BENEFITS OF CROSS BORDER LISTING

To the Firm and the Home Country

i. Greater Access to Lower Cost Equity Finance
Corporations require resources to enable them serve effectively the needs of their
customers. Consequently, they need to find the funds necessary to sustain their
customers. The most common types of long term financing available to firms
include long term debt, common stock, preferred stock and retained earnings.
However, as they continue to grow in size, they deplete their available savings
and resort to borrowing. Equity or debts remain the only options at their disposal,
yet they prefer equity over bond because it represents a permanent source of
funding that cannot be easily cancelled.

Through cross listing, the financing of the firm increases, i.e., the market
capitalization of the firm will spike. The latter can simultaneously increase its
equity and reduce its debt. Ultimately, its cost of capital is reduced as equity
increases.

ii. Enhances Business Reputation
Firms can use a cross listing on markets with openness and more stringent
financial disclosure to signal their quality to foreign investors and to provide
improved information to potential customers and suppliers. For e.g., if the latter is
quoted on the US stock market, then it has to adhere to the Generally Accepted
Accounting Principles (US GAAP) and this will eventually boost its brand equity.

There are also mass media corporations like Bloomberg which consistently
monitor the performance of firms which are quoted on the famous stock markets
such as New York Stock Exchange (NYSE), Tokyo Stock Exchange (TSE),
NASDAQ Stock Exchange, London Stock Exchange (LSE) and so on.
Accordingly, if the firm is cross listed on one of the famous stock market, then
there will be an increase in media attention, greater analyst forecast accuracy and
higher quality of accounting information. Ultimately, the reputation of the firm
will improve provided that the latter is performing well.

iii. Good Corporate Governance
Corporate governance is concerned with the ways in which shareholders of
corporations assure themselves a return on investment. At the heart of corporate
governance lies the risk that corporate managers will misuse or even steal the
capital lent to corporations. Minority shareholders can be abused not only by
managers but also by those shareholders (controlling ones) which hold a
significant proportion of the share capital of the corporation. Corporation
managers and controlling shareholders enjoy private benefits of control at the
expense of minority shareholders. Hence, if a company is cross listed on a foreign
stock market, the dominant shareholders will have less power provided that the
proportion of shares held by the minority shareholders increases significantly
through fresh issue of shares.

iv. Reduces Market Segmentation Problems
Firms usually capture new markets through a product differentiation strategy.
They diversify their products and introduce them in to a new market.
Diversification is costly especially if the firm is making unrelated diversification.
The latter has to innovate and undertake research and development activities so
that it sustains its competitive advantage within the market segment. The market
segmentation problems can also be in terms of high switching cost, advertising
cost and fixed cost.

If the firm is cross listed on a foreign stock market, then it can extend its
resources to meet its market segmentation costs. In other words, the firm will be
able to meet its process, marketing and product innovation costs by increasing
equity finance.


v. The Liquidity Position of the Firm is Improved
Some corporations are quoted on foreign stock markets because the domestic
stock markets are not as much liquid as the foreign ones. In a liquid stock market,
the volume of stock dealings is high. The firm can easily sell its shares and
consequently, it can improve its liquidity position. In other words, a liquid stock
market enhances the liquidity position of the firm, i.e., it can have more cash by
cross listing its shares.

vi. Greater Accessibility to Capital
Cross Listing enables firms to increase their finance at any point in time. With
globalization, time is no longer a problem. Firms quote their shares both
domestically and internationally to benefit from the time zones which differ
across the globe. In fact, when the domestic stock market closes, it is day time for
the foreign stock market and consequently, the firm can trade its shares on a 24 hr
period.

vii. Greater Market Share and Merger and Acquisition (M&A) is More Likely
Cross Listing may be driven by product and M&A considerations. Firms are able
to increase visibility with foreign customers by broadening product identification
while operating abroad. As a result, the market share of the firm increases and
simultaneously, the latter is able to increase both its turnover and profits.

Cross Listing appears to strengthen the bargaining power of target firms, allowing
them to extract higher takeover premiums relative to their non-cross-listed peers.
In other words, the net worth of the target firms can increase significantly when
they are cross listed abroad. As a result, the acquiring firm will have to pay a
premium to take over the target firm compared to the non cross listed peers which
are usually acquired at a discount.



To the Foreign Firms and Country
i. Stock Market Liquidity is Improved
When firms are listed on the foreign stock market, the volume of stock dealings
rises, i.e., more investors will be willing to purchase the shares of the cross listed
firms. As a result, the stock market liquidity will improve, that is, stock can be
easily traded. However, those investors who are expecting a higher return should
invest in an illiquid market. Hence, cross listing improves the stock market
liquidity but at the expense of making the stocks less rewardable.

ii. Wider Pool of Assets Available to Foreign Investors
The investors can diversify their portfolio of assets by including more stocks. This
will increase the return on their investments and at the same time, they can
include more bonds in their portfolios to minimise investment risk. Investment
risk can also be minimized when the investors include more stocks emanating
from the focal companies with a good credit rating. Accordingly, they may be
reluctant to invest on domestic stocks and will rather switch to the cross listed
stocks.

iii. Unemployment Rate can Fall
Firms often list their stock abroad to be a target for merger or acquisition.
Consequently, if the M&A strategy is met, then investment will spike within the
foreign country both in real and financial terms. This will create jobs and
simultaneously, the growth rate of the country will rise. Hence, cross listing can
reduce rate of employment as well as sustaining the economic and social stability
in the foreign country.

iv. Reputation of the Foreign Firms can Improve
If the foreign firm enters into a joint venture agreement with the cross listed firm,
then the reputation of the foreign firm can improve provided that the cross listed
one has a good brand equity. For e.g., when Sony made a joint venture agreement
with Ericson to produce mobile phones, the brand equity of the Ericson company
has improved. Customers were perceiving Ericson mobile phones as premium
phones and its turnover was skyrocketing.

v. The Concentration of Investors in the Money Market is Reduced
Cross listing reduces the spreads on interest rates and debt securities by increasing
the number of investors in the stock market, thereby reducing the concentration of
investors in the money market. The bond yield is usually lower than the stock
yield. Hence, if more stocks are listed in the foreign stock market, investors will
have more opportunities in terms of stock investments to make higher expected
gains. They will switch to stock investment and consequently, they will trade less
money market instruments. As regards to the focal firms, they will supply less
bonds and accordingly, the price of bond will increase significantly and
ultimately, the bond yield will fall, i.e., the spread on lending rate and borrowing
rate will fall.

vi. Less Information Asymmetry through GAAP
Firms which cross list their shares are required to fulfill the accounting principles
which prevail within the foreign country. For e.g., in the US, the foreign firms are
required to prepare and display their financial statements according to the
Generally Accepted Accounting Principles (US GAAP). Hence, this ensures that
the proper financial statements are being disclosed thereby reducing information
asymmetries, i.e., more accurate information are available to the public.