During the 1980s-1990s, but also to a lesser extent during
the 1970s, foreign cross-listing had been an important phenomenon, helped by
the internationalisation of companies and the liberalisation of financial
markets. Such operations had been performed by numerous of companies with the
objective to access to the main financial places. This was particularly the
cases of many major French and European companies, which had increasingly
listed abroad, and more especially in the United States.
First of all, the main impediment regarding a foreign
cross-listing results from its cost. We may point up two types of cost: direct
and indirect. Direct costs correspond to expenses that prepare the listing
operation (mainly listing charges and fees for advisors), whereas indirect
costs include commitments for the company to abide by the local laws.
Nowadays, most of costs regarding a foreign cross-listing
stem from the obligation to comply with the different accounting norms (e.g. US
GAAP, IFRS). For instance, the costs of keeping an ADR compliant with the S.E.0
regulation have become increasingly annoying and demotivating, even for the
biggest European companies. This non-negligible element may thus become a
"financial border" between small and large companies, these last ones being the
only ones that could afford such expenses.
In part II.3.c. Size and Growth, we tried to verify and to
confirm this element by analyzing the main characteristics of foreign
cross-listed companies (e.g. market capitalisation, sales, presence in main
national/international index, and so on).
Secondly, one of the main reasons for a foreign
cross-delisting is the low level of daily traded shares. This point may be
illustrated by the decision of Air France-KLM in January 2008 to apply for a
complete cross-delisting of its ordinary shares and ADRs from the Nyse. Reasons
given by Air France-KLM's management regarding this decision are the
following:
"The rationale for delisting and deregistration is principally
based on the fact that
Air France-KLM is primarily listed on Euronext Paris,
which is now part of NYSE-
Euronext, where the average trading volume accounted for more
than 95% of trading over the last twelve months, making the additional costs
and expenses associated with dual registration not cost-justified. Air
France-KLM remains committed to developing its contacts with American
investors, who represent an important part of the Group's shareholding
structure." 36
Thirdly, there are also risks of regulation modification in
the countries where the company is cross-listed. One of the most relevant
examples is the enactment (2002) of the Public Company Accounting Reform and
Investor Protection Act (also known as the Sarbanes-Oxley Act or SOX) which has
initiated the withdrawal from the quotation in the United States of numerous
European companies. These companies were discouraged by the new penalizing
rules and had to perform a double accounting (US GAAP and IFRS norms) which is
quite consuming in financial and in human resources.
Moreover, it is important to notice that the Sarbanes-Oxley
Act has introduced a new juridical risk for the companies' managements which
may lead to a 20-years jail sentence. P. Hostak, E. Karaoglu, T. Lys and Y.
Yang37 noticed that "the passage of the Sarbanes-Oxley Act (SOX)
coincided with an increase in voluntary delistings of foreign firms traded as
American Depository Receipts (ADRs) from US stock exchanges. [...] these
delistings were motivated by firms' costs of complying with SOX or by managers'
or controlling shareholders' (MCOs) loss of control rents that resulted from
corporate governance mandates of SOX."
In addition, we may consider legal risks related to
regulators and to class actions from shareholders in countries where the
company is cross-listed. This was the case of Siemens in 2008 which because of
its listing on the Nyse had to paid a $800m fine to settle a probe by U.S.
Justice Department following the offense of the Foreign Corrupt Practices Act
about corruption, but also EADS, Societe Generale and Vivendi which had been
suited by class actions in the United States. Translation from French: "In the
case of an ADR [...] the question has to be considered for companies organizing
presentations for potential investors in the United States; a particular
precaution is important concerning earnings forecasts which may lead to
posterior appeals if the company is unable to reach its guidance and if the
stock falls significantly. In order to reduce European companies' commitments
in terms of financial information, a harmonisation between American
36 Source: Air France-KLM, the 18th January 2008
37 P. Hostak,, E. Karaoglu, T. Lys and Y. Yang, 2007,
"An Examination of the Impact of the SarbanesOxley Act on the Attractiveness of
US Capital Markets for Foreign Firms"
(US GAAP) and international (IFRS) norms appears to be the best
solution in midterm."38
Finally, it is also worth to notice that being cross-listed in
different countries considerably complicates procedures related to mergers and
acquisitions.
Obviously, foreign cross-listing provides undeniable
benefits, but in some cases these benefits may appear to be weak regarding the
drawbacks previously listed. This point could be verified by surveying managers
about the costs and benefits of foreign cross-listing. In this perspective, F.
Bancel and C. Mittoo performed a survey in 2001 and came to the conclusion that
despite "a majority of managers (60%) perceive that benefits outweigh the costs
of foreign listing, about 30% also view the net benefits to be negative.
Perceived net benefits are positively related to the increase in the total
trading volume after foreign listing, the financial disclosure levels of the
firm, and the dual listing on both the US and European foreign exchanges.
Without the influence of these factors, the perceived net benefits are
negative"39. However, it is essential to pay attention to the
study's date of publication: 2001. Since this publication, we have now to take
into consideration that financial markets have evolved and some conclusions,
true in 2001, may have become no more topical. However, this study still gives
us a good overview of what feelings managers have for foreign
cross-listings.
