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

IV. Is the Foreign Cross-Listing Efficient ?

IV.1. Empirical Determination of the Efficiency

The current globalisation of financial markets implies a greater mobility of capital, an easier access to the main financing markets, the emergence of new trading facilities and a standardisation of the corporate governances.

After the analysis over the last years of the reasons given by companies announcing a foreign cross-delisting, it emerges that the notion of "efficiency" is most of time associated with "significant trading volumes".

	#27: Recent Foreign Cross-Delistings				Rationales behind the delisting (sources company)				Company
Country	Dates		Delisting from	Low trading volumes	Costs	Administrative complexity	Deregulation of capital markets
								Volvo
Sweden	2001		Tokyo SE
	2003		Euronext Brussels
	2003		Frankfurt
	2004		L.S.E
	2007		Nasdaq					LVM H
France	2002		Nasdaq
	2003		Euronext Brussels					Nokia
Finland	2003		L.S.E
	2004		Euronext Paris
	2007		OMX Stockholm					Lafarge
France	2004		L.S.E
	2004		Frankfurt
	2007		Nyse					Bombardier
Canada	2004		Euronext Brussels
	2005		Frankfurt					ABB
Switzerland	2005		L.S.E
	2005		Frankfurt					Euro Disney
France	2005		L.S.E
	2005		Euronext Brussels					K Line
Japan	2005		Euronext Brussels
	2005		Frankfurt					Vivendi
France	2006		Nyse					RSA Insurance
U.K	2006		Nyse	-	-	-	-	Pioneer
Japan	2006		Nyse
	2006		Euronext Amsterdam
	2006		Osaka SE					Ahold
Netherlands	2007		Nyse					BASF
Germany	2007		Nyse					Fiat
Italy	2007		Nyse					E.ON
Germany	2007		Nyse					Technip
France	2007		Nyse					Danone
France	2007		Nyse					British Airways
U.K	2007		Nyse					Suez
France	2007		Nyse					Akzo Nobel
Netherlands	2007		Nasdaq					Telenor
Norway	2007		Nasdaq					Arcadis N.V.
Netherlands	2007		Nasdaq					Scor
France	2007		Nyse					Swisscom
Switzerland	2007		Nyse					Adecco
Switzerland	2007		Nyse					BG Group PLC
U.K	2007		Nyse

(following, on the next page)

(following of the previous page)					Rationales behind the delisting (sources company)				Company
Country	Dates	Delisting from	Low trading volumes		Costs	Administrative complexity	Deregulation of capital markets
								Bayer
Germany	2007	Nyse
	2008	Tokyo SE						Boeing
U.S	2008	Tokyo SE						Ducati Motor
Italy	2008	Nyse						Societe Generale
France	2008	Tokyo SE						Dassault Syst.
France	2008	Nasdaq	-		-	-	-	Altria Group
U.S	2008	Euronext Paris						Telefonica
Spain	2008	Euronext Paris
	2008	Frankfurt						BP Plc
U.K	2008	Nyse Arca & Chicago	-		-	-	-
	2008	Toronto SX
	2008	Tokyo SE
	2009	Swiss SX	-		-	-	-	Boeing
U.S	2008	Tokyo SE						Bosch
Germany	2008	Tokyo SE	-		-	-	-	Barclays Plc
U.K	2008	Tokyo SE						KPN
Netherlands	2008	Nyse
	2008	L.S.E
	2008	Frankfurt						Ericsson
Sweden	2008	L.S.E						AnheuserBush*
U.S	2008	L.S.E						Alcatel-Lucent
France	2008	Tokyo SE						ING Groep
Netherlands	2009	Euronext Paris
	2009	Frankfurt
	2009	Zurich						BNP Paribas
France	2009	Tokyo SE

85.5% 51.6% 12.9% 24.2%

* delisting announcement was made on March 2008, whereas the takeover by InBev was announced in June 2008 Sources: Companies

The previous exhibit #27 underpins that in the very great majority of foreign cross-delisting cases, companies' management are used to pointing out the low trading volumes (85.5%). As regards the second most evoked rationale, the costs (51.6%) stem from the low trading volumes since the management highlight the weak relevance to pay such costs for insignificant trading volumes. Managers estimate that volumes on foreign stock exchanges no longer justify a broad range of foreign cross-listings. The findings deriving from the previous analysis allow us to determine the operational definition of the efficiency.

