is that the portfolio abnormal returns are

computed using geometric averages as opposed to true averages. Another bias results

from comparing buy and hold returns for the portfolio with the benchmark. In addition,

Serra (1997) lacked information to adjust the size and book to market risk factors in

selection of the benchmark. The potential effect is a downward bias of abnormal

performance.81

Serra (1997) reviewed foreign firms of Chile, India, Mexico and Taiwan to determine

whether the impact on share price varied according to the degree of segmentation. In

India and Taiwan, where direct barriers are high and foreign investment is low, more

positive impact on returns were experienced. However, other factor impacted the results

of both Chile and Mexico making conclusions regarding the impact on returns based on

the extent of segmentation less clear.82

H. GEOGRAPHIC CONSIDERATIONS

1. COMMONWEALTH BIAS FOR LONDON

In making the cross-listing decision, foreign firms consider the geographic location of

the host market. Breeden (1994) indicates that foreign firms from countries that are

former members of the British Commonwealth have a geographic preference for London

in cross-listings as opposed to the U.S., due to the colonial tie. Breeden (1994) concludes

that the U.S. capital market cannot change this preference of certain countries, such as

South Africa, by deregulation.83 He presented these assertions at a Fordham Symposium.

81 Serra, The Valuation Impact of Dual-Listing on International Exchanges: The Case of Emerging MarketStocks, 1997, p 12 (and footnote 22).82 Serra, The Valuation Impact of Dual- Listing on International Exchanges: The Case of EmergingMarket Stocks, 1997, pp 29-31 and 33.83 Breeden,Foreign Companies and U.S. Securities Markets in a Time of Economic Transformation,Symposium: Entering the U.S. Securities Markets: Opportunities and Risks for Foreign Companies,Fordham International Law Journal, 1994, p 5.


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While Breeden (1994) offers no specific source for his above assertion, the

commonwealth bias of foreign firms cross-listing in London is supported by the empirical

evidence of Pagano et al. (1999), except for foreign firms from Canada.

2. EUROPEAN FIRMS CROSS-LISTINGS- U.S. v EUROPE

Pagano et al. (1999) studies geographic preferences of European firms engaged in

cross-listing either in Europe or the U.S.84 Pagano et al. (1999) identifies three factors

that influence the selection of the host market from a matrix of foreign cross-listings and

countries of incorporation. First, common language appears to influence the cross-listing

decision. Vienna Stock Exchange (VSE) is the largest cross-listing destination for

German firms and vice versa. The same pattern is noted between the U.S. and U.K.

Second, similar institutions are suggested to enhance cross-listing activities. For

example, the NYSE and LSE are considered similar institution as opposed to the NYSE

and VSE. Third, geographic proximity or cultural homogeneity positively impacts the

location of the cross-listings. This means, for instance, that an U.S. investor may be more

confident with accounting data and behavior patterns of a U.K. firm than those of a

French or Spanish firm.85 Pagano et. al (1999) infers these factors from the sample

results.

Foreign firms seeking to cross-list securities may be interested in the current

geographic trends prior to selection of the host market. Pagano et al. (1999) identifies

changes in geographic patterns of cross-listings by European and U.S. firms. Foreign

84 The sample includes such listing on 10 major European exchanges as well as on the NYSE, Nasdaq andAmex during the 1986, 1991 and 1997.85 Pagano, Roell and Zechner, The Geography of Equity Listing: Why Do European Companies ListAbroad?, Center for Studies in Economics and Finance Working Paper No. 28, 1999, pp 15-16.


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firms from Europe are increasingly cross-listing their securities in the U.S., while

decreasingly cross-listing in Europe.86 Fewer U.S. firms are cross-listing in Europe.87

Foreign firms may evaluate the impact of the firms characteristics on geographic

preferences prior to selecting the host market. Overall, Pagano et al. (1999) finds

European firms are more likely to cross-list in the U.S. than in another European market

when pursuing a strategy of rapid expansion and large equity issues after the cross-listing.

