THE UNIVERSITY OF ECONOMICS HO CHI MINH CITY

THE INTERNATIONAL SCHOOL OF BUSINESS

(UEH - ISB)

SUBJECT: INTERNATIONAL FINANCIAL MANAGEMENT

INSTRUCTOR:
GROUP 6

TABLE OF CONTENTS:
ABSTRACT: 2
INTRODUCTION: 2
Definition: 2
History: 3
Purposes: 3
FINANCIAL INSTRUMENT: AMERICAN DEPOSITORY RECEIPTS (ADRS) 3
Definition of ADRs: 3
Benefits of ADRs: 5
Risks of ADRs 6
BENEFIT OF CROSS-LISTING 6
1. Eliminating the barrier of market segmentation/ Investor Recognition Hypothesis 9
2. Increased Market Liquidity (Liquidity hypothesis) 11
3. Increasing the protection for investors (bonding hypothesis) 12
Cost of Cross-Listing in the U.S 13
Costs of Cross-Listings in the United States 14
CONCLUSION 16
REFERENCES 17

ABSTRACT:
Cross-listing is one of the most common concepts in international economics;
therefore, understanding and research on cross-listings is very important in gaining
international financial management. Within the context of this report, we provide a basic
report on the definition, objectives and development of the cross-listing. In addition, we will
analyze cost, benefit and related issues about it.

INTRODUCTION:

Definition:

Cross listing is when company lists their common shares in a foreign currency other
than the home country’s one. Accounting policy, initial filing and minimum number of
shareholders, minimum capitalization and other shareholders are fundamental factors that
need to be taken into account in determining whether a company is acceptable; in fact, these
factors are based on available regulations that apply to companies already on the previous
list. This concept is diverse under forms of American Depositary Receipt (ADR), European
Depositary Receipt (EDR), global depository receipt (GDR) (also referred to as international
depository receipt), and Global Registered Shares (GRS).

History:

Studies show that over the past decade, many European-based companies such as Air
France, British Airways, Danone, etc. stopped their cross-listing at The U.S because the
market here is no longer attractive. In 1997, the number of stocks that were cross-listed was
nearly twice higher than in 2011. In fact, Lasfer has expressed the view that cross-listing is a
matter of controversy, in particular, the question is whether cross-listing actually brings added
benefits to the business. To explain this phenomenon, many people assert that the more cross-
listing, the more expensive but the benefits brought are not really significant.

Purposes:

“Why do firm cross-list?”. Doidge et al. (2004) point out that the main driving force
for cross-listing of companies is their desire to enter the larger market and increase their
opportunities for growth. According to Karolyi (1998) cross-listing can also improve a firm’s
ability to effect structural transactions abroad such as stock swaps acquisitions and other
tender offers. Baker (1992) further argued that increased visibility can boost corporate
marketing efforts by broadening product identification among investors and consumers in the
host country.

FINANCIAL INSTRUMENT: AMERICAN DEPOSITORY RECEIPTS (ADRS)

Definition of ADRs:

ADRs are securities that represent shares of non-U.S. firms that are held by U.S.
depositary bank outside the United States, providing an opportunity for non-U.S. companies
to access to the U.S capital markets. The bank serves as the transfer agent for the ADRs,
which are traded on the listed exchanges in the United States or in the OTC market. This will
depend on its level of compliance with US securities regulations. Besides that, ADRs also
allow investors in the U.S. to invest in companies on a more global basis (Risk, 2018).

The first ADRs began trading in 1927 J.P. Morgan as a means of preventing some of
the risks, delays, inconveniences, and expenses of trading the actual shares. According to
the Bank of New York ADR index, there are more than 450 companies available today which
represent from 39 countries listed on the NYSE, AMEX, and NASDAQ (Spaulding,
2018). There are also 39 country indexes:

Sponsored and unsponsored ADRs:

ADRs can be sponsored or unsponsored. A sponsored ADR is created by a bank

issuing on behalf of a foreign company whose equity serves as the underlying asset. The
sponsoring bank often provides ADR owners with services, including investment information
and the annual report translated into English. Sponsored ADRs are the only ones that can be
listed on the U.S. stock markets, (Lợi, 2018). Besides that, unsponsored ADRs are created by
a U.S. investment bank or a brokerage that buys the shares in the country where the shares
trade, deposits them in a local bank. However, unsponsored ADRs can only trade on the
over-the-counter market (OTC).

