Cross-Listing Allows Companies to Tap the World’s Resources
The process of having shares listed in more than one equity market is called cross-listing. As companies reach out in search of capital to fund start-ups and expansion, they often look beyond their own borders for investors and lenders. Why? The three main reasons are
The domestic availability of capital is limited and can be relatively homogeneous.
Issuing bonds abroad increases a company’s access to the number and types of lenders interested, reducing the amount of interest the company must pay to attract investors.
Issuing stock abroad increases a company’s access to investors, increasing the amount of capital raised in stock issuances for a given expected rate of return for the estimated corporate risk.
In other words, companies look to international investors in order to raise more money at cheaper rates.
To do so, companies start by sourcing capital from their domestic markets. From there, they often begin sourcing capital internationally by issuing foreign bonds, which work a lot like regular financial bonds. With a little added sophistication, companies can choose to issue Eurobonds to raise their domestic currency in a global market.
If a company wants to issue equity internationally, often the best method of attracting the attention of investors is to first list equity on a foreign exchange. Doing so doesn’t issue new shares in the other country but allows people from that nation to purchase shares in secondary transactions (which can still raise capital for the company if it holds any treasury shares).
Cross-listing allows foreign investors to purchase a company’s stock in a number of ways, including the following:
Depository receipts: These receipts are traded like equity but are actually representative of the equity held by another organization. They allow foreigners to invest without giving them direct foreign ownership.
Global registered shares: These traditional shares of equity can be traded on multiple markets worldwide rather than a single equity market.
If a company has already cross-listed or feels that it’s large enough to attract investors, it can issue equity in multiple countries simultaneously during an initial public offering.
As with all international operations, sourcing capital globally comes with some additional risks that increase the costs of capital to some extent. For instance, companies often have to cover agency costs associated with staying within foreign financial accounting and reporting standards.
Plus, foreign exchange risk often becomes an issue when companies deal with bonds or equity denominated in foreign currencies, and you can’t rule out the potential for additional risk any time politics (and two or more governments) are involved.
The real question is whether these risks result in costs that are greater than the original benefits of sourcing capital internationally. In general, when sourcing capital internationally, companies need to try to source capital from low-risk nations with great potential to provide cheap and plentiful access to investors and avoid listing in nations that hold little benefit but high cost requirements or other forms of risk.