INSTITUTE OF BANKING STUDIES

Student: Issa Nicola Faraj

Course: Special Topics in Bankin !
Finance
Second E"a#
Dr$ G%assan O#et
Q3: The Finance Literature documents a number of benefits that
might arise from cross-listing. Discuss these benefits.
- Definition of Cross- Listing:
Cross listin o& s%ares is '%en a &ir# lists its e(uit) s%ares on one or #ore &orein
stock e"c%ane in addition to its do#estic e"c%ane$ E"a#ples include: A#erican
Deposit *eceipt +AD*,- European Depositar) *eceipt +ED*,- International Depositar)
*eceipt +ID*, and Glo.al *eistered S%ares +G*S,$
Generall) suc% a co#pan)/s pri#ar) listin is on a stock e"c%ane in its countr) o&
incorporation- and its secondar) listin+s, is on an e"c%ane in anot%er countr)$
Cross0listin is especiall) co##on &or co#panies t%at started out in a s#all #arket .ut
re' into a larer #arket$
For e"a#ple- nu#erous lare Canadian co#panies are listed on t%e Ne' 1ork Stock
E"c%ane or NASDA2 as 'ell as t%e Toronto Stock E"c%ane$ T%e ter# can also .e
used to re&er to t%e listin o& a co#pan) on #ore t%an one stock e"c%ane in t%e sa#e
countr): as an e"a#ple- t%ere are a %and&ul o& co#panies in t%e United States t%at are
listed on .ot% t%e Ne' 1ork Stock E"c%ane and t%e NASDA2$ So#e orani3ations-
suc% as 4i.ert) 5edia- %a6e #ultiple listins re&lectin di&&erent underl)in assets-
called trackin stocks$
Motivations for cross-listing (enefits of Cross Listing!:
T%e acade#ic literature %as identi&ied a nu#.er o& di&&erent aru#ents to cross0list
a.road in addition to a listin on t%e do#estic e"c%ane$ *oosen.oo# and 6an Dijk
+7889, distinuis% .et'een t%e &ollo'in #oti6ations:
Mar"et segmentation
T%e traditional aru#ent &or '%) &ir#s seek a cross0listin is t%at t%e) e"pect to .ene&it
&ro# a lo'er cost o& capital t%at arises .ecause t%eir s%ares .eco#e #ore accessi.le
to lo.al in6estors '%ose access 'ould ot%er'ise .e restricted .ecause o&
international in6est#ent .arriers$
Mar"et li#uidit$
Cross0listins on deeper and #ore li(uid e(uit) #arkets could lead to an increase in
t%e li(uidit) o& t%e stock and a decrease in t%e cost o& capital$
%nformation disclosure
Cross0listin on a &orein #arket can reduce t%e cost o& capital t%ou% an
i#pro6e#ent o& t%e &ir#:s in&or#ation en6iron#ent$ Fir#s can use a cross0listin on
#arkets 'it% strinent disclosure re(uire#ents to sinal t%eir (ualit) to outside
in6estors and to pro6ide i#pro6ed in&or#ation to potential custo#ers and suppliers +&or
e"a#ple- .) adoptin US GAA;,$
Also- cross0listins tend to .e associated 'it% increased #edia attention- reater
anal)st co6erae- .etter anal)sts: &orecast accurac)- and %i%er (ualit) o& accountin
in&or#ation$
%nvestor &rotection ('bonding'!
*ecentl)- t%ere is a ro'in acade#ic literature on t%e so0called <.ondin= aru#ent$
Accordin to t%is 6ie'- cross0listin in t%e US acts as a .ondin #ec%anis# used .)