These firms have high leverage before the cross-listing, have relatively larger export

revenues before and after the listing and tend to be in the high-tech industry. On the

other hand, European firms that are more likely to cross-list in another European market

tend to be lower growth companies than the control group and increase their leverage

after the listing. However, export revenues of such firms tend not to increase following

the listing. Such firms have stronger records of past profitability. Those foreign firms

that cross-list in the U.S. are less likely to subsequently cross-list in Europe, while

foreign firms cross-listing in Europe have no impact on a subsequent decision to cross-

list in the U.S. Common feature of the two groups are large sales, high export revenues

before the cross-listing and high research and development spending after the cross-

listing.88

Pagano et al. (1999) compares the studies on domestic IPOs and his research on cross-

listing to explain the reasons European exchanges appear less attractive to the high

86

The total number of EU9 firm cross-listings doubled (177 v 337) between 1986 and 1997, while the totalnumber of cross-listings increased 61% (320 v 516). The total number of cross-listings by EU9 firms onEuropean stock exchanges increased slightly between 1986 and 1991 (732 v 757), but then declinedbetween 1991 and 1997 (757 v 625). The total number of cross-listings by EU9 firms on the NYSE,Nasdaq and Amex combined increased 291% between 1991 and 1997 (53 v 207).87 The total number of cross-listings by U.S. firms on the European stock exchanges decreased 32%between 1991 and 1997 (465 v 316).

88 Pagano, Roell and Zechner, The Geography of Equity Listing: Why Do European Companies ListAbroad?, Center for Studies in Economics and Finance Working Paper No. 28, 1999, pp 25 and 29.


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growth and export oriented European firms. First, the high-tech nature of European firms

cross-listing in the U.S. suggests that the U.S. capital market has skilled analysts and

institutional investors specialized in evaluating firms of this nature. Pagano et al. (1999)

cites Baker et al. (1999) finding that foreign firms cross-listing on the NYSE results in

higher analyst coverage than cross-listings in London. Second, U.S. capital markets have

lower capital costs resulting from more liquidity, better accounting standards and better

shareholder protection than most European countries. Third, the U.S. economy is the

largest capital market and a large product market.89

3. OTHER PARTS OF THE WORLD CROSS-LISTING GEOGRAPHIC

PREFERENCES

In terms of other parts of the world, Canadian and Israeli firm whose countries of

origin share a historical connection with the U.K. prefers to cross-list on U.S. exchanges.

Canada is a former commonwealth country. Israel is a former U.K. territory. Latin

American firms prefer to list on U.S. exchanges. On the other hand, South African and

Asian firms, which are part of the former commonwealth, prefer to list in London.

However, Japanese firms prefer to list in Frankfurt.90

4. CLOSE-TO-HOME HOST MARKET PREFERENCE

On the other hand, Sarkissian and Schill (2000) study the host market preferences of

foreign firms involved in the cross-listing decision.91 They find geographic proximity

89 Pagano, Roell and Zechner, The Geography of Equity Listing: Why Do European Companies ListAbroad?, Center for Studies in Economics and Finance Working Paper No. 28, 1999, pp 30-31.90 Pagano, Roell and Zechner, The Geography of Equity Listing: Why Do European Companies ListAbroad?, Center for Studies in Economic and Finance Working Paper No. 28, 1999, p 17.91 The sample included 2,367 listings from 44 home countries on 26 host markets. Sarkissian and Schillgroup each sample country into three regions, which are the Americas, Australasia and Europe-Africa-Middle East (EAME) and which are represented 34%, 21% and 45%, respectively.


