Initial public offerings of international companies and cross-listing on stock exchanges

IPOs

Stock exchanges today are virtual entities that compete globally for new business. Multinationals have in recent decades taken an interest in cross-listing on multiple exchanges, as to do so improves the ability to raise capital and to allow more investors access to their companies. A company like mining giant Rio Tinto, for example, is listed in its native Australia, but is also cross-listed in London and on the NYSE. There are other benefits as well, such as greater liquidity, or in some cases seeking a more knowledgeable investor base (PWC, 2014). It has been shown that the determinants of long-term performance are different for cross-listed firms with IPO and those that cross-listed after their IPO, illustrating the value of starting with a cross-listing from the outset (Bancel, Kalimipalli & Mittoo, 2009).

Cross-listing should in theory provide a lower cost of capital, especially when cross-listing from a smaller country to a larger one, lower agency costs, and better growth opportunities (Pett, 2013). The results should be that cross-listed firms will enjoy better long-run performance. That in part explains why there has been an uptick in cross-listing, including cross-listing at the IPO.

The unique aspect of the cross-listing IPO is the timing. The timing, as it turns out, matters. When a small market company cross-lists in a larger market, there are prestige effects. The cross-listing effectively signals to investors about the firm's value going forward, in the enhanced firm visibility, improved corporate governance and lower costs. But when a large-market firm cross-lists in a less prestigious market, this sends the opposite signal to the market. It would be expected that the improved liquidity and other factors would be enhanced with any cross-listing, but the prestige factor can explain why this is not the case, and small to large cross-listings outperform large to small cross-listings significantly (Cetorelli & Peristiani, 2010). It may well be that there is home bias, however, as domestic investors tend to faster rates of price discovery than the foreign market investors -- so the benefit might be more about investor ignorance in the larger market than prestige (Yaseen, Lam & Barkoulas, 2014).

While a cross-listed IPO is not the norm, it has become used more frequently. Cross-border IPO activity peaked during 2006-2007 when the IPO markets in general were robust, and then dipped in line with the Great Recession to almost none in 2009. The highest number recorded was 25 such cross-listed IPOs, so they are still a relatively small portion of global IPOs (PWC, 2014).

In keeping with the prestige factor, London (41%) and New York (23%) were the most popular destinations for cross-border IPOs. They came from a wide range of countries, and it is possible that London is more popular because of the effects of GAAP vs. IFRS -- companies listing in the UK can opt for IFRS, and the requirements of SOX. PWC (2014) also reports that Hong Kong and Singapore are hubs for Asia-Pacific issuers.

The largest demand driver of cross-border IPOs is from Chinese companies, as the PRC accounted for 30% of all cross-border IPO activity. This is somewhat different than most cross-border IPOs between Western countries, in that the PRC exchanges do not have the same liquidity and capital-raising abilities, nor the same governance, as would be found on exchanges outside the country. This means that Chinese companies are likely seeking a different set of benefits from their cross-listed IPOs than would, say, a Canadian company doing a simultaneous IPO in New York.