Cross-listing

Sun Yubei

Article 1:

Corporate governance, agency problems and international cross-listing: a defense of the bonding hypothesis

—— G. Andrew Karolyi

What is cross-listing?

Cross-listing is usually a strategic choice made

by a firm to list its equity shares on one or more

exchanges, in addition to its domestic exchanges.

Motivations

Market segmentatio

n

Investor recognition

Market liquidity

Bonding hypothesis

Market segmentation hypothesis

barriers

Regulatory restrictions

Costs problems

Investor preference…

Information problems

• When the investment barrier is higher:

Market segmentation hypothesis

Segmented market

Share’s owned by

local investors

Higher risk

Super risk compensatio

n

Higher capital

cost

More Cross-listing

• more liquid equity markets could lead to an increase in the liquidity of the stock and a decrease in the cost of capital.

Market liquidity

Signal effectStringent disclosure requirementsImproved information to potential investors and customers

Media attentionGreater analyst coverage

Better analyst’s forecast reports

Higher quality accounting information

Investor recognition

• Investor protection

• cross-listing in higher standard market acts as a bonding mechanism used by firms (that are incorporated in a jurisdiction with poor investor protection and enforcement systems to) commit themselves voluntarily to higher standards of corporate governance.

• In this way, firms attract investors who would otherwise be reluctant to invest.

 

Bonding hypothesis

Disadvantages

pressure on executives for public scrutiny

reporting and disclosure

requirements

scrutiny by analysts in advanced market

Listing fees

• Some financial media have argued that the

implementation of the Sarbanes-Oxley act in the

United States has made the NYSE less attractive

for cross-listings, but recent academic research

finds little evidence to support this.

• The Sarbanes–Oxley Act of 2002 is a United States federal law that set new or enhanced standards for all U.S. public company boards, management and public accounting firms.

• The bill was enacted as a reaction to a number of

major corporate and accounting scandals.  

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• top management must individually certify the accuracy of financial information

• penalties for fraudulent financial activity are much more severe

• increase the independence of the outside auditors who review the accuracy of corporate financial statements

• increase the oversight role of boards of directors

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• Opponents of the bill have claimed it has reduced

America’s international competitive edge against

foreign financial service providers, because it has

introduced an overly complex regulatory

environment into U.S. financial markets.

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Thanks for attention!!