There are 3 basic levels of sponsored ADRs including:

Level I - includes shares traded on the OTC market. At this level, companies do not have to
comply with strict regulations such as not complying with U.S. GAAP. However, the liquidity
of these shares is also lower.
Level II - includes listed shares on the official stock market, such as the NYSE or AMEX, but
listed companies are not allowed to issue new shares on the market. At this level, companies
are not fully compliant, but have to convert certain financial statements into U.S. GAAP.

Level III - is the highest level, listed companies, as well as new stock offerings on the market.
Foreign issuers must comply with all regulatory requirements for listing and distributing them
in the same manner as U.S. firms (including compliance with U.S. GAAP), (Spaulding,
2018).

Level II
-Listed on the New York Stock
-Partial comply with GAAP
Level III
-Listed on the New York Stock
-Completely comply with GAAP
-Allowed to issue new shares

Level I -Not allowed to issue new shares

-Traded on the OTC market

-Not comply with U.S. GAAP

Benefits of ADRs:

ADRs offer many advantages for not only U.S. investors but also non-U.S. investors.
Especially for non-U.S. investors, they can achieve many benefits. Firstly, ADRs are
denominated in dollars, traded on a U.S. stock exchange, and can be purchased through
regular broker, whereas trading in the underlying stocks would likely require the investor to
set up an account with a broker, make a currency exchange and arrange for the establishment
of a custodial account.

ADR investors can receive dividends on the underlying shares that have already
converted to dollars by the custodian. By contrast, for investment in the underlying shares,
investors need to collect the foreign dividends and make a currency conversion. Moreover,
there has a difference in tax treaties between the United States and home countries. ADR
simplifies tax calculations. Trading in shares of foreign company in ADR would lead to tax
under US jurisdiction and not in the home country of company (About, 2018).

ADRs are registered securities that provide for the protection of ownership rights,
whereas most underlying stocks are bearer securities. ADRs allow investors to invest in
foreign companies without having to worry about foreign trading practices, different laws,
accounting rules, or cross-border transactions”.

ADR holders give instructions to the depository bank as to how to vote the rights
associated with the underlying shares. Voting rights are not exercised by the depository bank
in the absence of specific instructions from the ADR holders.

Risks of ADRs

Although ADR transactions are in U.S. currency, there still has a currency exchange
risk. The amount of dividend in U.S. dollars will be reduced if the dollar falls. Therefore the
market price of the ADR will drop. Furthermore, there is also a political risk. It could be
affected by changes in the law of the country. This makes foreign countries unfavorable
because of the fact that the ADR is still valued by the foreign stock (About, 2018).

BENEFITS OF CROSS-LISTING:

Overview of its benefit

Since 1980s, the capital markets have become an globally integrated trend in the
world. From Exhibit 13.7, it shows the number of tatal company listed on various national
stock exchanges in the world and the analysis of the listings between domestic and foreign
for 2009. It also illustrates the number of new listings and the domestic and foreign split for
2009. Some foreign companies are listed on all national stock exchanges from developed
countries. Actually , the London Stock Exchange has more domestic than foreign listings,
while on the Mexico Stock Exchange foreign listings accounted for 100 percent of the total.
 There are many benefits so that a firm can choose cross-listing:

First, it can be seen as the tool to help the investor base expand his firm’s stock. As a
result, it can increase the potential demand, which helps market stock price increase. In
addition, price liquidity of this security will be increasing thanks to both higher demand
market and a larger investor base.

