Racing towards the top?: The impact of cross-listings, and stock market competition on international corporate governance

Cross-listing by foreign issuers onto U.S. exchanges accelerated during the 1990s, bringing international market centers into competition for listings and draining liquidity from some regional markets. Although cross-listing has traditionally been explained as an attempt to break down market segmentation and to increase investor recognition of the cross-listing firm, the globalization of financial markets and instantaneous electronic communications render these explanations increasingly dated. A superior explanation is "bonding": Issuers migrate to U.S. exchanges because by voluntarily subjecting themselves to the United States's higher disclosure standards and greater threat of enforcement (both by public and private enforcers), they partially compensate for weak protection of minority investors under their own jurisdictions' laws and thereby achieve a higher market valuation. Still, this explanation is also incomplete because many issuers who are eligible to cross-list do not do so. Increasing evidence suggests that cross-listing firms differ significantly from firms in the same jurisdictions that do not cross-list, most notably in that the former have higher growth prospects and are willing to sacrifice some of the private benefits of control to obtain equity finance. As a result, specialized markets or market segments seem likely to persist, each catering to a different clientele of firms. Cross-listing appears to be producing a new and desirable form of regulatory competition. In particular, new "high disclosure" exchanges have appeared that seek to increase the protection for minority shareholders, but they encountered problems that in part relate to U.S. policy. To encourage this competition, this Article recommends that the United States rationalize its currently schizophrenic and inconsistent approach to the foreign issuer, which approach sometimes waives all governance listing requirements for foreign issuers and sometimes subjects them to mandatory and incompatible governance standards.