Lower cost of capital, expanded global share holder base, greater liquidity in the trading of shares, prestige and publicity are among other the drivers behind firm’s decision to list their shares abroad. In addition, the afore mentioned benefits surpass possible costs that the firm may experience like listing costs, exposure to legal liabilities, taxes and various trading frictions and reconciliation of financial statements with home and foreign standards.
Existing regulation in local capital market like taxes, information asymmetry and foreign ownership restrictions usually act as barriers and prevent foreign investors entering those markets. In addition, local investors in segmented domestic capital markets in order to undertake the risk tighten to the local market usually require a risk premium.
In order to counter these problem domestic firms can adopt policies such as listing in a foreign exchange in order to offset the negative effects of market segmentation and offer several other straightforward advantages that stem from lower transaction costs.
Further more, cross border listing serves as a mean for foreign investors to save any transaction costs associated with dealing in a foreign currency as well as to effectively bend any existing foreign exchange regulations since they are allowed to trade share in their own currency. Taken into account that cross-listing serves to lower barriers to foreign investment cross-border listing serves effectively in reducing the firms costs related to market segmentation and therefore lowers the cost of external financing.
The ability to prevent shareholders or managers to acquire private benefits from their firms is an important aspect of corporate governance since it represents an important source of potential conflict with public shareholders.
After all the rationale of raising external capital must be towards that it must be raised only after managements commitment to return this capital to investors and not extracting it for the controlling shareholders personal uses.
Agency conflicts could arise in the case where the set of actions of corporate managers or controlling shareholders are not aligned with the interests of public shareholders.
On the other hand, information problems may arise if the management of the company, although having good information about future cash flows, is unable to credibly convince investors about the accuracy of these cash flows.
Managers can alter those problems if they choose to bond themselves in a better governance regime by cross-listing in order to commit not to engage in illegal activities and as a result they can increase the firms’ value since they are able to raise external capital.
Consequently, cross border listing effectively improves a company’s corporate governance regime and this particularly true for such companies that come from countries with inadequate supervision and disclosure standards.
In addition, firms that decide to list their shares on a more demanding exchange in terms of disclosure and corporate governance standards enjoy a better post listing profitability than those that cross list in other exchanges.
Awareness / Investor Recognition
Through cross listing firms can increase investor awareness and expand its potential investor base on their securities more easily than if it traded on a single market. Cross border listing enhances the credibility of a firm by providing information to the local capital market therefore the continue flow of information allow the capital market to make faster and more accurate decisions.
Further more, listing a company’s shares in a major and prestigious stock exchange like NYSE or LSE is accompanied with increased coverage and local media attention which in turn enhances visibility.
In order for a market to be liquid transactions must be executed rapidly and with little impact on prices. Firms pursue cross border listings since it reduces transaction costs via an improvement in market liquidity following the foreign listing.
The relationship between liquidity and cross listing lies upon the global competition for order flow (trading volume). Consequently, exchanges are forced to continuously look for ways to improve their trading processes in order to enhance market quality and maintain or attract order flow.
The benefits that companies seek to gain through cross border listing come as a reduction in the firm’s bid ask price resulting in an increase in firm’s valuation, therefore this improved liquidity is more likely to attract more institutional investors.
In addition, another factor favouring the enhancement of liquidity, especially for listing firms that come from emerging markets, is the existence of informational links between markets. If informational links for example were poor for listing firms that come from emerging markets cross-listing would actually reduce liquidity and increase volatility on the domestic market as informative trades were directed to other markets.
Another benefit that cross border listing provides to foreign companies is the improved terms by which they can raise external capital either because credit constraints are relaxed, or because of the existence of the bonding effect due to which investor protection is increased.
The benefits of cross listing are further increased in the case that either the firm or its shareholders due to financial constraints present in the home market serve as barriers to capital raising.