Thesis: Analysis of the Efficiency and the Future of the Foreign Cross-Listing

SPECIALIZED MASTER

In Corporate Finance

Professional thesis subject:

Analysis of the Efficiency and the Future of the Foreign Cross-Listing

Societe Generale Corporate & Investment Banking

(Contact : vincent-chertier.mas(c) em-lyon.com)

Promotion 2008

Date: 17^th December 2008

Professor supervisor: Associate Professor in Finance Mr Loïc Belze

Copyright E.M.LYON

Par accord du CFC

Cession et reproduction interdite

Summarv

Introduction............................................................................................... 3

I. Theoretical Approach of the Foreign Cross-Listing ......................................... 5

Preamble .......................................................................................... 5

Different Methods of Foreign Cross-Listing ............... 6

I.2.a. Depositary Receipts (DRs) ............................... 6

I.2.b. Dual-Listed Companies (DLCs) 7

I.2.c. Other Means .............................................................................. 16

Reasons Pleading for Foreign Cross-Listing .......................................... 16 I.3.a. Business Motivations ................................................................... 16 I.3.b. Corporate Governance Motivations ................................................ 17 I.3.c. Financial Motivations ................................................................... 20 I.3.d. Main Impacts of the Foreign Cross-Listing ...................................... 25

Different Geographical Origins Imply Different Purposes ........................ 27

II. Geography of the Foreign Cross-Listing ................................................... 28

Methodology for the Creation of the Sample ....................................... 28 II.1.a. Sources .................................................................................... 28 II.1.b. Statements and Assumptions Regarding the Analysis ...................... 30

Presentation of the Results ............................................................... 31

Empirical Interpretation of the Results ............................................... 33 II.3.a. Geographic Distribution .............................................................. 33 II.3.b. Sector ...................................................................................... 36 II.3.c. Size and Growth ........................................................................ 38 II.3.d. Cultural Similarities ................................................................... 41

Going Further in the Empirical Interpretation ......... 42

III. Environment and Current Evolutions ...................................................... 43

III.1. Decreasing Advantages and Increasing Concerns ? 43

III.2. A Major Tendency Has Emerged .......................... 45

III.3. A New Deal in the Stock Exchanges Industry 49

III.3.a. Mergers between Stock Exchanges 49

III.3.b. Strategic Partnerships between Stock Exchanges 50

III.3.c. New Actors Are Arriving... 50

IV. Is the Foreign Cross-Listing Efficient ?.................................................... 52

Empirical Determination of the Efficiency 52

Liquidity Analysis 56

Volumes Analysis 60

IV.3.a. Analysis of the Efficiency 60

IV.3.b. Current Tendency: the "Fading Listing" 64

Future of the Foreign Cross-Listing 69

ArcelorMittal Case Study 71

V. Conclusion ........................................................................................... 75

Bibliography............................................................................................ 78

OtherSources 79

Appendix1 80

Appendix2: Articles 81

Introduction

In 2001, the Kenyan based company East African Breweries Ltd, initially listed on the Nairobi Stock Exchange, performed a foreign cross-listing on the Uganda Securities Exchange and, the year after, re-performed this operation on the Tanzanian Dar-es-Salaam Stock Exchange in Tanzania. This atypical example materializes how the company's decision to be cross-listed on a foreign stock exchange depends on a set of motivations or events inherent to each company. Over the decades, the phenomenon related to foreign cross-listing has known various tendencies, illustrated by a set of highs and lows. This phenomenon started in the 70s and reached its highs during the 1980s-1990s. However, since the beginning of the new millennium new cross-listings have become scarcer, but above all the number has been steadily diminishing. This growing loss of interest in foreign cross-listing mainly results from regulatory framework evolutions, materialized by the Sarbanes-Oxley Act (2002) and the amendment of the Markets in Financial Instruments Directive (2007) which paved the way to the harmonisation of regulatory regime for investment services.

Up to now, many researches have already dealt with the phenomenon of foreignlisting and foreign cross-listing, but few have developed the notion of efficiency of such operations. In this perspective, this research bases its findings on a sample of 1,347 foreign cross-listing cases and tries to answer to the following problematic:

Within the current context of financial markets, is the foreign cross-listing an efficient tool for companies ?

Nevertheless, on account of the existence of intangible benefits like the visibility, the prestige and the recognition, there is no Manichean answer. However, through the analysis of a set of elements, it is possible to outline the current tendencies and therefore to predict the likely future of foreign cross-listing.

In the first place, this research focuses on the theoretical analysis of the foreign cross-listing, describing the advantages and drawbacks for a company. The goal is to understand the motivations and the patterns leading to perform such operations.

Then, the second part develops a statistical analysis of the foreign cross-listing
phenomenon and its geographical distribution, with a focus on Western European,
North American, Japanese and Australian stock exchanges. Through the analysis

of the collected data, the purpose is the identification of the main characteristics of cross-listed companies. This step is essential because it serves of foundation of the part dealing with the efficiency analysis.

In the third place, this research tackles the theme related to the on-going revolution in the stock exchanges industry. This research tries to outline the impacts and the implications on foreign cross-listing.

Finally, this research combines the statements made in the previous parts and the outputs given by the efficiency test. Hence, the interpretation of the results helps to draw the conclusion and the future of foreign cross-listing.