&ir#s t%at are incorporated in a jurisdiction 'it% poor in6estor protection and
en&orce#ent s)ste#s to co##it t%e#sel6es 6oluntaril) to %i%er standards o&
corporate o6ernance$ In t%is 'a)- &ir#s attract in6estors '%o 'ould ot%er'ise .e
reluctant to in6est$
(ther motivations
Cross0listin #a) also .e dri6en .) product and la.or #arket considerations +&or
e"a#ple- to increase 6isi.ilit) 'it% custo#ers .) .roadenin product identi&ication,- to
&acilitate &orein ac(uisitions- and to i#pro6e la.or relations in &orein countries .)
introducin s%are and option plans &or &orein e#plo)ees$
Disadvantages of cross-listing:
T%ere are- %o'e6er- also disad6antaes in decidin to cross0list:
Increased pressure on e"ecuti6es due to closer pu.lic scrutin)$
Increased reportin and disclosure re(uire#ents$
Additional scrutin) .) anal)sts in ad6anced #arket econo#ics$
Additional listin &ees$
So#e &inancial #edia %a6e arued t%at t%e i#ple#entation o& t%e Sar.anes0O"le) act
in t%e US %as #ade t%e N1SE less attracti6e &or cross0listins- .ut recent acade#ic
researc% &inds little e6idence to support t%is$
Do cross-listings create value)
T%ere is a 6ast acade#ic literature on t%e i#pact o& cross0listins on t%e 6alue o& t%e
cross0listed &ir#s$ 5ost studies &ind t%at a cross0listin on a US stock #arket .) a
non0US &ir# is associated 'it% a sini&icantl) positi6e stock price reaction in t%e %o#e
#arket$ T%is &indin suests t%at t%e stock #arket e"pects t%e cross0listin to %a6e a
positi6e i#pact on &ir# 6alue$ Doide- Karol)i- and Stul3 +788>, s%o' t%at co#panies
'it% a cross0listin in t%e U$S$ %a6e a %i%er 6aluation t%an non0cross0listed
corporations- especiall) &or &ir#s 'it% %i% ro't% opportunities do#iciled in countries
'it% relati6el) 'eak in6estor protection$
T%e pre#iu# t%e) &ind is larer &or co#panies listed at o&&icial US stock e"c%anes
+4e6el II and III AD* prora#s, t%an &or o6er0t%e0counter listins +4e6el I AD*
prora#, and pri6ate place#ents +*ule ?>>A AD*:s,$ Doide- Karol)i- and Stul3
+788>, arue t%at a cross0listin in t%e US reduces t%e e"tent to '%ic% controllin
s%are%olders can enae in e"propriation +t%rou% @.ondin@ to t%e %i% corporate
o6ernance standards in t%e US, and t%ere.) increases t%e &ir#:s a.ilit) to take
ad6antae o& ro't% opportunities$ *ecent researc% s%o's t%at t%e listin pre#iu#
&or cross listin %as e6aporated- due to ne' US reulations and co#petition &ro#
ot%er e"c%anes$
So#e recent acade#ic researc% &inds t%at s#aller &orein &ir#s seekin cross listin
6enues #a) .e optin &or UK e"c%anes o6er US e"c%anes due to t%e costs
i#posed .) t%e Sar.anes0O"le) Act$ On t%e ot%er %and- larer &ir#s seekin
@.ondin@ .ene&its &ro# a US listin continue to seek a US e"c%ane listin$T%e
acade#ic literature larel) inores cross0listins on non0US e"c%anes$ Ao'e6er-
t%ere are #an) cross0listins on e"c%anes in Europe and Asia$ E6en US &ir#s are