Operational definition of an efficient foreign cross-listing

In this research, we consider a foreign cross-listing as efficient, from the moment that the volumes and the liquidity on the foreign listing place are "significant" in comparison to those on the primary listing place.

In this research, "significant" implies a free-float rotation higher than 0.1% and volumes accounting for more than 5% of the total volumes.

However a question remains without answer. Do the notions of volume and liquidity overshadow all the advantages provided by foreign cross-listings and enounced in part 1.3. Reasons Pleading for Foreign Cross-Listing ? According to the companies' managements, the answer is in the very great majority 'yes". Undeniably, nowadays it appears that some advantages, true in the past, have become operationally negligible or no more relevant.

As regards the reduction of volatility and transaction costs that may provide a foreign cross-listing, the on-going evolution initiated by new trading platforms (see part 111.3. A New Deal in the World of Stock Exchanges 1ndustry) helps to improve all two points. Indeed, the increasing competition between traditional and alternative trading platforms improves the trading effectiveness, reduces the volatility by making shares accessible for a largest panel of investors, and lowers the transaction costs. Foreign cross-listings are not anymore the only one solution to improve these points.

Furthermore, the idea that a foreign cross-listing allows to access to new investors and to broaden shareholders basis remains true, but the contrary is not necessarily true. As we have already noticed, nothing is more mobile than the capital, which may easily and rapidly move from one financial place to another one. Hence, by taking into consideration this fact, not being cross-listed does not prevent companies from accessing foreign investors because investors are more and more mobile. Nowadays, roles have been reversed, i.e. it is not anymore the company that reaches investors, but investors that reach the company. To some extent, this situation is more convenient.

Concerning the business motivations (visibility, notoriety, relations with clients/suppliers) and the corporate governance motivations (gain in media and analyst coverage, facilitate M&A operations with foreign companies), it is quite difficult to materialize and to quantify their advantages. But we may consider that from the companies' management point of view, these elements are secondary considerations in the decision of the foreign cross-listing.

Differences Between Stock Exchanges

Since we have noted that the notions of liquidity and volumes are the most important elements in the management's decision for a foreign cross-delisting, it may be relevant to compare the liquidity by main stock exchanges.

#28: Rationales Behind the Delisting

Low trading Costs Administrative Deregulation of

volumes complexity capital markets

Cases in which the rationale is evoked	84.2% 42.1%		12.3% 21.1%	Sources: Companies

As stated B. Kadlec and J. McConnell⁴⁸, some financial markets like New York and London provide a better liquidity thanks to a greater competition between actors which implies a fall of transaction costs and an increase of the trading activity.

#29: 2007 Liquidity⁴⁹ on each Stock Exchange

0.86% 0.82% 0.76%

⁰.⁶⁵% 0.61% 0.60% 0.59%

0.52%

0.42%

0.30%

1.52%

1.06% 1.04%

0.92%

Sources: World Federation of Exchanges, ThomsonReuters Datastream

* includes the Nyse, the Nasdaq and the Nyse Alternext

** includes the Copenhagen, Helsinki, Iceland, Stockholm, Tallinn, Riga and Vilnius Stock Exchanges *** includes Euronext Paris, Euronext Amsterdam, Euronext Brussels, Euronext Lisbon

According to the exhibit #29, the Nasdaq appears to be by far the most efficient stock exchange in terms of liquidity, followed by the L.S.E and the Nyse Alternext. Regarding Borsa Italiana, it is important to mitigate its figures and its honorable 0.86% by regarding the relatively "weak" total market capitalisation of the Italian place in comparison to the Italian GDP.

⁴⁸ B. Kadlec and J. McConnell, 1994, "The Effect of Market Segmentation and Illiquidity on Asset Prices Evidence from Exchange Listings"

⁴⁹ Average Daily Turnover in US$ / Total Market Capitalisation in US$