Second, cross-listing creates name recognition as the secondary market for the
company’s shares. This help that enterprise “from emerging market countries with limited
capital markets to cross-list their shares on exchanges in developed countries with enhanced
capital market access.” ( International Fiancial Management, Eun and Resnick)

Third, cross-listing not only enhances the company’s name but also its products in
foreign markets.

Fourth, “ cross-listing into developed capital markets with strict securities regulations
and information disclosure requirements may be seen as a signal to investors
that improved corporate governance is forthcoming.” ( International Fiancial Management,
Eun and Resnick)

Fifth, cross-listing may reduce the possibility of a hostile takeover of the firm.

Finally, cross-listing may improve a company’s corporate governance and

transparency.

Therefore, from these reason above, many firms often choose cross-listing in another
country nowadays, especially in the United States. According to Fanto and Karmel (1995),
with 95 companies from more than 20 countries that had cross-listing in the US market, the
motivations that help those company invested here are:

● It is a part of business strategies: creating advantages for those who want to

gain the US stock market share. Additionally, cross-listing in America can be
seen as the commitment to advertise company image as well as its product
with low costs.
● Taking advantages of the US stock market: because it is the largest and the
most prestigious stock market around the world

Exhibit 17.7 illustrates a incomplete list of foreign stocks that are cross-listed on the
New York Stock Exchange (NYSE). Many famous international companies like
BHP, Nokia, Siemens, Honda Motor, Telmex, ING, Unilever, BP, and Vodafone are all
listed and traded on the NYSE.
1. Eliminating the barrier of market segmentation/ Investor Recognition Hypothesis

The world is changing day by day and it does not look like some unrealistic
hypothesis in financial theory models or some cases that not only is capital market perfect,
but it does not have any barrier between all investors all over the world. Unfortunately, real
world has many of them. For example, a plenty of foreign investors are restricted in some
portfolios, or their differences in accounting and financial statements. That’s why many
foreign investors choose cross-listing in NYSE, London Stock Exchange (LSE) or other
foreign stock exchanges. Consequently, they may reduce their risks and costs.

According to the market segmentation hypothesis, the valuation gain around the
cross-listing thus depends on the degree to which the home country is integrated in the world
market. Miller (1999) shows that cross-listings on US markets are connected with
substantially higher announcement returns for firms from emerging countries than for firms
from developed markets. Lins et al. (2005) finds out the significance of get access to external
capital markets, especially for emerging markets firms. Karolyi (2004) emphasizes that the
expansion of ADR programs originating from 12 emerging markets is associated with greater
integration with world markets.
 In addition,the market segmentation hypothesis also implies the logic that net benefit
includes both lower cost of capital and increasing liquidity. This enables the firmsto get
access of their shares to non-resident investors. Hail and Leuz (2009) believe that investment
of cross-listing on the US base exchanges (such as AMEX, NASDAQ, NYSE) helps to
reduce cost of capital between 70 and 120 points in average. Moreover, the bonding
hypothesis explains a plenty of reasons why many companies from emerging econimoies and
weaker environment have the choice of cross-listing in a stricter institutional environment.
Additionally, these firms often cross-listed shares in the US or other foreign exchanges that
have higher listing standards and stricter institutional environment compared with their home
countries. “Lau et al. suggest that reduced home bias and greater global risk sharing would
help reduce the cost of capital. In addition, they report that accounting transparency also
helps reduce the cost of capital.” (International Fiancial Management, Eun and Resnick,
p440).

A study by Doidge, Karolyi, and Stulz (2001) shows that if a country need to raise its
capital, it will choose to pursue U.S listing. It is also mentioned that with other things beings
equal, the value of firms cross-listing US exchanges is higher 17% on average than non cross-
listing firms. For instance, it reveals that “Canadian stocks cross-listed on U.S. exchanges are
priced in an integrated market, and segmentation is predominant for those Canadian stocks
that are not cross-listed” (Mittoo,1992). An argue by Lang, Lins, and Miller (2003) illustrates
that cross-listed shares can increase firm value thanks to improve the firm’s overall
information environments. In addtion, from report “ Why do Chinese firms cross-list in the
United States?”, merging and acquisition are likely to be more sucessful for firm cross-
listing in US exchange than those do not. Aditionally, cross-listed firms have higher
compensation levels for their CEOs (about $20m in smaller companies) compared with non
cross-listed firms ( approximately $250,000 in bigger companies).

