Michael Nyaga

Running head: CROSS BORDER LISTING The Impetus Behind Cross Border Listing Michael Nyaga Kenya School of Monetary Studies 12 Dec 2016 1 CROSS BORDER LISTING 2 Abstract This essay focuses on the rationale behind cross border listing and the factors that drive its momentum. As such, the essay briefly summarizes only the advantages of the undertaking without limiting itself to certain regions or economies. The impetus behind cross border listing or dual listing can be limited to five main factors; Expansion of investor base, maintaining liquidity, firm visibility, price discovery and credit exposure. CROSS BORDER LISTING 3 The Impetus Behind Cross Border Listing in Harvard Style Cross border listing is said to exist when shares of a domestic listed company are listed in one or multiple foreign stock exchanges. Dual listing or cross-listing are other definitions used to describe the same (Chouinard, E and D`souza, 2004). Khurana (2007) opines that a firm cross- lists when its shares have achieved maximum saturation in the domestic market, thus seeking alternative avenues to increase its marketability and investor base across borders. Further, he argues that domestic markets may be unable to meet certain liquidity and financial needs a specific firm is seeking, or that local barriers such as market segmentation, taxes, and presence of asymmetric information may curtail profits or growth, hence the need to list their shares in foreign markets that provide a greater level of liquidity and investor base. Cross border listing also leads to the shares of a cross-listed firm to trade at higher volumes and subsequently, higher prices. This again leads to elevated levels of liquidity (available sellers and buyers) in the stock (Chouinard, E. and D`souza, 2004) Cross border listing is a tried and tested method of introducing a firm's shares to a foreign investor base, increasing awareness and visibility of its brand and at the same time, increasing its ability to acquire a new customer base. It also enables the cross-listing firm to gain access to foreign money and debt since a dual listed company is justifiably seen as creditworthy (Licht, 2003). Coffee (2002) supports the argument above. He opines that firms located in countries with less stringent listing requirements tend to alleviate their status by listing in a country or countries with above board listing regulations. He termed this as the signaling or ‘bonding effect, in that, it would signal a firm`s approval of globally accepted corporate governance practices in its internal culture and to potential foreign-based investors. CROSS BORDER LISTING 4 A dual-listed firm can create a secondary market for its shares to be used in cases of acquisition and employee stock ownership plans for multinational companies. The shares can be structured to compensate employees and management located in a host country. Employees and or management who wish to sell or acquire shares can do so in their foreign subsidiaries (Licht, 2003). Firms that cross-list have a greater level of media coverage and analysts following prior to and after its dual listing which tends to reflect positively on its earnings forecasts. Thus, investors will effectively pay a reduced cost to keep up with the company`s financial statements. This will have a positive effect on the shares demanded and eventually, its share price, due to the transparency provided (Lang, M., Lins, K and Miller, 2003). Price discovery is yet another major advantage a cross-listed firm enjoys. The aspect of introducing the firm`s shares in a foreign exchange enables re-pricing of the stock`s value and in different time zones (Chouinard, E, and D`souza, 2004). Cross listing is also another way to raise much needed financial capital in form of credit. Firms may be unable to raise sufficient credit domestically and as such, cross-listing allows for external credit at cheaper terms since the investor (creditor) is protected by the firm`s shares, which also serve as collateral (Pagano, 2002 ). In conclusion, cross border listing allows for a myriad of advantages. From increasing a firm's access to foreign markets and investor base, increasing the number of bids and offers on the firm`s shares, or liquidity, increasing the value of the stock, increased media and analyst coverage, price discovery, and above all, to raise cheap and reliable credit that would have otherwise been unavailable domestically. CROSS BORDER LISTING 5 References Chouinard, E., & D`souza, C. (2004) ‘The rationale for cross-border listing’, Financial Markets Department, Bank of Canada Review, 28, 26-29 Coffee, J. (2002) ‘Racing towards the top: The impact of cross-listing and stock market competition on international corporate governance’, Columbia Law Review, 102, 17571831 Khurana, I., Martin, X., Periera, R. (2007) ‘Cross-listing and firm growth’, Review of Finance, 12(2), 293-322. doi:10:1093/rof/rfm031 Lang, M., Lins, K., Miller, D. (2003) ‘ADRs, analysts and accuracy: Does cross listing in the United States improve a firm`s information environment and increase market value’, Journal of Accounting Research, 41(2), 317-45. doi: 10.1111/1475-679X.00107 Licht, A. (2003) ‘Cross-listing and corporate governance: Bonding or avoiding’, Chicago Journal of International Law, 4, 317-45. doi.org/10.2139/ssrn.382660 Pagano, M., Roell, A., Zechner, J. (2002) ‘The geography of equity listing: Why do companies list abroad’, Journal of Finance, 57, 2653-2659. http://www.csef.it/pagano/jf-2002.pdf CROSS BORDER LISTING 6 CROSS BORDER LISTING 7