cross0listed in ot%er countries$ In t%e ?9B8s t%ere 'as a 'a6e o& cross0listins o& US
&ir#s in Capan$ *oosen.oo# and 6an Dijk +7889, anal)3e D7E cross0listins &ro# >>
di&&erent countries on B #ajor stock e"c%anes and docu#ent sini&icant stock price
reactions o& ?$FG on a6erae &or cross0listins on US e"c%anes- ?$?G on 4ondon
Stock E"c%ane- 8$EG on e"c%anes in continental Europe- and 8$DG on Tok)o
Stock E"c%ane$ T%ese &indins suest t%at cross0listins on Anlo0Sa"on
e"c%anes create #ore 6alue t%an on ot%er e"c%anes$ T%e) also %i%li%t t%e
inco#plete understandin o& '%) &ir#s cross0list outside t%e UK and t%e US- as #an)
o& t%e aru#ents discussed a.o6e +en%anced li(uidit)- i#pro6ed disclosure- and
.ondin, do not appl)$
Q*:discuss the economic im&ortance of + an"ing Com&etition,. %n
addition- ho. can $ou measure the e/tent of com&etition in a ban"ing
sector)
%ntroduction:
It is 'ell kno'n t%at .anks are special in t%at t%e) are 6ulnera.le to insta.ilit)$ As t%e
nu#erous episodes o& crises s%o'- .anks are &raile and are prone to take e"cessi6e
risks$ T%eir &unction as inter#ediaries .et'een &ir#s and .orro'ers and t%e #aturit)
trans&or#ation t%e) operate in t%eir asset0lia.ilit) #anae#ent #ake .anks pla) an
i#portant role as pro6iders o& li(uidit) to depositors- .ut also e"pose t%e# to runs and
s)ste#ic crises$ T%e reat reliance on deposits as source o& &unds creates a se6ere
aenc) pro.le# .et'een .anks and depositors in t%at- .ein su.ject to li#ited
lia.ilit)- .anks do not .ear t%e do'nside risk and %a6e stron incenti6es to c%oose
risks t%at are e"cessi6e &ro# t%e 6ie'point o& depositors$
T%e need o& a sta.le .ankin sector- toet%er 'it% t%at o& protectin consu#ers-
pro6ides t%e #oti6ation &or t%e introduction o& deposit insurance sc%e#es and lender
o& last resort &acilities$ T%ese sa&et) arrane#ents are e&&ecti6e in pursuin a sta.le
s)ste#- .ut introduce se6eral distortions and call &or &urt%er reulator) #easures-
suc% as capital re(uire#ents$
T%e lo.al trend to'ards consolidation in t%e &inancial sector %as &ocused t%e
attention o& polic)#akers on its potential econo#ic conse(uences$ T%is can .e
dauntin- .ecause t%e rane o& issues is e"pansi6e and t%e econo#ic literature is .)
no #eans conclusi6e$ To appropriatel) address consolidation- polic)0#akers need to
consider %o' it could a&&ect t%eir o6erall o.jecti6e &or t%e &inancial s)ste#- '%ic% is to
#a"i#i3e social 'el&are$ Alt%ou% t%e &inancial s)ste# co#prises &inancial
institutions- &inancial #arkets- and in&rastructure arrane#ents suc% as t%e clearin
and settle#ent s)ste#s- t%is paper &ocuses on &inancial institutions- speci&icall)
.anks$? To understand %o' t%e .ankin s)ste# can contri.ute to social 'el&are-
consider t%e &unction o& .anks$ T%e) pro6ide &inancial ser6ices necessar) &or
enterprises and consu#ers to undertake t%eir .usiness: a#on ot%er t%ins- t%e)
pro6ide a #eans to %old and e"c%ane &inancial assets- t%e) inter#ediate sa6ins to
