The concept of cross listing entails the purchase and dealings in stocks listed in foreign markets. With the onset of globalization, countries were compelled into eliminating legal hurdles so as to open their markets for purposes of cross listing. However, the idea is still nascent in most of parts of the world. The leading international stock markets for cross listing are New York, Tokyo and London markets. This paper would tackle two central issues. The first limb seeks to examine advantages and disadvantages of listing companies in different foreign stock markets while the second limb examines issues involved in relation to raising capital within the global markets.
Cross listing essentially carries along two significant advantages with others being collateral. These two are performance and diversification. Ideally, not all markets would perform dismally during a given financial period. In that context, it is advantageous for companies to spread their equities all over so as to cushion itself from the poor performance in one market. In addition, stock markets like the above mentioned have the outstanding reputation of sound performance. This performance is often a product of a number of factors. Such factors include blossoming economies of the regions, strict adherence to the rule of the game, among others. Companies would, therefore, benefit from cross listing in such markets whose performance has historically been impressive.
On diversification, prudent accounting demands that companies diversify their portfolios to the best extent possible. A diversified portfolio accrues more returns, absorbs losses better and exposes investors to lesser risks. In addition, diversification enables companies to access a higher pool of sources capital. This predictably informs the decisions by companies to cross list. Access to more capital means the entity can entertain more capital intensive investments, consequently, earning higher returns. Another collateral advantage to cross listing is the exposure it affords to the company. This often serves as an opportunity for the company to learn the foreign market and make future strategic decisions which include decisions as to venturing into a particular market.
On the other hand, cross listing comes with its own disadvantages. One is the risk of loss of investments. The risk emanates from the fact that most markets are still developing and have poor corporate governance practices. Issues such as insider dealings and poor information flow to the disadvantage of listed companies are still common. Most economies are also illiquid making cross listing irrelevant for strategic purposes since the cross listed firms do not necessarily access capital. Lastly, cross listing is intended for portfolio diversification. However, in most cases companies list in foreign markets that have similar characteristics and are faced by same risks. This defeats the whole sprit of diversification as the cushioning effect is not availed. Perhaps a solution out of this problem would be cross listing in completely different markets. For instance, cross listing in the United States and South Africa as the two countries have entirely different risk factors.
The second limb of the paper relates to issues involved in raising capital in global markets. One significant issue relates to legal and ethical requirements. Developed and complex markets such as the United States of America would require a litany of legal qualifications alongside some ethical and corporate governance practices. Such requirements, though well intended, have in many cases only prohibited access to global capital. In some cases, they have increased the overall cost of capital thereby negating the original saving. Secondly, global capital is susceptible to foreign exchange transactions. In many cases, unrealized foreign exchanges upon realization have commuted to foreign losses on the borrower. This discourages borrowing. The practice embraced in solving this issue entails dealing in one currency often the US Dollar.
Investor trust has become a challenge. Investors are generally risk averse or indifferent. They hardly want to gamble with their funds especially given the global context of operations. The challenge has often been appealing to investors from different countries that come on the table with their inherent cultural biases and stereotypes. For instance, investors from the United States have generally shown skepticism to borrowers from China given their historical records of corrupt practices and low corporate governance performance. Within the same context is the national rivalry for economic development. This has in some cases hindered access to global capital as nations deliberately control their markets to disadvantage external borrowers who would prosper with their investors’ funds to the detriment of their domestic markets. A good example can be seen in the Asian markets where legal provisions tend to favor the small local companies to access their capital rather than lending to foreign multinationals who would end up occasioning a capital flight.
In conclusion, it is noteworthy that cross listing is still nascent and yet to find its footing in the global world. However, as markets become more integrated and globalized, cross listing would be the norm rather than the exception.
References
Moneywatch. (2008, December 13). Why cross-listing shares doesn't create value. The McKinsey Quarterly. Retrieved from http://www.cbsnews.com/8301-505125_162-51255550/why-cross-listing-shares-doesnt-create-value/?tag=bnetdomain
Purfield , C., Oura, H., Kramer, C., & Jobst, A. (2006). Asian Equity Markets: Growth, Opportunities, and Challenges. Tokyo: IMF Working Paper. Retrieved from http://www.imf.org/external/pubs/ft/wp/2006/wp06266.pdf
Youxing, L. (2009). Comparison of the Legal Institutions of Enterprise Financing in China and the United States. Indiana: US-China Business Cooperation in the 21st Century: Opportunities and Challenges for Entrepreneurs Conference. Retrieved from http://www.indiana.edu/~rccpb/uschinacooperation/papers/P10%20Li%20Youxing.pdf
