Key Highlights
Cross-listing involves listing a company's ordinary shares on an exchange other than its primary and original stock exchange.
Fulfilling the listing criteria of the exchange is a prerequisite for companies seeking cross-listing.
Advantages of cross-listing include trading shares in various time zones, enhancing liquidity, and facilitating access to new capital.
Cross Listing Meaning
A cross-listing of shares takes place when a company's shares are listed on stock exchanges in multiple countries, enabling interchangeability between shares traded on different exchanges. Companies listed on various stock exchanges must adhere to the regulations, mainly accounting policies, of each foreign exchange. These firms have multiple choices and carefully evaluate the advantages and disadvantages of each potential stock exchange. Typically, big multinational companies choose to be listed not only on their home country's stock exchange but also on exchanges in other countries where they have significant operations. Cross-listing platforms offer companies the benefit of having a presence on stock exchanges in various time zones.
Benefits of Cross Listings
While numerous companies choose to list on the stock exchange within their domestic market exclusively, there are advantages to considering cross-listing on multiple exchanges.
1. Market SegmentationMarket segmentation involves dividing a large market into distinct segments with similar needs. Cross-listing facilitates firms in segmenting foreign investor markets for easier access, anticipating the cost of capital reductions as stocks become more available to foreign investors, and overcoming international investment barriers.
2. DisclosureCross-listing can reduce the cost of capital by enhancing the company's information environment. It is linked to improved media awareness, elevating the quality of accounting information. Companies listed on markets with stringent disclosure requirements can use cross-listing to signal their quality to foreign investors and provide better information to potential suppliers and customers.
3. Increased Market LiquidityIncreased market liquidity results from cross-listing, allowing companies to trade shares in various time zones and currencies, thereby enhancing the issuing company's liquidity and capital-raising capabilities.
4. Investor ProtectionAs a linking mechanism, cross-listing is employed by companies incorporated in jurisdictions with lower investor protection, voluntarily committing to higher corporate governance standards. This commitment reassures investors, fostering a sense of security in their investments.
Challenges and Obstacles Associated with Cross-Listing
Simply cross-listing a company abroad does not guarantee the attraction of foreign shareholders, and the perceived advantages of this practice may be exaggerated. Here are some potential risks and hurdles associated with cross-listing:
1. Exposure to RisksThe cross-listed company becomes more vulnerable to risk, particularly in the face of political and economic instability. Success in cross-listing relies on alignment between the foreign country's economic and financial policies and those of the home country.
2. Increased Compliance RequirementsCross-listed companies must navigate complex dual sets of rules, encompassing auditing, internal controls, and corporate governance regulations. Fulfilling the listing requirements of the host country is imperative, and foreign nations often mandate adherence to local accounting policies. These additional demands can pose significant challenges to companies and substantially increase their compliance costs.
Conclusion
Cross listing is a strategic financial move that allows companies to expand their investor base and enhance liquidity by listing their shares on multiple stock exchanges. This practice not only provides companies with access to a broader pool of investors but also fosters transparency and regulatory compliance. Cross-listing can strengthen a company's global presence, increase visibility and potentially attract more institutional investors.
