Cross Listing - Literature review Example

? Cross Listing Table of Contents Table of Contents 2 0 Literature Review 3 1 Introduction 3 2 Definition of Cross Listing 3 3 Reasons for Cross Listing 4 1.3.1 Market Segmentation Theory 4 1.3.2 Liquidity Theory 5 1.4 Benefits of Cross Listing 5 1.5 Cost of Cross Listing 6 1.6 Conclusion 7 Reference 9 1.0 Literature Review 1.1 Introduction Chi and Zhang (2010) defined cross-listing as the situation where companies list their shares in more than one foreign stock exchange in addition to listing in domestic exchange. According to these scholars, companies go for cross listing for raising capital from global investors and enhance visibility in foreign market. In this portion of the research paper, the researcher will determine the reasons, benefits and costs for companies which have cross listed or are planning to cross list their equities in foreign markets. The researcher will take the help of the research work of previous research scholars in order to shed light on the topic. 1.2 Definition of Cross Listing Karolyi (2012) defined cross-listing or “dual-listing’ as the strategic measure taken by companies to list its equities in exchange of foreign countries and the process may or may not involve secondary or initial capital rising. The scholar has also pointed out that cross-listing involves customization or changing the disclosure measure, transparency, corporate governance requirement in accordance with nature of the business environment of the foreign country where equities are going to be listed. Jian et al. (2011) also pointed out that cross-listing is basically a strategic choice rather being a mere accounting trick performed by top level management of the firm to internationalize its business without involving any traditional international expansion policy such as merger & acquisition, exporting, licensing etc. In such context, Karolyi (2012) and Jian et al. (2011) agreed with the fact that cross-listing requires involvement of multiple capital market participants such as accountants, investment banks, custodian agency which undertakes clearance and settlement activities, strategic advisors etc. Hence it can be assumed that cross-listing is a lengthy and complex process. Karolyi (2012) highlighted the fact that benefits like getting access to a larger market, attracting cash rich investors, greater diversification of ownership base, opening door for liquid trading can influence a firm to go for cross listing. However, careful analysis of the research work of O’Connor (2009) shows that it is very difficult to assign one reason which might influence firms to go for cross listing. O’Connor (2009) has pointed out that nature disclosure in cross-sectional setting can even influence cross-listing decision. In such context, the study will shed light on empirical reasons behind cross listing with help of previous research work of research scholars. 1.3 Reasons for Cross Listing Cross-listing is one of the hotly debated topics among research scholars and identifying exact reason behind cross listing is a long debated issue among research scholars. Charitou et al. (2008) identified the fact that none of the research scholars have ever tried to understand the motivation behind cross- listing from managerial perspective. Charitou et al. (2008) argued that executives go for cross-listing in order to get higher equity based compensation. Hence, it can be assumed that listing equity of a firm in exchange of foreign markets is strategic decision which is taken by executives in order to fulfill the interest of shareholders. Listing equities in foreign exchange attracts foreign investors to invest money on the shares of the company and as a result of the investment of foreign investors, the firm gets able to provide better return to shareholders and subsequently board executives also get higher equity based compensation. Dodd (2013) pointed out that cross-listing helps firms to overcome the market segmentation, limitation of attracting investors and improvement of stock liquidity but these factors are not the only motivators behind the firm’s decision to go for cross listing. Ultimately cross-listing is a complex process which is subjected to market specific risks and hence the motivating factor should be strong enough to encourage a firm to go for cross listing. Although, from the viewpoint of perfect market, cross listing has no significance but in real world scenario, cross-listing is vital decision due to investment barrier in international market segmentation. Careful analysis of the research work of Dodd (2013a and 2013b) and other research scholars such as Zhang (2010) reveals the following reasons which lure firms to cross list equities in security exchange of foreign countries. 