capital.
Cross-listed shares reduce existing market frictions, such as currency or custody requirements, associated with foreign ownership of common stock. For example, consider a U.S. incorporated multinational company that wants to broaden its investor base in Japan. This company could issue shares on the Tokyo Stock Exchange, which would trade in Japanese yen in the home market of Japanese investors, perhaps raising visibility with investors in a new market.
Like depositary receipts, which are described in the next subsection, cross-listed shares are fungible for the same company's shares on another exchange. Unlike a depositary receipt, which represents shares held by a custodian, cross-listings are direct ownership vehicles in the subject company. The local exchange may demand reporting and corporate governance obligations to qualify for trading and comply with local laws and regulations. According to Dobbs and Goedhart (2008), the idea that cross-listings create value is dated because capital markets have become more globalized and integrated. Additionally, trading liquidity in the cross-listed markets often pales in comparison to the primary market's. Therefore, the potential benefits do not justify the costs for compliance with additional exchange rules, notably for companies cross-listing into the United States. In contrast, Roosenboom and van Dijk (2009) conclude that a firm's cross-listing shares on developed market exchanges, such as the NYSE or LSE, do create shareholder value by way of bonding to heightened investor protection laws and increased information disclosure of the developed market. Bonding is the process by which companies located in countries with lax regulation align themselves with more stringent financial disclosure and corporate governance standards by cross-listing onto a developed market exchange.
Depositary Receipts
To facilitate the trading of internationally listed stocks for domestic investors, financial institutions created depositary receipts (DRs) because market frictions and structures prevent most investors from transacting easily across markets, due to differences in clearance, settlement, and currency denominations. When banks and brokers issue DRs to investors, the underlying stock remains held and deposited in the market of the foreign company. A Securities and Exchange Commission (SEC) (2012) bulletin explains DRs' ownership of the underlying foreign listed stock, but the DR may be sold as a multiple or fraction of the underlying shares. Although DRs represent indirect ownership for investors outside the company's home market, they are fungible, meaning the DR itself can be exchanged for the underlying shares in the company's home market.
The most common form of DR is the American depositary receipt (ADR), which enables U.S. investors to buy and sell shares of non-U.S. listed companies. These shares trade and settle in U.S. dollars and their prices fluctuate with movements in the underlying stock and changes in the exchange rate, as well as the local market (i.e., the United States) conditions such as ownership and trading volume. ADR facilities may be sponsored, which involves cooperation between the depositary and the company issuer, or unsponsored, which involves a bank or broker offering the ADR without the company's participation (Saunders 1993). Depending on the degree of access the foreign company has to the U.S. equity market, ADRs can also be classified into three levels (I, II, and III), which determine reporting requirements. Level I ADRs trade over the-counter (OTC), rather than on a U.S. exchange, and also have minimal reporting requirements but may not raise new capital via the ADR (JPMorgan 2008). Levels II and III have more stringent financial reporting requirements and trade on national U.S. exchanges (e.g., NASDAQ or NYSE), with the primary distinction between the two levels being that Level III can raise new capital via the ADR facility (Citi 2019).
Following the ADR, the second most common DR is a global depositary receipt (GDR), which is a generalized form of the ADR. For example, a Chilean company could offer shares to European investors in Europe by engaging a depositary bank to implement a GDR program. Likewise, a European depositary receipt (EDR) is a DR used for investors based in Europe. Other country-specific programs exist, such as CREST Depository Interests (CDIs) for U.K.-based investors and Transferable Custody Receipts (TraCRs) for Australia-based investors, each designed to conform with local regulations and norms.
DRs offer benefits for issuers and investors alike. For issuers, a DR is a useful tool to diversify the investor base beyond the home market, which contributes to increases in investor recognition of the company (Foerster and Karolyi 1999). Additionally, having new investors in the company also raises trading liquidity for the company's shares. In certain instances, companies may use DRs to raise capital or to fund cross-border merger or acquisition activity. Similarly, DRs facilitate stock ownership for employees in the company's overseas subsidiaries. For investors, globalizing a portfolio is simplified via DRs because they trade, clear, settle, and pay dividends in the investor's home currency and by its market conventions, eliminating foreign custody and safekeeping charges. When transacting in DRs, investors pay taxes only as levied by their home market. Moreover, depending on tax treaties between the home market and the market of the invested company, investors may receive dividends without foreign withholding taxes. For institutional investors whose charters prevent transacting in foreign securities, DRs may be recognized as local market stocks.
Alongside these benefits come certain disadvantages for DR issuers and investors. For the issuer, DRs can create direct listing costs and periodic fees charged by securities exchanges. Moreover, DRs may create reporting obligations, raising audit costs as a corollary, maintaining compliance with securities regulators in the overseas market (Doidge, Karolyi, and Stulz 2010). Failure to comply could result in fines and sanctions for the DR listing. For investors in DRs, despite being quoted and traded in a local currency, DRs fail to protect against risks from changes in exchange rates and inflation of the foreign currency, or changes in the political and regulatory environments of the overseas market. Although arguably simpler than investing directly in a foreign market, DRs still require coordination by the depositary bank, safekeeping by the custodian, and other services. These institutions typically pass the cost of these services through to investors in DRs, in some instances as a direct fee or as a deduction from the dividends paid by the company. Finally, investors may find DRs to be illiquid in their home market, despite adequate trading activity in the issuer's home market.
Dual Listings
Dual listings, also referred to as “Siamese twins” or “dual-headed” enterprises, are atypical, and ostensibly a vanishing corporate structure in which two legally distinct companies operate as if they were a single economic enterprise, retaining independent legal identities. A set of contractual agreements pool operations and link the cash flows and control of the dual-listed companies (DLCs) into a single entity. Profit-sharing and other arrangements associate rights, cash flows, and ownership of one entity of the pair to those of the other, based upon a predefined ratio, thereby implying that ownership in either of the pair should be equivalent to the other contractually. Because each pair's shares manifest ownership in a different company, shares between the pairs are not fungible. Unlike a cross-listing, which offers investors the same shares on multiple markets, a DLC's shares are associated with discrete underlying companies.
In most cross-border combinations, a single holding company combines the merging companies. Still, dual-listing transactions arose from a desire to merge business operations while retaining individual corporate identities. This separation permitted the involved companies to retain their respective tax jurisdictions, national identities, exchange listings, and distinct shareholder bases. The survival of the discrete legal entities likewise avoids unintended political or tax-related negative synergies that might arise following standard merger or acquisition transactions (U.K. Panel on Takeovers and Mergers 2002).
Although the DLC structure is not unique to specific industries or countries, most historically have involved a U.K.-domiciled pair. Current and historical examples of DLCs include Unilever, a consumer products manufacturer; Royal Dutch Shell, an oil and gas company; Carnival, a cruise line operator; and SmithKline Beecham, a pharmaceutical and consumer healthcare manufacturer (now part of GlaxoSmithKline). At one point in their respective histories,
