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1.0 Literature Review

Chapter 2

The decision of cross listing brings many incentives and privileges for firms. These include having shares trade in multiple time zones which gives the listed firms additional capital, reduction in cost of capital, increase in the value of firm, added liquidity, reduced information asymmetry, enhanced customer and supplier base and so on.

Furthermore, High portion of the firms preferred to invest its funds and list their shares in US, UK and European markets is due to the high technology provided by those markets, analytical and advisory guidance of its fund and those markets has experience and ability for adaptation of any new forms or structure.

That was from the advantages side and on the other side the company's boarder decision of cross listing carries some expenses too. Including extra fees might imposed as part of the followed regulations of more disclosure, higher transparency which place pressure on the executives because of closer public and analyst scrutiny in the developed markets.

While most of those studies have examined the cost structure, performance, efficiency, competitive conditions and concentration of the cross listing by foreign issuers on US and other developed countries stock exchange, rarely attention has been focused on cross listed companies in emerging and developing countries from both side, the one which is based in developing country and cross the boarder to be listed in a stock market of developed country or visa versa or even cross boarder of listing the shares and stocks exchangeable between tow markets located in developing nations.

From that view, this study will attempt to review the written literatures on cross listing of US market and extend its review to cover some studies and researches which has been conducted on emerging markets.

1.1 Cross listing in developed markets

Karolyi (1998) reviewed academic literature in his monograph on economic inferences of cross listing decisions, having focus on the “valuation and liquidity effects of the cross listings”. He found a number of benefits associated with cross listing decisions.

He showed positive relationship and positive effect on share prices in the first month of listing. However, after first month, he found that results vary company to company and environment.

Trading volume increases after listing dates and also the liquidity increases as well, but the volume of liquidity depend on trading volume.

Local market beta is reduced considerably. Also, he documented that most important and difficult part of the cross listing process appeared to be the strict disclosure requirements. Mangers find it very challenging and difficult task to fulfil.

Further, he depicted that reconciliation cost and cost of compliance with more stringent accounting and disclosure requirements appear to be an inhibiting factor for those companies which choose not to list abroad.

When a firm list its shares in US stock exchanges, they opt to move from lower transparent environment to a richer and stricter environment. They have to comply with US Generally Accepted Accounting Principles (GAAP) in order to keep themselves in US stock exchanges. US GAAP requires more strict rules and more transparency. Consequently, the information environment of the firms is enhanced. Findings of Lang et al. (2003) and Bailey et al. (2006) are consistent with these arguments. They found that companies go through increased litigation, disclosures, audit and transparency requirements when they choose to list in US.

Lins et al (2005) argued that firms from emerging markets that are American Depositary Receipt (ADR) listed have increased capital access and normally utilise the benefits for expanding their capital base since they face “capital constraints” in emerging markets. Miller (1999) documented that cross listing is also perceived as a marketing tool for some firms. By this, they can increase their foreign sales, improve their relationship with suppliers, and get added customer base. Also, Pagano et al. (2002) cite in their article that Bancel and Mittoo (2001) documented “global marketing and production” as the key motive of foreign listing for 16 percent of European cross-listed companies.

Increasing investor base through cross listing improves “risk sharing” and decreases the cost of capital (Lombardo and Pagano, 1999; Stulz 1999). Karolyi (1998) showed that average firms, listed in US, enjoy increased value of their share prices after listing date, however, effect of foreign listing over stock price is not the same with all firms and it disappears following the year of cross listing. This study is also consistent with the one by Foerster and Karolyi (1998). They further add that the beta (risk of the firm) is reduced for firms after listing which results in reduced cost of capital.

A considerable research on dark side of the cross listing has been made by some researchers, academics and practitioners. For instance, Ananth Seetharaman et al (2002), Bruce M. Bradford et all (2002), Vivekanand Jayakumar (2002), R W Faff et all (2002), and more lately by Melvin and Valero(2009).

As discussed above, Faff et al (2002) examines the ‘investor awareness’ hypothesis and show that the incentives earned from cross-listing outweigh the substantial incremental costs. The examine a sample of 22 Australian firms. They conclude that for Australian firms, the act of cross-listing on a major international exchange does not persuade market recognition effects and is not value creating in the 250-day event window. But it may be more complex. Managers may have insider knowledge of the real value of stock, which is overpriced, by the domestic market and decide to list at an opportune time. The international market, (being the more efficient market) then re-evaluates the fundamentals and reduces the price to the appropriate level. Few studies, however, consider the effects of cross listing on these firms’ primary rivals.