1.3.1 Market Segmentation Theory Dodd (2013a) pointed out that the concept of cross listing is not a contemporary issue rather there are evidences which show that scholars discussed the benefits of cross listing even during 1970’s. Roosenboom and Van Dijk (2009) pointed out that market reaction for cross listing differs in accordance with the nature of business environment in domiciles. However, Dodd (2013a) argued that companies go for cross listing in order to overcome the segmentation barriers in domestic market. The scholar also argued that cross listing helps companies to evade market imperfections such as investment regulatory restrictions, high tax charges etc. Sometimes due to stringent regulatory policy of domestic countries, investors of the firm are restricted from trading particular securities which ultimately affect the market return of the firms, to overcome such imperfection, firms go to cross list securities in those markets where they can operate more profitably. However, Lin (2011) tried to understand the reasons behind cross listing from USA GAAP model perspective and found that cross listing helps companies to increase access of stocks to investors which is otherwise less advantageous due to investment barrier in domestic market. Dodd (2013a) pointed out that increase in investing opportunity to investors caused by cross listing also increases risk sharing, size of investor base and decreases cost of equity capital. 1.3.2 Liquidity Theory Dodd (2013a and 2013b) argued that cross listing can help firms to overcome problems such as poor stock market liquidity caused by regulation in domestic market. Cross listing not only helps the firm to attract more investors or trading hour increase but also fillip the competition among traders, which in turn positively influences trading in domestic market. Such assumptions are held true by the argument of Dodd (2013a and 2013b), that cross listing decreases the cost of equity capital through reduction of illiquidity premium. Uzunkaya (2012) found mixed result regarding the assumption that cross listing increases stock liquidity, probably due to the fact that the researcher emphasized more on stock risk associated with cross listing. Majority of researchers found that cross listing might increase the stock liquidity in terms of trading cost reduction, reduction in zero return frequency and enhancement in trading volume. It is evident from the above discussion that there can be more than one reason for cross listing when it is viewed from perspective of firms. Apart from overcoming market segmentation or enhancement of liquidity, there are micro benefits such as tax evasion, trading cost reduction, trading volume enhancement etc which can be associated with cross listing. 1.4 Benefits of Cross Listing Doidge et al. (2009) investigated the benefits of cross listing for foreign firms which decide to list their equities in USA stock exchange. Doidge et al. (2009) argued that cross listing is subjected to direct and indirect constraints such as law enforcement regarding the disclosure of financial results of firms in foreign market, agency cost, shareholder obligation etc. However, Chan et al. (2010) investigated general benefits for domestic firms going for cross listing in USA market. According to these research scholars, listing equities in USA stock exchange provides better protection to shareholders because of stricter regulatory environment of USA. Better protection to interest of minority shareholders obviously brings down the cost of capital of firms (Chan et al., 2010). Group of some researchers also found that cross listing might decrease the voting right premium for minority shareholders which ultimately help the firms. Doidge et al. (2009) argued that the assumption of high return due to cross listing might not true because in many cases it has been found that firms got negative stock return after cross listing. Hence, there is significant amount debate when it comes to measuring the benefits of cross listing in terms of better return. Hillman and Wan (2005) pointed out that extreme liquefaction of asset, lack of control of firms over very large shareholder base and political pressure are the key reasons for the declining nature of return after cross listing. Banalieva and Robertson (2010) emphasized on minimization of negative investor perception when a multinational organization go for cross listing. The scholars duo have also argued that companies of developing countries wants to cross list securities in exchange of developed countries due to their urge to move from a riskier corporate governance environment to a secure environment which is governed by well defined corporate governance codes. Banalieva and Robertson (2010) blamed the highly regulated capital market of developing countries which is plagued by the impractical intervention of government which ultimately increases the transaction cost for domestic companies while cross listing securities in developed countries alters the situation for these firms. It is evident from the above discussion that there are multiple benefits such as reduction in agency cost, reduction in transaction cost, enhancement in shareholder base, enhancement of stock liquidity, protection of interest of shareholders, diversification of financial portfolio etc which can be realized by firms when they cross list their securities. However, certain cost factors are associated with cross listing and next portion of the study will discuss about this issue. 