Foreign Listings on Global Exchanges

Transcription

1 Foreign Listings on Global s By Research & Corporate Development Department Most exchanges mainly list and trade their domestic companies. London and New York, the two leading international financial centres, have been able to attract a large number of listings and relatively active trading of stocks. While these successful cases are not easy to replicate, Hong Kong may be able to attract more listings. Globalisation has become a common goal for almost any kind of business organisation industrial, commence or financial. Apart from competing for the world s investment money, exchanges with an international perspective also compete for the listing of equities and other securities of issuers from all over the world. Cross-border listing the listing of companies abroad has become increasingly popular. This article briefly examines the listing and trading activities of equities on global exchanges 1, looks at the possible reasons for an issuer to seek listing, and examines Hong Kong s experience in listing and trading. Statistics of the World Federation of s (WFE) are used for the examination. According to the WFE definition, a company is considered if it is incorporated in a country other than where the exchange is located. However, exchanges may adopt their own definitions. For example, the Singapore (SGX) defines companies as companies whose principal place of business is outside Singapore. As a result, the statistics may not be strictly comparable. The Global Picture of Foreign Listing and Trading Understandably, the key international financial centres in the world London and New York attract the most company listings. At the end of June 2007, the London Stock (LSE) had the largest number of listings (670), followed by the New York Stock (NYSE) (434) and Nasdaq (313). SGX with 255 listings, ranked the 4 th globally and the first in the Asia-Pacific region 2. (See Table 1) In percentage terms, for most exchanges companies made up less than 20 per cent of their listings. 1 2 Comprising exchanges which are members of the World Federation of s (WFE). It should be noted that companies may be cross-listed on multiple markets, eg many big multinational companies are listed both in London and New York. 27

2 Foreign Listings on Global s Top 10 exchanges by number of listed companies (June 2007 vs June 2006) Table Rank Number of listings June 2007 June 2006 % of global listings* Number of listings % of global listings* 1 London Stock % % 2 New York Stock % % 3 Nasdaq % % 4 Singapore % % 5 Euronext % % 6 Luxembourg Stock % % 7 Mexican % % 8 American Stock % % 9 Deutsche Börse % % 10 Swiss % % Top 10* (June 2007) 2, % 2, % Other exchanges* (25 in total in June 2007; 23 in total in % % June 2006) # Global exchanges* (35 in total in June 2007; 33 in total in June 2006) # 3, % 2, % * Include listings on multiple markets. # In addition, 16 exchanges in June 2006 and 15 exchanges in June 2007 recorded no listings. Data for Tel-Aviv Stock in both periods and for BME Spanish in 2006 are not available. Source: WFE Monthly Statistics downloaded on 20 February 2007 and 20 August 2007 ( In terms of funds raised, the LSE had a significant proportion contributed by issuers. In 2006, new listings on the LSE Main Market raised a total of 10.5 billion (HK$160 billion), contributing 55 per cent of the total funds raised by new listings in the year. The latest data of the other exchanges are not available. Nevertheless, a study of initial public offers (IPOs) involving underwriting during 2003 to 2005 found that IPOs constituted 31 per cent of total IPO funds raised on NYSE and 14 per cent on Nasdaq but only 0.2 per cent on Euronext and none on Deutsche Börse, compared to 29 per cent on LSE 3. Table 2 shows the trading of stocks on global exchanges. In the first half of 2007, 90 per cent of the global trading of stocks was concentrated in London and New York - 55 per cent on LSE, 24 per cent on NYSE and 11 per cent on Nasdaq. As shown in Table 3, among the global exchanges, LSE had the largest proportion of its share trading in stocks (46 per cent in the first half of 2007). The corresponding figures for the New York exchanges (NYSE and Nasdaq) were, however, below 10 per cent; the same was true for most other exchanges. Overall, only 10 per cent of global stock exchange trading was in stocks, ie 90 per cent was in the shares of domestic companies. If the top ten exchanges by percentage of share trading in stocks were excluded, the percentage of exchange trading in stocks for the rest in aggregate declined to only 1 per cent (see Table 3). If the three exchanges (ie LSE, NYSE and Nasdaq) with the largest stock trading value were excluded, the percentage of exchange trading in stocks for the rest in aggregate was only 2 per cent. In other words, most stock exchanges trade almost exclusively their domestic stocks. 3 The cost of capital: An international comparison, Oxera Consulting Ltd for London Stock, June