producti6e in6est#ent t%rou% t%e suppl) o& credit to .usinesses and consu#ers- and
t%e) ena.le risk0s%arin$ E&&icient &unctionin o& t%ese acti6ities contri.utes to
econo#ic ro't%$ Indeed- t%e &unda#ental i#portance to ro't% o& a 'ell0&unctionin
&inancial s)ste# enerall)- and o& a .ankin sector speci&icall)- %as .een esta.lis%ed
&or so#e ti#e in t%e e#pirical literature on ro't%$
0hen a ban"ing s$stem does not .or" .ell- there is &otential for financial
instabilit$. an"s have traditionall$ been considered to be more vulnerable to
instabilit$ than other industries- for various reasons:
H A .ank:s .alance s%eet consists o& s%ort0ter# deposits on t%e lia.ilit) side and lon0
ter#
assets t%at can .e di&&icult to li(uidate (uickl)$ T%is lea6es t%e .ank 6ulnera.le to runs
in t%e
a.sence o& deposit insurance or #aturit)0#atc%in tec%noloies$
H Ai%l) le6eraed &ir#s %a6e an incenti6e to enae in risk) .e%a6ior$ I& t%e a#.le
'orks-
s%are%olders .ene&itI i& it does not 'ork- t%e lenders .ear t%e cost$ T%is aenc)
pro.le# is particularl) stron &or .anks: .anks tend to .e 6er) %i%l) le6eraedI a
lare s%are o& t%e de.t %olders are depositors '%o %a6e s#all clai#s- are 'idel)
dispersed- and #a) not .e 'ell in&or#ed o& a .ank:s acti6ities and potential risksI and
t%e e"istence o& deposit insurance &urt%er lessens depositors: incenti6es to #onitor
t%e risk0takin .e%a6ior o& t%e .ank$
Not onl) are .anks potentiall) #ore 6ulnera.le- .ut insta.ilit) in t%e .ankin s)ste#
can also %a6e #ore de.ilitatin e&&ects t%an insta.ilit) in ot%er industries$ Because
.anks %old &inancial assets o& consu#ers and producers- and are i#portant to
econo#ic ro't%- .ank &ailures can %a6e su.stantial econo#ic costs$ As 'ell- .anks
are connected t%rou% a 6ariet) o& net'orks +suc% as t%e inter.ank #arkets and
pa)#ents s)ste#s,- and so a s%ock to one .ank can lead to s%ocks to ot%er .anks
+contaion,$ T%is can reatl) increase t%e cost o& a crisis$ For t%ese reasons- t%e
sta.ilit) o& t%e &inancial s)ste# %as lon .een a oal o& polic)0#akers$
0hat is the (&timal Com&etitive 1tructure of the an"ing 1$stem)
T%ere %as .een considera.le concern a.out %o' onoin consolidation in
&inancial s)ste#s around t%e 'orld 'ill a&&ect co#petition$ Indeed- #uc% o& t%e
recent pu.lic de.ate see#s to assu#e t%at per&ect co#petition in .ankin is
ideal$ T%is %as not al'a)s .een t%e case$ For #uc% o& t%e last centur)- polic)0
#akers &ocused on sta.ilit)$ T%e .elie& t%at so#e deree o& #arket po'er 'as
necessar) to #aintain sta.ilit) in t%e .ankin sector led #an) countries to
pursue policies t%at- i#plicitl) or e"plicitl)- restricted co#petition$ In t%is section-
t%e 6alidit) o& t%is perception is e"plored .) e"a#inin t%e t%eoretical and
e#pirical literature on t%e e&&ects t%at co#petition and #arket po'er %a6e on
e&&icienc) and sta.ilit)$
2conomic efficienc$:
Banks are a ser6ice industr)$ T%e) contri.ute to econo#ic ro't% not .)
