What are the benefits for foreign firms to cross list in the US markets? Do the benefits remain after the SOX? Do you think the benefits would remain unchanged after the worldwide adoption of IFRS? Foreign companies are always looking for a new country to plant a flag and expand their global market place. One of the ways that they do this in the business world is through a process called cross listing. This practice allows a company owned and operated in Country A to list their company in Country B’ s financial trading exchange.
Some have argued that introduction of Sarbanes-Oxley (SOX) and the ongoing plans of convergence between US GAAP and IFRS have decreased the need for cross listing. While there is a difference of opinion as to whether or not the practice is still beneficial is this day an age; I tend to believe that even if the benefits are not as robust as they once were they are worth the investment Cross listing is when a corporation “lists its equity shares on one or more foreign stock exchange in addition to its domestic exchange. (Wikipedia, 2013) The practice became very popular in the in 80’s and hit its peak in the 1990’s. Research has uncovered a number of benefits and reasons for cross listing. Three models were established to show the benefits of cross listing. They are the market segmentation / investor recognition model, the liquidity model, and the shareholder protection / legal bonding model. (Weisbach, Reese, 2002) When it comes to discussing the benefits of cross listing in the United States. Some of the benefits are as follows: The first is that it will increase the visibility of company in a global scale. Zhu, Small, 2007) Changing the visibility of a company from national to global offers a company a larger audience who may not have been familiar with a company in the past. Second, companies can gain access to liquid markets. (Zhu, Small, 2007) A foreign company in a developing country may not have enough liquidity in its surrounding area for the purposes of investment and growth. Leaning on developed countries with large financial exchanges is a way to tap into those economic resources that issuers are trying to find. Third, is to show that the company is strong. Zhu, Small, 2007) In a competitive industry such as the earning management and the stock market, investors are looking for strong companies to give their money to. It is up to the foreign firms to establish themselves. In some cases an audience with financial analyst that can tout the benefits of investing in your company is a way of building international credibility with the investment world. Finally, cross listing is done in order to follow tougher requirements. This can show that a company is “for real” and worth a look because they are willing to cross list in a country with tough exchange requirements. Zhu, Small, 2007) The overall benefits of cross listing can be summed up in a few words: global exposure that leads to international investments from multiple countries that will fuel growth opportunities. There are critics that say that SOX has affected cross listing negatively due to its strict and stringent rules. In some cases, these are so different from a foreign companies “home” accounting policies that it makes it almost impossible or the firm to comply. Congress has made it clear that “U. S. nvestors are entitled to …protection regardless of…issuer” (Zhu, Small, 2012) SOX was established to protect investors from fraud by companies when they are reporting their performance to the SEC and regardless of cost the U. S. should stand behind those principles and try to keep companies “honest”. In my opinion the same benefits that cross listings had before SOX still exist; the willingness of companies to comply with SOX and reap the benefits of cross listing. Once the convergence between US GAAP and IFRS is complete I still see a benefit to cross listing.
However, by sheer transition to IFRS a company would lose the benefit of stricter exchange requirements. The move would require changes to legal and financial interpretations of accounting standards. However, the true consequences of this move to a global standard could not be determined until the framework of these standards was complete and implementation has taken place with U. S. and foreign firms. In closing, I consider cross listing a beneficial practice for foreign firms. I agree that we are living in an Internet world where I can invest in German company with a few clicks of a mouse.
I also agree that we are heading towards a global accounting standard that will level the playing for all companies of all sizes in all countries. However, the benefit of cross listing that I see never going away is the visibility. Having a tangible presence in developed countries is key to growth. Having a presence in developing countries is a stepping-stone to bigger growth opportunities in the future. Bibliography “Cross Listing. ” Wikipedia. Wikimedia Foundation, 17 Jan. 2013. Web. 20 Jan. 2013. Dobbs, Richard, and Marc Goedhart. Why Cross-listing Shares Doesn’t Create Value. ” McKinsey Quarterly Autumn 2008 29 (2008): n. pag. Print. Reese, William, Jr. , and Michael Weisbach. “Protection of Minority Shareholder Interests, Cross-listings in the United States, and Subsequent Equity Offerings. ” NBER. Journal of Financial Economics, 2002. Web. 20 Jan. 2013. Zhu, Hong, and Ken Small. “Has Sarbanes-Oxley Led to a Chilling in the U. S. Cross-Listing Market. ” Has Sarbanes-Oxley Led to a Chilling in the U. S. Cross-Listing Market. The CPA Journal, Mar. 2007. Web. 20 Jan. 2013.