3 Trading value of stocks on global exchanges (2006 and 2007H1) Table Rank Foreign stock trading value (US$m) 2007H % of global stock trading Foreign stock trading value (US$m) % of global stock trading 1 London Stock 2,578, % 3,288, % 2 New York Stock 1,110, % 1,795, % 3 Nasdaq 502, % 712, % 4 Deutsche Börse 168, % 253, % 5 Swiss 91, % 109, % 6 Borsa Italiana 53, % 87, % 7 JSE (South Africa) 45, % 81, % 8 OMX Nordic 39, % 67, % 9 Oslo Børs 31, % 55, % 10 Australian Securities 27, % 35, % Top 10 (2007H1) 4,648, % 6,484, % Other exchanges (22 in total in 2007H1; 23 in 2006)* Global exchanges (32 in total in 2007H1; 33 in 2006)* 54, % 79, % 4,702, % 6,564, % * In addition, 16 exchanges recorded no trading in stocks in both periods. Data is not available for American Stock and Singapore. Source: WFE Monthly Statistics downloaded on 27 July 2007 ( Percentage of share trading in stocks on global exchanges (2006 and 2007H1) Table Rank % share of exchange total 2007H London Stock 46.4% 43.4% 2 Buenos Aires Stock 24.2% 36.0% 3 JSE (South Africa) 24.1% 26.2% 4 Oslo Børs 12.2% 13.6% 5 Lima Stock 12.1% 11.1% 6 New Zealand 10.0% 9.6% 7 Swiss 9.6% 7.8% 8 New York Stock 8.5% 8.2% 9 Deutsche Börse 7.9% 9.3% 10 Nasdaq 7.3% 6.0% Top 10 (2007H1) 15.6% 13.7% Other exchanges (39 in total)* 1.0% 1.2% Global exchanges (49 in total)* 10.1% 9.5% * Data is not available for American Stock and Singapore. Source: WFE Monthly Statistics downloaded on 27 July 2007 ( 29

4 Foreign Listings on Global s The relative significance of listing and trading on major exchanges is summarised in Figure 1. The chart gives an overview of the situation for the exchanges ranked in the top 10 either by market capitalisation or by turnover value. As observed, it is rare that an exchange of substantial size has a high percentage share of companies in both its listing and trading activities. Only London can be regarded as a truly international market, with companies contributing 46 per cent of its market turnover in the first half of 2007 and 20 per cent of its listed companies by number as of the period end. 1 Market share of companies in number of listings and trading value on major WFE exchanges* (2007H1) 50% LSE % of total shares trading 40% 30% 20% 10% Deutsche Börse Nasdaq HKEx 0% 0% 5% 10% 15% % of total number of companies NYSE Euronext 20% HKEx BME Tokyo TSX Italy Nasdaq Deutsche Börse NYSE Euronext LSE * Including only the top 10 exchanges by market capitalisation at the end of June 2007 or by turnover value for the first half of 2007 which had listings. Note: BME operates Spain s securities markets; TSX runs the Toronto Stock. Source: WFE Monthly Statistics downloaded on 27 July 2007 and 20 August 2007 ( It can be concluded that most exchanges mainly list and trade their domestic companies. The biggest global exchanges the LSE, NYSE and Nasdaq do have substantial trading in stocks, but they are the exception rather than the rule. Elsewhere, exchanges generally have few listings, or if they have some, the stocks usually do not trade much. The stock exchanges in London and New York are successful in attracting listings by offering a convenient instrument depositary receipts (DRs) for the companies. DRs help companies overcome domestic restrictions or administrative difficulties in their home markets that would constrain direct overseas listing of their shares, e.g. in areas like tax issues, settlement of stock transactions overseas and exchange restrictions. Moreover, London and New York are the world s leading international financial centres and have their own attractions for listings that other markets may not able to replicate. (See sections below on drivers of listing and depositary receipts.) 30