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plays an important role in firms selection of a host market, with foreign firms preferring

neighboring market as the destination of the cross-listing.92

Sarkissian and Schill (2000) reviewed the associations without the G-5 group of

industrial countries. The G-5 group of industrial countries includes France, Germany,

Japan, the U.K. and the U.S. Consequently, the neighboring market preference for the

cross-listing destination is more pronounced for the non-G-5 group of industrial

countries.93

Sarkissian and Schill (2000) also performed regression analysis finding that the choice

of cross-listing destinations is biased towards neighboring markets.

94

I. EXPORT SALES AND PRODUCT MARKET SPILLOVER

Foreign firms consider export sales and product market spillover in making the cross-

listing decision. Saudagaran and Biddle (1995) study the relationship between cross-

listing in a particular foreign market and the level of exports to that foreign market.95

They cite previous research that a foreign listing enhances name recognition for the firm

and its products among investor and customers partly through free media coverage. The

proposition is that foreign firms with a marketing motive and a greater emphasis on

foreign sales are more likely to list in product export markets abroad. Saudagaran and

Biddle (1995) find that for six exchanges a direct relationship exists between the location

of exchange chosen by foreign firms and such firms exports to the country where the

92

For the 1,417 foreign firm cross-listings in EAME, 47% come from within EAME. For the 801 foreignfirm cross-listings in the Americas, 42% come from within the Americas. For the 149 foreign firm cross-listings in Australasia, 49% come from within Australasia.93 For the 660 foreign firms cross-listed in EAME, 68% come from within EAME. For the 614 foreignfirms cross-listed in the Americas, 50% come from within the Americas. For the 87 foreign firms cross-listed in Australasia, 77% come from within Australasia.94 Sakissian and Schill, The Overseas Listing Decision: New Evidence of Proximity Preference, 2000, p17.95 The sample included 459 foreign firms representing 8 countries with at least one foreign listing on one of9 exchanges as of year-end 1992.


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exchange is located. Saudagaran and Biddle (1995) conclude that a foreign firms

revenue in a foreign country do affect the cross-listing decision.96

This research does not tell us whether export revenues increased subsequent to the

cross-listing or whether there exist underlying reasons that firms choose to cross-list on

an exchange in the market where their export revenues are generated. Instead, this

research only suggests that foreign firms list abroad in those markets where such firms

have the higher relative export sales before the cross-listing decision.

Concerning foreign firms listed in the U.S., Fanto and Karmel (1997) find that 38% of

the respondents indicated that publicly committing to the U.S. product market and, as

such, the resulting inexpensive form of publicity were major reasons for listing in the

U.S.97 For foreign firms in U.S. unlisted ADR programs, 56% of the respondents stated

that publicity for the foreign firm and its products were major reasons for establishing an

ADR program.98

This research indicates the underlying reasons for cross-listing on an exchange of the

product export market is due to firm and product publicity as well as to signaling

commitment to the export market.

Pagano et al. (1999) considers the impact on subsequent export revenues and

profitability in the export market after the cross-listing. Pagano et al. (1999) indicates

that perceived reliability and managerial and product quality following the cross-listing

may generate product demand from consumers. Pagano et al. (1999) cites that the

96 Saudagaran and Biddle, Foreign Listing Location: A Study of MNCs and Stock Exchanges in EightCountries, Journal of International Business Studies, 1995, pp 2, 12, 20 and 22.97Fanto and Karmel (1997) surveyed either the chief financial officers or shareholder relations executives of88 foreign firms with U.S. listing on either the NYSE or Nasdaq or with U.S. unlisted ADR programsduring 1995- 1996.98 Fanto and Karmel, A Report on the Attitudes of Foreign Companies Regarding a U.S. Listing,Stanford Journal of Law, Business and Finance, 1997, pp 9-10 and 14.


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Stoughton, Wong and Zechner (1998) model indicates that cross-listing on the exchange

of the firms export market increases its market share of export revenues and, as such,

increases profits. This is the product market spillover hypothesis. Pagano warns

against management timing cross-listings with abnormally goods financial results, as a

return to normal conditions may not yield the expected increased revenues or profits.99

One limitation of the product market spillover hypothesis is that it is only relevant

for industries in which a firms product market reputation is of particular importance.100

While this limitation may affect the usefulness of the study, it does not affect the studys

validity.