2. Increased Market Liquidity (Liquidity hypothesis)

The Liquidity Hypothesis was established by Amihud and Mendelson (1986), states
that “Since U.S. capital markets are very liquid, firms who cross-list can raise capital at a
lower cost than at home, especially companies from emerging markets”.

Increasing liquidity is one of the main benefits of cross listing. Liquidity of an asset is
measured by the cost of time and money spent to transfer it into cash. For stocks, the listing
on the United State market not only expanded the stock transaction market with more
investors but also helped to set the stock price accurately based on the supply-demand. In
addition, listed companies in US market with quality regulations, good corporate governance,
good legal protection, domestic and foreign investors protection will attract many investors
from outside. In other words, Cross-listing in Unites States will increase liquidity for the
asset. Moreover; cross-listing in US allow companies to trade its shares in numerous time
zones and diverse currencies. This increases the company’s liquidity and gives it ability to
raise capital. Foreign companies that cross-list in the United States do so through American
depository receipts (ADR). This term applies to foreign companies which want to list their
stocks on United States-based exchanges.

A commitment to increasing after cross-listing can reduce selection among buyers and
sellers of the firm’s shares increasing liquidity (Kyle 1985; Glosten and Milgrom 1985).
Nowadays, U.S. investors control about 50% of the total global assets. Therefore, cross-
listings in the U.S. provide firms with access to a large pool of potential investors. Cross-
listing contributes to the stock value by increasing the liquidity of the shares. Chouinard and
D‟Souza (2004) explain that “expected returns positively correlate with liquidity, measured
in terms of the bid-ask spread. Cross listing in US generates liquidity, which in turn increases
the share value of a company”. According to Chouinard and D‟Szouza (2004), “enhanced
market competition might lower the spread and therefore improve liquidity”

Amihud and Mendelson 28 (1986) suggest that “Companies who reside on capital
markets with poor liquidity should cross-list in US on exchanges with superior liquidity,
which would decrease their liquidity risk premium and expected return”. They claim that “the
liquidity risk and expected returns will decrease and, consequently, share price will rise”.

3. Increasing the protection for investors (bonding hypothesis)

The bonding hypothesis stated that “firms from countries with poor protection desire
to respect the rights of shareholders by listing in a jurisdiction with higher scrutiny, tougher
regulation, and better enforcement”. Better investor protection is seen as one of the factors
that explain the increase in stock returns following cross-listing, because U.S. and home-
country investors are more willing to invest in a foreign firm that has tied its hands in this
way. Cross-listing is used by companies that are incorporated in a jurisdiction with the
reduction of investor protection. These companies commit to high standards of corporate
governance. Investors will feel safe to invest in these companies because their investments
are protected
 Coffee (1999), Stulz (1999), and Black (2001) argue that “firms can bond themselves
by cross-listing on a stock exchange with higher standards of investor protection in order to
protect minority shareholders”. Doidge et al. (2004) model the cross-listing decision as a
trade-off between private benefits of control and taking advantage of growth opportunities by
using bonding to reduce the cost of capital. They show that “companies with a cross-listing in
the US have a higher valuation than non-cross-listed company, especially when they have
high growth opportunities”. Reese and Weisbach (2002) and Lins et al. (2005) show that
“cross-listings by firms from countries with weaker investor protection lead to greater
subsequent equity issues and a relaxation of capital constraints”. Doidge (2004) finds that
“the voting premiums of firms with dual class shares are considerably lower for cross-listed
firms”. Chung (2006) argues that “investor protection also affects the liquidity of ADRs.