5 The Home Market Effect As discussed above, apart from the leading international financial centres, most exchanges list and trade mostly their domestic stocks. This can be called the home market effect. Foreign listings are very much in the minority only 3,124 (7 per cent) of the over 44,000 equity listings at June 2006 were 4. And listings that trade actively are rarer still. Even when a company has its stock cross-listed in a market, trading tends to concentrate in the domestic or home market. The dominant trend of stocks trading in the home market can be illustrated in Figure 2 for Hong Kong stocks dual-listed in the US (either on NYSE or Nasdaq). For the 27 dual-listed stocks in 2006, 83 per cent of the trading took place in Hong Kong. The home market s percentage share remained high throughout the past years. If the London market trading in these stocks (excluding HSBC, which is domiciled in London and has a primary listing in London) was included, the Hong Kong market share in 2006 was still high at 75 per cent, the US market share was 17 per cent and London 8 per cent. The findings of research done by the Securities Futures Commission (SFC) 5, which covers more stocks in its sample and includes trading in the over-the-counter (OTC) market, also illustrates the home market effect in the trading of Hong Kong and Mainland stocks listed in Hong Kong. 2 Hong Kong s market share in turnover value of companies dual listed in the US ( ) 100% 90% 80% 70% 60% 85% (21) 89% (22) 85% (23) US 75% (24) 81% (28) 85% (28) 83% (27) 50% 40% 30% HK 20% 10% 0% ( ) No. of dual-listed stocks Source: The Bank of New York for the stock list; Reuters for US trading data. The possible causes for the home market effect are that domestic investors have greater interest in the domestic stock listed in their home market than investors in the host market where the stock is cross-listed, and that international investors who have access to both markets still prefer to trade the stock in its home market not least because they know the domestic investors are concentrated there. 4 5 The figures include cross-listings. Trading of listed equity products in Hong Kong, the UK and US, Research Department, Supervision of Markets Division, July The study analysed trading in H shares, red chips and Hang Seng Index constituent stocks which were also traded (ie not necessarily listed) in the UK and the US. It was found that, if HSBC was excluded, Hong Kong s market share was over 80 per cent during each of the years 2003 to

6 Foreign Listings on Global s For these causes, the key underlying factors are stock familiarity and information accessibility. Domestic investors are more familiar with domestic companies than companies. In the host market where a company is cross-listed, investors over there may find it difficult or inconvenient to access and comprehend the company s information. This is especially so when the host market is located far from the home market, eg in a different time zone, and has a different language and culture. For example, not all information about the company may be available in the language used in the the host market; shareholders meetings would be held in the home market; site visits by host market stock analysts or institutional investors to the company or meetings with the company s management would be considered inconvenient or costly; and information dissemination and communication channels may not be efficient or effective between the host and home markets. These factors would negatively affect investor interest in the stock and would often result in poor secondary market liquidity. A study found that Mainland companies prefer a listing in Hong Kong to one in the US because of the better information environment that Hong Kong offers to them Mainland companies listed in Hong Kong have a better analyst following than those listed solely in the US 6. Issuers determined to make a success of overseas listing would normally have to make frequent investor relations visits to the host market to compensate for these negative factors. Whether a cross-listed stock can overcome the home market effect would depend on the characteristics of the home market relative to the host market. A study of cross-listings in the US market found that trading in the host market where the stock is listed (ie US) dominates trading in the home (origin) market of that stock when: the company s home country is geographically close to the US; has a lower degree of financial development; and has less protection against insider trading 7. The same study found that if the home market is a developed market, the domestic turnover would increase and remain high in the wake of a cross-listing. In other words, there is some evidence that if the home market is less developed with less investor protection relative to the host market and information access from the host market is relatively convenient, the home market effect would be less. Otherwise, it is likely that the home market effect dominates. In summary, the home market effect will tend to prevail unless the home market is less developed than the host market (see section below) and the host market can overcome the geographical barrier and differences in language and culture, and can provide efficient information dissemination and an adequate analyst following. Possible Drivers of Foreign Listing Given the home market effect, why would a company choose to list overseas? The major reason may be that the company has limited access to capital in its home market. In jurisdictions where the capital market is less developed and/or the access to it is restricted (ie the case described in the foregoing section), companies would tend to list abroad if they are allowed to do so. Even if market access is not restricted at home, the capital raising capability of a company at home and abroad may be enhanced by listing on a leading exchange. A study found that there is a significant premium for US exchange listings, i.e. companies cross-listed in the US are worth more due to the governance benefit offered by the regulatory regime in the US 8. Empirical Choice of listing location: Experience of Chinese firms, Ting Yang and Sie Ting Lau, Pacific-Basin Financial Journal 2006, Volume 14, Issue 3. Where is the market? Evidence from cross-listings in the US, Michael Halling, Marco Pagano, Otto Randl and Josef Zechner, March Has New York become less competitive in global markets? Evaluating listing choices over time, Craig Doidge, G. Andrew Karolyi, and René M. Stulz, April

