Cross-Listing: Fortescue to Cross-List?
Today's (28/03) AFR reports the possibility of Fortescue Metals cross-listing its securities on the HKSE (Hong Kong Stock Exchange). Cross-listing is the process (loosely) that allows a company to be traded on more than one exchange. There can be different levels of cross-listing and the term itself does not mean that a company will be raising equity from listing in a foreign market. In fact, as discussed in the AFR "Fortescue is understood to view a listing in Hong Kong as a potentially attractive way to gain access to new investors rather than as an opportunity to raise equity to help fund its growth plans..."
Cross-listings come in many different forms. For example, ADR (or just DR's - depository receipts), one type of cross-listing, can be traded on an exchange or OTC (over-the-counter) and allow investors in foreign markets to trade Australian securities without needing to trade on the ASX. In Australia, many of the big miners are already cross-listed. BHP and Rio Tinto are listed in London and also have ADR's trading on the NYSE.
What are therefore, the main attractions for cross-listing?
The attractions of cross-listing have been heavily debated for some time, and despite the intensity of the debate, no clear resolution of the advantages of dual (or multiple) listings has been reached. The arguments, generally focus on one of two lines of thought. They are: 1) Cross-listing will improve shareholder value 2) Cross-listing will improve shareholder diversity. While the second point can ensure that no one large block is able to exert a detrimental effect over the rest of the firm's stakeholders, it also has implications for firm value.
To address the first point, lets think about how performance could be improved. Cross-listed stocks are often thought to benefit from an:
1) Increase in analyst coverage - if a stock gets greater analyst following then value estimates are likely to reflect a more accurate set of projections.
2) Improvement in liquidity - Diversifying the shareholder base can potentially increase a company's free-float. Recent studies have shown a positive relationship between liquidity and value (O'Hara (2004).
3) Increase in access to capital (and therefore potentially lower cost of capital).
4) Increase in exposure for emerging market firms - If a stock is from a developing country then the exposure to a foreign (developed) market may have positive implications for liquidity and the cost-of capital. A firm from an emerging market that lists in a developed market is additionally required to adhere to the same level of internal corporate governance provisions as a domestic firm which may send a positive signal to the rest of the market regarding the quality of firm.
In a world where capital markets are becoming more integrated by the day (Deutsche Borse takeover of NYSE, Singapore for ASX etc...) there seems little, or at least, less of a benefit than in the past. Where people may have been hesitant to invest in BRIC's (Brazil, Russia, India and China) in the past, these markets have become more accessible in time. In 2007-2008, 35 large European companies actually delisted from the NYSE. Certainly as exchanges and sovereign regulatory bodies continue to increase the onus on firms to improve their disclosure and transparency through "black-letter" type accounting and governance requirements, the costs will begin to outweigh the benefits.
Studies that have examined the empirical impact on shareholder value of US, UK, European and Australian firms around the announcement of a cross-listing (or even de-listing from foreign markets) have also shown little benefit. A rather un-technical examination of Fortescue reveals that the stock finished broadly in line with market movements today (on rumours rather than an actual announcement).
In summary, I think whether the decision to cross-list is beneficial is dependent on the company in question. Many NZ companies have separate listings on the ASX and find that a sizable volume of their trading is actually executed in the Australian market. The LSE's AIM (Alternative Investments Market) is a market that lists small, growing firms from around the world and claims to have assisted many firms raising capital necessary for expansion (though this claim is largely unverified). I believe the questions that a firm needs to address before taking this step include: What are the intentions for seeking cross-listing (i.e. seeking outright value increase, more exposure, or a more diverse shareholding base)?, and what are the potential costs from cross-listing (potential dilution effect, costs from disclosure and other regulatory requirements)?.This will ultimately allow management to evaluate the substance of the claim.
Cross-listings come in many different forms. For example, ADR (or just DR's - depository receipts), one type of cross-listing, can be traded on an exchange or OTC (over-the-counter) and allow investors in foreign markets to trade Australian securities without needing to trade on the ASX. In Australia, many of the big miners are already cross-listed. BHP and Rio Tinto are listed in London and also have ADR's trading on the NYSE.
What are therefore, the main attractions for cross-listing?
The attractions of cross-listing have been heavily debated for some time, and despite the intensity of the debate, no clear resolution of the advantages of dual (or multiple) listings has been reached. The arguments, generally focus on one of two lines of thought. They are: 1) Cross-listing will improve shareholder value 2) Cross-listing will improve shareholder diversity. While the second point can ensure that no one large block is able to exert a detrimental effect over the rest of the firm's stakeholders, it also has implications for firm value.
To address the first point, lets think about how performance could be improved. Cross-listed stocks are often thought to benefit from an:
1) Increase in analyst coverage - if a stock gets greater analyst following then value estimates are likely to reflect a more accurate set of projections.
2) Improvement in liquidity - Diversifying the shareholder base can potentially increase a company's free-float. Recent studies have shown a positive relationship between liquidity and value (O'Hara (2004).
3) Increase in access to capital (and therefore potentially lower cost of capital).
4) Increase in exposure for emerging market firms - If a stock is from a developing country then the exposure to a foreign (developed) market may have positive implications for liquidity and the cost-of capital. A firm from an emerging market that lists in a developed market is additionally required to adhere to the same level of internal corporate governance provisions as a domestic firm which may send a positive signal to the rest of the market regarding the quality of firm.
In a world where capital markets are becoming more integrated by the day (Deutsche Borse takeover of NYSE, Singapore for ASX etc...) there seems little, or at least, less of a benefit than in the past. Where people may have been hesitant to invest in BRIC's (Brazil, Russia, India and China) in the past, these markets have become more accessible in time. In 2007-2008, 35 large European companies actually delisted from the NYSE. Certainly as exchanges and sovereign regulatory bodies continue to increase the onus on firms to improve their disclosure and transparency through "black-letter" type accounting and governance requirements, the costs will begin to outweigh the benefits.
Studies that have examined the empirical impact on shareholder value of US, UK, European and Australian firms around the announcement of a cross-listing (or even de-listing from foreign markets) have also shown little benefit. A rather un-technical examination of Fortescue reveals that the stock finished broadly in line with market movements today (on rumours rather than an actual announcement).
In summary, I think whether the decision to cross-list is beneficial is dependent on the company in question. Many NZ companies have separate listings on the ASX and find that a sizable volume of their trading is actually executed in the Australian market. The LSE's AIM (Alternative Investments Market) is a market that lists small, growing firms from around the world and claims to have assisted many firms raising capital necessary for expansion (though this claim is largely unverified). I believe the questions that a firm needs to address before taking this step include: What are the intentions for seeking cross-listing (i.e. seeking outright value increase, more exposure, or a more diverse shareholding base)?, and what are the potential costs from cross-listing (potential dilution effect, costs from disclosure and other regulatory requirements)?.This will ultimately allow management to evaluate the substance of the claim.
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