What makes stock exchanges succeed? Evidence from cross-listing decisions

Abstract

Despite the increasing integration of capital markets, geography has not yet become irrelevant to finance. Between 1986 and 1997, European public companies have increasingly listed abroad, especially in the U.S. We relate the cross-listing decisions to the characteristics of the destination exchanges (and countries) relative to those of the home exchange (and country). European companies appear more likely to cross-list in more liquid and larger markets, and in markets where several companies from their industry are already cross-listed. They are also more likely to cross-list in countries with better investor protection, and more efficient courts and bureaucracy, but not with more stringent accounting standards.

Introduction

In the last two decades technological progress and liberalization of capital flows have lowered the barriers that insulated domestic stock markets from each other. Firms can access foreign capital markets more easily. And they increasingly seek such access, to cater to the growth in the scale and reach their operations. But it is far from obvious that accessing foreign capital markets should require them to seek stock listings abroad. As capital markets become more integrated, companies should be able to tap foreign capital directly from their home market. Investors should be able to participate in initial public offerings abroad and trade shares cross-border, and brokers to operate directly in foreign stock markets via remote membership.

In other words, one may expect that as capital market integration proceeds, geography becomes increasingly irrelevant to finance. Surprisingly, however, this does not appear to be the case. The number of European companies seeking a foreign listing has increased between the mid-1980s and the late 1990s. As we document in Section 2 of this paper, some exchanges – chiefly those in the U.S. – have attracted a larger number of these cross-listings than others, becoming more international in character. Most European exchanges, instead, have tended to move in the opposite direction. In addition, there is evidence that it is the most dynamic European firms that are cross-listing in the U.S.

This leads to the question: what makes some stock markets more attractive than others from the viewpoint of companies? In Section 3 of this paper we address this question by asking which characteristics of exchanges are most closely correlated with the cross-listing decision for a sample of European companies. We find that companies are more likely to cross-list in more liquid and larger markets, and in markets where several companies from their industry are already cross-listed. In contrast, the decision to cross-list is not correlated with the difference in analyst coverage between exchanges.

The decision to cross-list on a given exchange may also be related to characteristics of the country where that exchange is located (rather than to those of the exchange itself ). Indeed, the European companies in our sample appear more likely to cross-list in countries with better investor protection and more efficient courts and bureaucracy, and with language and institutions similar to their home country. But their cross-listing decisions are negatively correlated with differences between the accounting standards of the destination and home country – possibly an indication that the cost of adapting to more stringent accounting standards exceeds the benefit stemming from the added transparency vis-à-vis investors.