IPOs and Cross Listings

The definition of an IPO is the first stock sale of a private company to the general public. Initial public offerings as they are referred to are those of smaller companies that are trying to expand and thus, seeking capital to do so. IPOs, however, can be done by companies that are larger and privately owned who are trying to become traded at the public level. There are many different perspectives on what it means to invest in the IPO; however, the consensus is by and large that it is a risky investment. When companies are seeking to execute an IPO, international or otherwise, the process usually requires significant planning in an effort to avoid any potential pitfalls that inevitably may happen as the company transitions to be a public entity. One thing that most companies cannot ascertain is the fluctuation of the stock market ("Execute an IPO," 2013).

There exists a nominal amount of information on the importance of foreign IPOs. Karoyli (1998) reviewed the benefits of international IPOs and the trend of cross listing. Cross listings are defined as securities that trade within their respective home country and at the time of listing internationally, the investors are privy to information on both the company and the activity with regard to trading. For the purposes of this discussion, it is essential to differentiate between cross listing and companies that dual list. Dual listed companies are where two specific companies or corporations’ function as one legally, but retain separate stock exchange listings under the watch of the SEC (Karoyli, 1998).  With IPOs because they are new, there is unfortunately no blueprint to work from or with, in terms of trying to examine the degree at which to actually invest in that initial public offering.

In a study presented by Chemmanur and Fulghieri (2006) a financial business model was presented with regard to the advantage of doing such an operation. If there is a stringent amount of laws in place then it can make the firm have what is known as an ongoing disclosure, meaning constant discussion of what information they a privy to (Chemmanur and Fulghieri, 2006). Additionally, empirical studies have been done on the valuation that firms gain when performing cross listing. There is reason to believe that there are benefits to international markets such as London, Shanghai, etc. are alternatives to the U.S. market. Subrahmanyam and Titman (1999) discovered that when firms cross list there is a type of positive market externality that happens. Thus, more activity information is able to be extracted for future investment projections. Market prestige was also found to be boosted with the prospect of cross listing companies (Subrahmanyam and Titman, 1999). 

Karoyli (1998) further found that companies see prosperity in direct listings along many of the world's stock exchanges, because of the pros. The article further highlighted that "the decision to list shares abroad may also reduce the company's cost of raising capital by diversifying its exposures to different market risks, by reducing illiquidity of trading in its shares and by eliminating investment barriers due to international differences in accounting practices, disclosure requirements and taxation laws” (pg.2). It can be said then that cross listing is more beneficial than one would expect or presume it to be.

Cross listing has also been noted as being beneficial to the secondary country where it is listed. This is because there is wider diversification of one's portfolio with cross listing and also a reduction in interest rates by increasing the number of investors within a certain market and simultaneously decreasing the number of investors within a money market. Cross listing is quite beneficial in how it can be executed with regard to the multiple currencies and time zones in which trading can take place. That is not to say however that accountability and governance do not exist. In fact, the requirements for cross listing as very strict (Adelegan, 1999). There are many different considerations to be had prior to investing in an IPO but based on research so far on the topic of cross listing, it appears to be very lucrative both in the short and long term regardless of the costs associated with doing it.

References

Adelegan, O. J. (1999, September). The impact of the regional cross-listing of stocks on firm value in Sub-Saharan Africa [IMF Working Paper]. Retrieved from http://www.imf.org/external/pubs/ft/wp/2009/wp0999.pdf

Chemmanur, T. J., & Fulghieri, P. (2006). Competition and cooperation among exchanges: A theory of cross-listing and endogenous listing standards. Journal of Financial Economics, 82, 455-489.

Execute an IPO. (2013). Retrieved from http://www.pwc.com/us/en/transaction-services/capital-markets/cm-ipo.jhtml

Karoyli, G. A. (1998). Why do companies list shares abroad? A survey of the evidence and its managerial implications. New York University Salomon Center Monograph Series Financial Markets, Institutions and Instruments, 1-60. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.196.7584&rep=rep1&type=pdf

Subrahmanyam, A., & Titman, S. (1999). The going-public decision and the development of financial markets. The Journal of Finance, 54, 1045-1082.