FINANCIERING WAARDERING(SSTELSELS) Do foreign cross-listings increase firm value? Evidence from announcement effects of Dutch firms Prof. E. C. Perotti and E. Cordfunke Introduction and external investor scrutiny. Yet increased scrutiny may allow better firms to finance themsel­ The rapid internationalisation of capital markets ves on better terms; Pagano, Panetta and Zingales in recent times has manifested itself in mobility of (1994) report that Italian firms appear to choose a equity investment as well as in a growing number of public listing in order to be able to diversify their foreign cross-listings. The classic argument is that bank borrowing and reduce its cost. foreign listings lead to a lower cost of capital Theoretically, the main benefits of cross­ because they help overcome the segmentation of the listings occur when international capital markets local equity market. Finns obtain a broader investor are small or segmented1. In addition to legal base which accepts a lower rate of return by diversi­ banders, there are other causes of market segmen­ fying firm specific and country specific risks, which tation, such as foreign exchange risk, small may be priced in a small market. This argument country bias and political risk. suggests that the cost of financing is different across A foreign listing may be driven by the inten­ listing countries. tion to send a signal to the local market about There may be different causes for such differ­ future prospects. Stoughton, Zechner and Wong ences. While for the trading of employee shares (1996) argue that managers with positive private transaction costs may be significant, in general information on their firm’s quality would choose asymmetric information costs (such as adverse for an IPO; the resulting increase in required selection) or agency costs (due to differential disclosure implies that the decision is a credible enforcement costs) must be different depending on signal. A listing on a prestigious exchange with the country of listing. This may lead firms to high standards of disclosure may enhance the choose, for instance, listing in countries which image of the company among investors, and either are more transparent (in order to overcome reassure them about its prospects. adverse selection) or have better enforcement of There may be also purely marketing purposes, conflicts of interest between management and namely to increase visibility with customers by outside equity holders. In Roell’s (1995) review, broadening product identification. ‘A foreign listing enhanced visibility is usually cited as the first or can boost corporate marketing efforts by enhancing second most important motivation for the decision name recognition among investors and consumers to go public. Mirroring this, somewhat ironically, in the foreign country’; moreover, ‘reports written the most important costs of going public are by local analysts and news media give “free” ‘increased pressure on senior management due to advertising’ (Saudagaran and Biddle, 1991). closer public scrutiny’, disclosure requirements, For large companies located in small countries for which foreign sales are a necessity, a foreign listing may offer an excellent promotional effect. Prof. E.C. Perotti is professor of International Finance at the Dutch companies are a case in point. KLM in Finance Department of the Faculty of Economies and Geome­ 1986 sold 15 million shares, of which 40% across tries at the University of Amsterdam. Europe, 55% in the United States and the rest in E. Cordfunke is researcher at MeesPierson, Amsterdam. Japan. The explicit aim of the management was 570 NOVEMBER 1998 GfflAB to promote its international activities and support Still, the initial and annual listing fees are only the share price (Euromoney, 1993). Interestingly, a fraction of the total costs: commissions payable Dutch firms have long followed this strategy. At to the ‘book runner’, accountants’ and lawyer’s the turn of the century, the Van Linden margarine fees and the expense of preparing annual and producer (a predecessor of Unilever) listed itself other reports in the foreign languages. To keep in London in a major stock offering even prior to and obtain new shareholders, companies have to seeking a listing in Amsterdam. organise road shows and presentations. This helps Besides broadening product identification, a preventing the flow back of shares to the country foreign listing may signal to foreign competitors of origin (Adhikari et ah, 1991). a more aggressive approach to local markets. In The next section describes the international addition, a local share listing can increase the evidence on the impact of cross-listings and the political appeal of the company in the foreign market assessment of the decision. Ultimately, the country by having local investors and reduce response of investors is prima facie evidence of the hostile nationalistic feelings. Moreover, often effect of cross-listings on shareholder value. foreign acquisitions and/or mergers require a share swap. Section 