This research suggests that foreign firms making the cross-listing decision should look

beyond simply the export markets and consider increased market share in the export

market following the cross-listing.

III. FACTORS FIRMS SHOULD CONSIDER CROSS-LISTING DECISION

A. GROSS SPREAD

The gross spread is a factor that foreign firms should consider in making the cross-

listing decision. The gross spread includes the management fee (paid to lead managers),

underwriting fee (paid to lead and co-managers who are part of the purchasing group) and

selling concession (allocated to the selling group) as a proportion of the offer proceeds.

99 Pagano, Roell and Zechner, The Geography of Equity Listing: Why Do European Companies ListAbroad?, Center for Studies in Economics and Finance Working Paper No. 28, 1999, p 14.100 Pagano, Roell and Zechner, The Geography of Equity Listing: Why Do European Companies ListAbroad?, Center for Studies in Economics and Finance Working Paper No. 28, 1999, p 14.


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Certain literature relating to IPOs provides insight into the gross spread for cross-

listing. Ljungqvist et al. (2000) studied the gross spread.101 Ljungqvist et al. (2000)

identifies and considers the tradeoff involving the decisions of non-U.S. issuers in

selecting either a U.S. investment bank or local bank as underwriter and in marketing the

shares either in the U.S. or other markets. U.S. investment banks typically use the book-

building approach, which involves assessing the market conditions before pricing the

transaction. Alternatively, other banks may use the fixed-pricing method that consists of

pricing the shares before such shares are put up for subscription. For instance, Ljungvist

at al. (2000) noted 332 UK IPOs using the fixed-price method as compared to 82 UK

IPOs using book-building method.102

The first issue is to compare the direct costs of the book-building and fixed-price

methods. In defining direct costs, Ljungvist at al. (2000) focuses on the costs associated

with employing the investment banking syndicate. Other IPO costs, such as road show,

advertising and management time are excluded due to the difficulty of obtaining

consistent information.103 The book-building average gross spread exceeded the fixed-

price spread regardless of the IPO location. The decision whether to hire an investment

banker using the book-building or fixed-price method is more important for issuers of

IPOs in Africa and the Middle East due to a relatively larger gross spread differential.

The decision is less important for issuers of IPOs in North and South

America, although the sample of fixed-price offerings included only one issuer. Such

decision for issuers of IPOs in Europe and Asia-Pacific turns on quantifying the

101 The sample was 2,132 IPOs (1,618 with spread information) by non-U.S. issuers from 65 countries in1992- 1999.102 Ljungqvist, Jenkinson and Wilhelm, Global Integration in Primary Equity Markets: The Role of U.S.Banks and U.S. Investors, 2000, Table 5.103 For the sample, 1,011 IPOs used the book-building method with an average gross spread of 4.56%.Those IPOs using the fixed-price method totaled 607 with an average gross spread of 2.21%.


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approximate 2% differential. For a $50 million IPO, the 2% difference in gross spread is

$1 million in additional fees.104

The next issue is to compare the gross spread of using an U.S. investment bank as the

lead underwriter and non-U.S. investment bank, assuming the book-building method is

used. For the sample, U.S. investment banks charge an average 75 basis points premium

(4.91% - 4.16%) over non-U.S. investment banks. The decision to choice an U.S.

investment bank is more important for IPOs of U.K. and Africa and the Middle East

issuers. For an U.K. issuer involved in a $50 million IPO, the additional cost of using an

U.S. investment banker is $1.16 million. For an Africa and Middle East issuer also doing

a $50 million IPO, the additional cost of using an U.S. investment banker is $1.42

million. These costs are additional to the decision to use the book-building method rather

than the fixed-pricing method.105

The next issue is to

Documents

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