1.5 Cost of Cross Listing Berkman and Nguyen (2010) showed doubt over the benefits of cross listing in comparison to its pertinent cost, for example, they highlighted the fact that firms experience drop in foreign-to-domestic trade volume after cross listing. However, Hail and Leuz (2009) argued that cross listing is directly linked with the cost of capital for firms. Silva and Chavez (2008) estimated liquidity cost in terms of implicit, explicit and opportunity cost associated with cross listing. These scholars argued that although cross linking can enhance stock liquidity but there are possibilities that cross listing may cause significant increase of liquidity cost. Research work of Berg (2012) also found that significant amount of valuation difference exist even for companies listing their equities in security exchange of China and Hong Kong. Such valuation difference may be caused due to the difference of liquidity cost. Silva and Chavez (2008) found that nature of regulatory environment in foreign countries determine the liquidity cost for cross listing, for example, trading cost in Latin America is 8% higher due to existence of considerable amount of liquidity difference. Shi et al. (2012) highlighted a conjectural model consisting of institutional theory, bonding theory and agency theory. Hillman and Wan (2005) argued that cross listed companies face pressure from both home and foreign government. For example, suppose a firm A from a country (which is plagued by poor corporate governance measures) wants to cross list its equities in foreign country (which is blessed with strong corporate governance codes), in such situation, managers of the company will face pressure from foreign government to disclose its financial results properly and subsequently proprietary costs for the company increases. However, it is expected that agency cost for firm will decrease when it lists its securities to a secure stock exchange market but same cannot be said for bonding cost in cross listing. Shi et al. (2012) argued that legal enforcement of foreign countries against cross listed firms of developing countries decide the legal aspect of bonding cost. Bonding cost for cross listed firm decreases as it enters a market which is blessed with strong legal enforcement system. Cross listed firms can even decrease the reputational bonding cost by securing the interest of minority shareholders. It is evident from the above discussion that cross listing is subject to more than one type of cost and such cost varies in accordance with the regulatory environment of foreign countries. Nature of regulatory environment can also affect the overall cost difference in cross listing. 1.6 Conclusion Throughout the above discussion, the researcher has tried to understand the reasons, benefits and cost of cross listing for firms. The researcher found, in most of the cases, reasons behind cross listing can also serve as its empirical benefits. The study has also found that, liquidity cost, agency cost, bonding cost and institutional cost are pertinent cost variable for cross listing. Based on the above literature review, it can be said that there is sufficient argument exist when it comes to realizing the benefits of cross listing among research scholars’ hence further research effort is needed from future researchers to clear out confusion regarding cross listing. Reference Banalieva, E. R. and Robertson, C. J., 2010. Performance, diversity, and multiplicity of foreign cross-listing portfolios. International Business Review, 19, pp. 531–547. Berg, M., 2012. Cross-listing and valuation differences between the Hong Kong and the Chinese stock markets. [pdf] Available at: [Accessed 18 June 2013]. Berkman, H. and Nguyen, N. H., 2010. Domestic liquidity and cross-listing in the United States. Journal of Banking & Finance, 34, pp. 1139–1151. Chan, K. C., Wong, H. and Wong, A., 2010. Performance of Foreign Firms After Their US Listing Upgrades. The Business Review, Cambridge. 15(1), pp. 46-51. Charitou, A., Louca, C. and Panayides, S., 2008. Why do Firms Cross-List? The Flip Side of the Issue. [online] Available at: [Accessed 17 June 2013]. Chi, W. and Zhang, H., 2010. Are stronger executive incentives associated with cross-listing? Evidence from China. China Economic Review, 21, pp. 150–160. Dodd, O., 2013a. Why Do Firms Cross-List Their Shares on Foreign Exchanges? A Review of Cross-Listing Theories and Empirical Evidence. [online] Available at: [Accessed 18 June 2013]. Dodd, O., 2013b. The Valuation Effects of International Cross-Listings. The Business Review, 21(1), pp. 59-66. Doidge, C., Karolyi, G. A., Lins, K. V., Miller, D. P. and Stulz, R., 2009. Private Benefits of Control, Ownership, and the Cross-listing Decision. The Journal of Finance, LXIV(1), pp. 425-466. Hail, L. and Leuz, C., 2009. Cost of capital effects and changes in growth expectations around U.S. cross-listings. Journal of Financial Economics, 93, pp. 428–454. Hillman, A. and Wan, W., 2005. The determinants of MNE subsidiaries’ political strategies: Evidence from institutional duality. Journal of International Business Studies, 36(3), pp. 322–340. Jian, Z., Tingting, Z. and Shengchao, C., 2011. Cross listing, corporate governance and corporate Performance: Empirical evidence of Hong Kong-listed Chinese companies. Nankai Business Review International, 2(3), pp. 275-288. 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Journal of Banking & Finance, 32, pp. 420–433. Uzunkaya, M., 2012. The Effect of International Cross-listings on Stock Risk. Journal of Applied Finance & Banking, 2(6), pp. 201-215. Zhang, X., 2010. Three Essays on Corporate Governance, Risk and Cross Listing. [online] Available at: [Accessed 18 June 2013]. Read More