1 International empirical evidence A final cause may be the introduction of stock purchase plans to maintain labour relations in Several studies investigate the role of financial foreign countries. The Dutch company Ahold, disclosure requirements on foreign stock exchange with more than 50 000 employees in the U.S., listing decisions. Biddle and Saudagaran (1991) stated this reason when it applied for a listing on report that companies are reluctant to apply for a the NASDAQ. Philips also applied for a listing listing on an exchange with high disclosure on the TSE with the intention to recruit qualified levels. However, Meek and Gray (1989) found personnel in Japan2. that continental European firms listed on the There are of course significant costs and London Stock Exchange exceeded the require­ disadvantages associated with a foreign listing, ments of the London Stock Exchange by a wide starting with listing fees. These costs can be range of voluntary disclosures, in some cases separated into: ‘initial listing fee’, which has to substantial. The authors conclude that ‘the be paid once, and the ‘annual fee’, which has to significance of the Stock Exchange requirements be paid annually. Listing fees depend on the size appeared to be relatively minimal compared to of the issue and are different on each stock the need to raise capital in the international exchange. capital market. It may also be that some compa­ The following table shows the listing fees on nies prefer more disclosure requirements under the largest exchanges of the world and the strict rules3. number of foreign companies listed. Goldman (1982) found that when the shares of a company are the hands of both domestic and foreign investors the influence of shocks in the Table 1: Listing fees and number of foreign listings on five stock exchanges economy and industry is decreased, suggesting Slock Exchange Number of Initial Annual that the share price becomes more stable with a foreign listings listing fee listing fee broader share base. (June 1996) ($) ($) Howe and Kelm (1987) examine the impact of New York a foreign stock listing on the domestic share price Stock Exchange 265 from 36.800 from 14.750 using the standard event-time methodology London Stock (Brown and Warner, 1985) . The ‘event’ day Exchange 518 990 - 62.500 910 - 16.300 taken in this research is the actual listing date. Tokyo Stock According to their results, ‘a firm’s first overseas Exchange 93 20.000 1.200 Federation of listing appears to be harmful to shareholder Gentian Stock wealth’ since at the listing date share prices seem Exchanges 345 272 - 27.256 none to decline on average. Paris Stock Alexander et al. (1988) assess changes in Exchange 208 none none expected returns. Their empirical results indicate Source: Eiteman et al., 1995, p. 326. that non-Canadian companies experience an NOVEMBER 1998 IfflAB 571 expected return decline after a cross-listing, while the stock. Furthermore, firms tend to list after a the result for Canadian companies was not period of good performance. It is therefore significant. This could indicate that non-Canadian difficult to determine whether the positive returns companies are based in partially segmented occurred because of the good results in the pre­ markets. The high positive CARs before the event listing period. Only a few studies used the correct date may suggest that the cost of capital did date, that is the announcement date4. decrease for cross-listing firms. In the next section we investigate the impact Lee (1991) presented a study on American on the stock price of a very large fraction of the companies with a listing on the London and population of Dutch companies with a foreign Toronto Stock Exchange. His results were in listing, using the correct date to measure the stock contrast to the findings by Howe and Kelm, as price reaction. returns on listing dates in his sample are not Our conclusion is clear: Dutch cross-listings significantly different from zero, a result con­ are associated with positive abnormal returns at firmed in a sample of UK firms listed on the the time of the announcement. There is also some Tokyo Stock Exchange (TSE) and Japanese firms evidence that the increase is positively associated listed on the LSE (Lee, 1992). with the degree of disclosure demanded by the These inconclusive results are not surprising listing markets. as in an efficient market any effect of the decision should already been discounted by the date of Section II Empirical results on Dutch listing. cross-listings Karolyi (1996) focuses on the valuation and liquidity effects of the listing decision, the impact Sample description of listing on the companies global risk exposure and its costs of equity capital. The main findings From the Amsterdam Stock Exchange, we are as follows: the impact on the stock price received a list of Dutch holdings that were listed around a cross-listing is initially favourable after on one or more stock exchanges up to February, the listing date, however the post-listing period 1996.