7 studies also suggest that the cost of equity capital declines following a listing 9. Suggested reasons are the reduction in transaction costs due to increased liquidity and increased accessibility of company information. The above factors, of limited access to capital, have also been applicable to the case of Mainland China. Moreover, in Mainland China, there are also drivers of listings other than commercial considerations. At an early stage, the Mainland authorities considered that listing in Hong Kong would help foster international standards of management and corporate governance at Mainland enterprises, so they encouraged the enterprises to list in Hong Kong. This led to the spate of successful Mainland listings in Hong Kong in recent years. Other possible reasons for listing overseas include the prestige that the market may offer to the issuer. By listing on a leading exchange in the world, the company would expect to gain a higher profile that would help in the marketing of its products or services in the market where it is listed and globally. A company with a global business perspective might also choose to list in multiple markets around the world to gain exposure to more potential customers and investors. A broader investor base would also help increase the firm s capital raising capacity. Companies may also go for a prestigious market that would highlight its business nature. Nasdaq, for example, has established itself as a global centre for the listing and trading of technology companies. Technology companies listed there would gain the benefits of knowledgeable professional service support and global investor interest specialising in the technology sector. Other reasons include employee relations being able to attract and retain employees in the market(s) where the company is listed and to provide incentives such as share options or restricted shares and legal considerations, eg to fulfill local ownership requirements in the host market without technology transfer, as in the case of a joint venture 10. Furthermore, a listing may facilitate a company participating in international mergers and acquisitions. Nevertheless, a listing involves costs which may be higher than the costs for a listing in the domestic market. These include explicit costs like listing fees, regulator fees, intermediary fees and registration fees and the implicit costs of regulatory compliance, investor relations, voluntary disclosures in the host market and even social responsibility. Where a company has multiple listings, the obligations are multiplied. Rationally, a company chooses to list in a market, whether or domestic, only if the benefits (as outlined above) outweigh the costs. In the end, a listing may not turn out to be beneficial to the company. For example, British Airways disclosed in April 2007 that it had decided to withdraw its listing from the NYSE in order to save costs. Hong Kong-based Henderson Land Development, which was listed on the Tokyo Stock (TSE) in 1997, applied to delist from the TSE about 10 years later for the reason of low trading of its shares that did not justify the listing costs; it was subsequently delisted on 22 July Deutsche Bank was listed on the TSE in 1989 and delisted in In fact, the number of listings on the TSE declined from a peak of 127 in December 1991 to 25 in August Quoted in The rationale for cross-border listings, Éric Chouinard and Chris D Souza, Financial Markets Department, Bank of Canada Review, Winter Foreign listings of Chinese enterprises Where and Why, International Financial Management Course Paper, Fall 2005, Professor: Mihir A. Desai, Students: Jian Sun, Brooke Zhou. 11 Source: Listing/delisting of companies dated 8 August 2007 on TSE website. 33