Karolyi (2004) looks at a sample of equity markets from under developed countries and examines the effects of cross-listings on development of the stock market. He finds that cross listed firms enjoy the benefits of international market but domestic firms which do not opt to list abroad suffer seriously. Levine and Schmukler (2007), using a panel of 55 emerging countries find that geographic locations might also influence a firm’s decision where they can cross list. An empirical evidence (Pagano et al, 2002) shows that European companies have increased their cross listing in the American exchanges “while the reverse has happened to” the European markets where the number of cross listing has decreased at the same time. According to their investigation firms which are cross listed to the United States exchanges are generally characterised by highly export oriented, equity funded operating in high tech industries as opposed to the motives of those firms that are cross listed else where in the European markets.

Another article that appears to have carried out similar kind of work is by Bradford et al. (2002). By selecting a window of listing dates for US rivals and rivals of local firms, they examine the effects of cross-listing. They found that US rival firms get positive impact whereas local rival firms don’t. Valero and Melvin (2009) also did a related work.

1.2 Cross listing in developing markets

On the other hands, there is a quit few studies have been conducted on the cross listing in developing countries specially in emerging markets where it might be found that the cross listing or dual listing has taken a place on individual basis among the domestic firms and this referred to various reasons such as: non availability of required data and information, the emerging markets is newly introduced to the cross listing or boarder listing comparing to its peers in developed countries, the varies of rules and regulation acts sometimes as a barriers and obstacles toward listing. Furthermore it's noticeable that the high percentage of the cross listing are categorised based up on geographical area. This refers the mutual interest and interrelation of the economies between the involved markets and its familiarity in the listings' regulations and law, however, the economic similarity also considered. For instance the far east markets (Singapore, Thailand and Hong Kong….etc), The Gulf Cooperation Council (GCC) which consist of six members: Oman, Qatar, United Arab Emirates, Bahrain, Kuwait and Saudi Arabia.

Roosenboom,et al. (2009) agree with this argument, where he made his study based on selected data from 44 different countries and choosing 526 cross listed firms on eight stock exchange considered to be major. The writer examines in his paper different queries:

Is there a relation between the cross listing on different geographical area and the market feedback?

What is the degree of correlation of different value creation factors such as:

Raise the market capital

Higher information and data disclosure.

Investors rights and protection

In his findings he prove there is a direct correlation between the level of information disclosure and the return in US exchange, which ultimately effect positively on the value creation. In other words high disclosure means high return and visa versa.

Moreover, in their results out of 3.5% declared returns of the selected data, firms cross listed in US exchange and comply with disclosure rules take an average portion of 1.3%. London stock exchange held a percentage of 1.1% of the total announced return. The characteristic of London market is related to segmentation's overcome is correlated with high return. On the other side the selected markets in Europe and Japanese market (Tokyo) had insignificant portion of the return. Europe had 0.6% while on Tokyo stock exchange only 0.5% of the total return.

NY'VOLTOVA (2006), has taken a case study on Czech Republic to find the impact of cross listing on its local market. Moreover, he realized there is nearly none liquidity in the market and that play a significant role on a lack of Initial Public Offer (IPO) among the companies. NY'VOLTOVA extends to go further than the effect of cross listing from the firm prospective to cover the effect on the Czech security exchange.

He select precisely a listed firm named Zentia. Biographer conclude in his research that there is a strong positive correlation between cross listing and the investors of domestic listed shares which will play as a motive drive to high percentage of successful IPO.

Vivekanand Jayakumar (2002), however, discovers the effect of cross boarder listing on local firms and stock exchanges having focus on a sample of 14 companies which were listed in US stock exchange and were originally from Chile’s stock exchanges. Two aspects mainly were analyzed, trading volume and price variances. Author found that the post ADR listing volume was significantly greater than the pre ADR listings. He also noticed that investors felt more confidence investing in cross-listed firms than non cross-listed. So, the benefit of the cross-listed firms was on the expense of other domestic firms which were not cross listed.

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