producin real oods- .ut .) pro6idin t%e &inancial #eans to &acilitate
production in ot%er industries$ An e&&icient .ankin sector 'ill #ake t%e larest
contri.ution to econo#ic ro't%$ T%e e&&ects o& a co#petiti6e .ankin s)ste#
6ersus one 'it% #arket po'er are discussed 'it% respect to allocati6e and
producti6e e&&icienc)$
Financial stabilit$:
T%ere %as lon .een a 6ie' t%at #arket po'er is necessar) to ensure sta.ilit) in
.ankin$ Banks t%at are pro&ita.le and 'ell0capitali3ed are .est positioned to
'it%stand s%ocks to t%eir .alance s%eet$ Aence .anks 'it% #arket po'er- and
t%e resultin pro&its- are considered to .e #ore sta.le$ T%e pro.a.ilit) o& a .ank
recei6in a s%ock 'ill depend in part on its risk0takin .e%a6ior$ T%e literature on
classic &inancial structure #aintains t%at %i%l) le6eraed &ir#s %a6e an
incenti6e to enae in risk) .e%a6ior$ I& t%e a#.le 'orks- s%are%olders .ene&itI
i& it does not 'ork- t%e lenders .ear t%e cost +Censen and 5ecklin ?9JE,$ T%is
aenc) pro.le# is particularl) stron &or .anks- since t%e) tend to .e 6er) %i%l)
le6eraed$ 5an) o& t%e de.t0%olders are depositors '%o are s#all- 'idel)
dispersed- and tend not to .e 'ell0in&or#ed o& a .ank:s acti6ities and potential
risksI t%e e"istence o& deposit insurance &urt%er lessens depositors: incenti6es to
#onitor t%e risk takin .e%a6ior o& t%e .ank$
4are .anks 'it% #arket po'er %a6e t)picall) .een 6ie'ed as %a6in incenti6es
t%at #ini#i3e t%eir risk0takin .e%a6ior +t%e c%arter06alue aru#ents, and
i#pro6e t%e (ualit) o& t%eir assets +t%e screenin t%eories,$ As seen in t%e
e&&icienc) literature- %o'e6er- t%e issue is not t%at strai%t&or'ard$
Conclusion:
A oal o& polic)0#akers is to &acilitate a .ankin s)ste# t%at .est pro#otes
econo#ic e&&icienc) and sta.ilit)$ T%e traditional perception is t%at t%ere is a
clear trade0o&& .et'een t%ese t'o oals$ A re6ie' o& t%e t%eoretical and
e#pirical literature- %o'e6er- suests ot%er'ise$ A co#petiti6e en6iron#ent
pro#otes allocati6e e&&icienc) .) encourain t%e reatest suppl) o& credit at t%e
lo'est price$ A .ankin s)ste# t%at e"%i.its so#e deree o& #arket po'er-
%o'e6er- #a) i#pro6e credit a6aila.ilit) to certain &ir#s- and it #a) pro6ide
incenti6es &or .anks to screen loans- '%ic% aids e&&icient allocation o& resources$
5arket po'er in a .ankin s)ste# #a) contri.ute to sta.ilit) .) pro6idin
incenti6es t%at #itiate risk0takin .e%a6ior- and .) pro6idin incenti6es to
screen and #onitor loans- '%ic% can i#pro6e t%e (ualit) o& .anks: port&olios$
;olicies suc% as capital re(uire#ents- disclosure rules- and risk0.ased deposit
insurance- %o'e6er- #a) pro6ide incenti6es &or .anks to .e%a6e prudentl) e6en
in a co#petiti6e #arket$
T%ere is no consensus in t%e literature as to '%ic% co#petiti6e structure
opti#i3es .ot% e&&icienc) and sta.ilit)$ T%ere are .ene&its to .ot%- and neit%er
e"tre#e is likel) ideal$ T%ere&ore- t%e oal #a) .e not to eli#inate #arket po'er
.ut to &acilitate an en6iron#ent t%at pro#otes co#petiti6e .e%a6ior
+contesta.ilit),$ In t%is 'a)- t%e potential costs o& #arket po'er are #itiated
'%ile per%aps reali3in .ene&its &ro# an) residual #arket po'er$
K%at does a contesta.le .ankin sector look likeL T%ere is a ro'in
consensus in t%e literature t%at t%e traditional approac% o& e(uatin &e' .anks or
concentration 'it% #arket po'er is not enou%$ Concentration is not in itsel& a
su&&icient indicator o& co#petiti6e .e%a6ior$ Ot%er i#portant &actors are in6ol6ed-
suc% as less0se6ere entr) restrictions- t%e presence o& &orein .anks- &e'
restrictions on t%e acti6ities t%at .anks can per&or# 'ell0de6eloped &inancial
s)ste#s- t%e e&&ect o& .ranc% net'orks- and t%e e&&ect and use o& tec%noloical
ad6ance#ents$ Because it re(uires an understandin o& t%ese 6arious &actors-
an assess#ent o& contesta.ilit) in t%e .ankin sector can .e 6er) di&&icult and is
likel) to .e speci&ic to a particular countr) at a particular ti#e$ It is #ore
co#plicated t%an it &irst appears to .e$