8 Foreign Listings on Global s Convenience of Depositary Receipts Although issuers in London and New York can list by way of ordinary shares, they often choose to list by way of depositary receipts (DRs). DRs, better known as American Depositary Receipts (ADRs) in the US, were first introduced in the US in 1927 to facilitate US investment in a UK company. Under a DR mechanism, shares of the issuer are deposited with a local custodian bank in the home market. Upon confirmation of the deposit, a depositary bank in the host (investors ) market issues DRs in matching quantity, each DR representing a parcel of the underlying shares in a fixed ratio. The DRs are then traded and settled on the host exchange, and dividends are paid, in the host market s currency. DRs offer a standard practice for listings and facilitate the issuer conforming with local administrative regulations. DRs are also commonly used in other markets seeking to attract listings, e.g. Luxembourg and Singapore. In some markets, there are DR segments available only to professional investors to cater for their investment needs, eg London s Professional Securities Market (PSM) and Singapore s Global Depository Receipts (GDRs) market. The Hong Kong Situation For HKEx, companies are defined as those incorporated overseas and which have a majority of their businesses outside Hong Kong and Mainland China. Under this definition, HKEx has only eight companies listed at the end of September However, under the WFE definition, 72 per cent of companies (869 in number) listed in HKEx at the end of September 2007 were companies companies incorporated in places outside Hong Kong and Mainland China which contributed in aggregate 28 per cent of total equity trading in the first nine months of HKEx does not classify companies by their place of incorporation because a substantial proportion of domestic companies listed in Hong Kong have redomiciled since the 1980s. The most popular places for redomicile have been the tax heavens Bermuda (currently 38 per cent of all Hong Kong-listed companies) and Cayman Islands (33 per cent). In another dimension, there are over 100 companies listed in Hong Kong if ownership is used as the basis for identification. These include over 50 Taiwanese companies and over 50 others 12 from various jurisdictions such as Malaysia, Singapore, Indonesia, Japan, Thailand, Australia, the US and the UK. Although domestic companies in Hong Kong include Mainland companies under HKEx's definition, the Mainland dimension of the Hong Kong market in fact constitutes a significant ex-hong Kong element. Albeit that Hong Kong is part of China, the Hong Kong financial market is separate from the Mainland market under the One-Country-Two-Systems principle. The first Mainland-incorporated enterprise (H-share company) was listed in Hong Kong in At the end of September 2007, there were 143 H-share companies listed in Hong Kong, constituting 12 per cent by number of listed companies, 27 per cent by market capitalisation and 44 per cent by equity turnover value for the first nine months of Apart from the H-share companies, there are the red chips companies incorporated outside Mainland China but controlled by Mainland government authorities and the Mainland private enterprises incorporated outside Mainland China. The entire Mainland dimension of HKEx H shares, red chips and non-h-share private enterprises constituted in aggregate 32 per cent of listed companies by number, 58 per cent by market capitalisation and 67 per cent by equity turnover value for the first three quarters of Companies with a controlling shareholding of over 30 per cent. 34

9 The Hong Kong market has been successful in establishing itself as an international listing and trading platform for Mainland enterprises. Now, it has gone beyond that to be well regarded as an international home market for Mainland businesses attracting the listing of other ex-hong Kong/ Mainland enterprises with businesses in the Mainland, eg Taiwan-controlled companies operating in the Mainland. Ranked 7th globally by market capitalisation at the end of September 2007, the Hong Kong market is an international financial centre well recognised by the world. Its attractiveness to Mainland enterprises, and potentially other overseas enterprises, lies in its substantial capital raising capacity stemming from a good combination of local and international market participants, a sound legal and regulatory framework that provides a high level of investor protection, a broad and balanced retail and institutional investor base, efficient information dissemination and communication channels and strong intermediary service support. With its current scale and international stature, the Hong Kong market may be able to attract more issuers. Conclusion Statistics show that most exchanges mainly list and trade their domestic companies. London and New York are the main exceptions in attracting significant listing and trading of companies. Nevertheless, the home market effect tends to dominate in the listing and trading of stocks. HKEx has successfully established itself as the home market and capital formation centre, with substantial international participation, for Hong Kong and Mainland enterprises. With its current market scale, international investor base, sound regulatory regime and professional intermediary service support, the Hong Kong market may be able to attract a wider range of issuers. 35