Conventional wisdom has long held that companies cross-listing their shares on exchanges in London, Tokyo, and the United States buy access to more investors, greater liquidity, a higher share price, and a lower cost of capital. In the 1980s and 1990s, hundreds of companies from around the world duly cross-listed their shares.
Yet this strategy no longer appears to make sense—perhaps because capital markets have become more liquid and integrated and investors more global, or perhaps because the benefits of cross-listing were overstated from the start. From May 2007 to May 2008, 35 large European companies, including household names such as Ahold, Air France, Bayer, British Airways, Danone, and Fiat, terminated their cross-listings on stock exchanges in New York as the requirements for deregistering from US markets became less stringent. These moves represent the acceleration of an existing trend: over the past five years, the number of cross-listings by companies based in the developed world has been steadily declining in key capital markets both in New York and London (Exhibit 1). On the Tokyo Stock Exchange, too, some well-known companies, such as Boeing and BP, have recently withdrawn their listings.
Whatever benefits companies might once have derived from cross-listing, our analysis shows that in general it brings few gains but significant costs, at least for most companies in the developed markets of Australia, Europe, and Japan.
Limited benefits—or none
Previous research attributes several categories of benefits to cross-listing. We investigated each of them to see if it still applies now that capital markets have become more global.
Although liquidity is difficult to measure, the trading volumes of the cross-listed shares (American Depositary Receipts, or ADRs) of European companies in the United States typically account for less than 3 percent of these companies' total trading volumes. For Australian and Japanese companies, the percentage is even lower. We did not analyze the trading pattern for UK or Japanese secondary listings, but the US finding hardly suggests that they do much to improve liquidity.
More analyst coverage
Academic research indicates that companies get better or more analyst coverage when they cross-list in the United States—and that potential investors therefore get better information. It is indeed true that cross-listed companies receive more coverage from analysts, but the reason, in part, is that cross-listed companies are on average larger. After correcting for the impact of size, we found that cross-listed European companies are covered by only about 2 more analysts than those that are not cross-listed—a very modest difference, since the average number of analysts covering the 300 largest European companies is 20 (Exhibit 2). Such a small increase is unlikely to have any economic significance.
Broader shareholder base
In an age when electronic trading provides easy access to foreign markets, the argument that foreign listings can give companies a broader shareholder base no longer holds. Furthermore, a foreign listing is not even a condition, let alone a guarantee, for attracting foreign shareholders. It may improve access to private investors, but as capital markets become increasingly global, institutional investors typically invest in stocks they find attractive, no matter where those stocks are listed. One large US investor—CalPERS—has an international equity portfolio of around 2,400 companies, for example, but less than 10 percent of them have a US cross-listing. In fact, because of better trading liquidity in the home market, institutional investors often prefer to buy a stock there rather than the cross-listed security.
Better corporate governance
UK and US capital markets may once have had higher corporate-governance standards than their counterparts in other parts of the world. Those higher standards lent credence to the argument that companies applying for cross-listings in the United Kingdom or the United States would inevitably disclose more and better information, give shareholders greater influence, and protect minority shareholders more fully—thereby improving these companies' ability to create value for shareholders. However, other developed economies, such as the continental member states of the European Union, have radically improved their own corporate-governance requirements. As a result, the governance advantages once derived from a second listing in the United Kingdom or the United States hardly exist today for companies based in developed countries.
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