Recent research argues that “a principal motivation for cross-listing in US is investor

protection”. Coffee argues that “Large firms can choose the capital market like United States
on which they will cross-list, they can opt into governance systems, disclosure standards, and
accounting rules that may be more rigorous than those required in their jurisdiction of
incorporation”. Hence, Coffee claims that “the most visible contemporary form of migration
seems motivated by the impulse to opt into higher regulatory or disclosure standards and thus
to implement a form of bonding under which firms commit to governance standards more
exacting than that of their home countries.” According to Coffee, “the application of U.S.
securities law significantly constrains opportunism by controlling shareholders”. Hence, the
bonding hypothesis argues that “companies from countries with low investor protections can
bond themselves with the U.S. where investor protections are high”.

Shareholders and managers (capital users) often have irrelevant information, so listing
in the market has a better information environment, better monitoring mechanism. Efficient
market will be very benefit the shareholders in supervising the use of capital. So to list
abroad, the beneficiary is also the current shareholders.

4. Volatility spillover effect occurs when a company’s stock is traded in the United
State.
When a company’s stock is traded in the United Stated, there can be volatility spillover from
those markets. Volatility spillover effect occurs when changes in price or returns volatility in
one market produce a lagged impact on volatility in one or more other markets. In this
section, there is the testing about volatility spillover effects from the United Stated to less
developed or developing countries. With the increase of integration between markets; the
financial crisis, emerged in different countries at different periods in the global markets, not
only affected a single country but through spillover and contagion effects has reached levels
that could affect more than one country. These days, the emerging market economies play
more and more important role in the global economy. This might lead to the economists be
not only interested in the developing markets but also in the emerging market economies.
This study from US market to developing countries (such as Vietnam stock market) will
provide some important information for businesses, investors and policy manager. More
importantly, if the emerging markets are closely linked to developed markets, investors in
developed markets should look for other markets to diversify their portfolio to reduce risk
while emerging market investors can forecast risk based on volatility analysis in developed
markets and policymakers in these less developed markets need to a better understanding of
market movements in the world market to manage risk in the domestic market to ensure a
stable development.
The fact remains that short-horizon and long horizon investors may have different
investment objectives. Short-horizon investors will focus on the correlation between stock
returns and high frequencies, which means short-term variability (the cycle of data series is
small). In contrast to this, long horizon investors will focus on the correlation between stock
returns and low frequencies, which means long-term variability (the cycle of data series is
large) (Gradojevic, 2013). Thus, analyzing the correlation of the variability between markets
in the short or long term independently will be essential for early and long-horizon investors
to further analyze for better risk management and diversification investment portfolio.
In detail, the study of volatility spillover is essential for two reasons. Firstly, market
efficiency, which is higher level of spillovers indicates lower level of efficiency. Secondly,
volatility spillover also indicates towards the level of market integration. As an effect, the
higher the interdependence among markets, the higher will be the cross-market spillover and
greater would be the chances of contagions occurring in the event of a financial crisis.
Definitely, it can affect return of portfolio which has implication on daily risk management,
portfolio selection, and derivative price. However, movement of volatility could help in
understanding shock transmission in global financial system. There is effect that affect
volatility of financial market and assets. In addition, once a company’s stock is made
available to the United Stated, they might acquire a controlling interest and challenge the
domestic control of the company.
5. Challenges cross-listed company might face.
 Finally, cross-listed company can face many challenges such as complying with
multiple regulation in the countries and lacking legislations in physical infrastructure that are
diverse in every nation. This can raise a problem for the firm in which policies conflict
happens between different countries. This will be a problem in that strong corporate culture
cannot be built. There is a considerable cost related to these challenges. The fact that if the
lower cost of capital from eliminating investment barriers, is the main encouraged, all firms
for which capital would fall sufficiently to justify the costs of overseas listing would show
this trend. Moreover, investors will enjoy greater protection from the United States regulators
who will keep the company’s management under control. The investor will be able to
diversify his investments in the listed firms and reduce his risks. The level of corporate
governance in developed markets is assumed to be better than in developing markets. For
instance, USA capital market has higher corporate governance standards than their
counterparts in other part of the world. Those higher standards lent credence to the argument
that firms apply for cross-listing in developed markets would disclose more information, give
shareholders greater influence, and protect minority investors more fully so improving these
firms’ ability to create value for shareholders. However, many economies have radically
improved their own corporate governance requirements. Therefore, the governance
advantages once started a second listing in the developed markets hardly exist today for firms
based on developing markets
Cavico Vietnam Company announced to become the first company to list its shares at
NASDAQ USA with stock code CAVO on September 18th, 2009. However, Cavico had left
the world's second largest stock exchange two years later because of violations of regulations
disclosure of financial statements, not meet the minimum requirements on liquidity and stock
value. In addition, the accounting records in accordance with Vietnamese law are different
from the standard accounting reports of the international. Therefore, Vietnamese companies
will have to spend a lot of time and money to complete all accounting books in accordance
with international accounting standards if they wish to list overseas.

CONCLUSION:
Cross-listing is an easier way for foreign investors to own shares in these firms and;
hence, “risk is more widely shared”. Hail and Leuz state that as a result, “cross-listed firms
should have a lower cost of capital and positive stock returns”. Although, some of the
evidence is consistent with the segmentation hypothesis (e.g., Foerster and Karolyi, 1999;
Miller, 1999), Hail and Leuz claim that ”recent research questions the extent to which market
integration alone can explain the cross-listing effects” (Doidge et al., 2004; Karolyi, 2006).
Hail and Leuz claim that “if the Market Segmentation Theory is correct, the major number of
cross-listings should originate primarily from countries where risk sharing benefits and
diversification gains are the largest”. Nevertheless, as stated by Hail and Leuz, “several
studies, such as the study by Sarkissian, Schill and Lee show that this hypothesis is not
empirically supported”.

REFERENCES:

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Nairobi Securities Exchange. Available from:
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(PDF) The Key Reasons for Cross - Listing in East African Stock Exchanges by Firms Listed in the
Nairobi Securities Exchange. Available from:
https://www.researchgate.net/publication/271316704_The_Key_Reasons_for_Cross_-
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[accessed Jul 11 2018].

S.R. Foerster and G.A Karolyi, “The effects of market segmentation and investor recognition on asset
prices: Evidence from foreign stocks listing in the U.S.”

Gradojevic, N. (2013). Causality between Regional Stock Markets: A Frequency Domain

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http://doi.org/10.2298/PAN1305633G
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san-chung-khoan-my~34752

With today’s rapid globalization, it makes sense that investors want the ability to invest in

foreign entities. Therefore, cross-listing is the one of the best way for them to make their

investment in foreign shares. Cross-listing brings many advantages that overweight its

disadvantages. It can be seen as a mechanism that overcomes market segmentation as well as

barriers, offerings opportunity for foreign firms to access to U.S stock market. Furthermore,

businesses can gain benefits when their stocks are listed on the US stock market, providing
the potential to capitalize on emerging economies. . However, to be satisfied with the listed

standards of this market is also not that simple. But if foreign firms can overcome these

barriers, they can success in U.S capital market.

Today, cross-listing is one of the most common ways for foreign firms listed their shares in

U.S stock market. To understanding and know how to exercise them on listed exchange is

very important for investors when they decide to invest in foreign shares. However, cross-

listing are still new for developing countries and have not received much attention from

foreign investors, especially for those who just enter into this market. For that reasons, within

the context of this report, we provide a basic report on the definition, objectives and

development of the cross-listing, also mentioning to its financial instrument: American

Depository Receipts (ADRs). In addition, we focus mainly on analyzing benefits,

costs and related issues about cross-listing. The research reveals that cross-listing bring many

benefits rather than costs and helping investors understand clearly in order to make their own

decisions.