Cross-listing refers to the listing of a company’s ordinary shares on a different exchange other than its original stock exchange. For example, a company might list its equity shares on a foreign stock exchange in addition to its domestic exchange. For a company to be permitted to cross-list, it must meet the same requirements as other listed companies. These are basic requirements for share count, filing requirements for financial reporting, accounting principles and firm revenues.
Cross-listing enables companies to trade its shares in numerous time zones and multiple currencies. This increases the issuing company’s liquidity and gives it more ability to raise capital. Foreign companies that cross-list in the United States of America do so through American depository receipts. This term applies to foreign companies that seek to list their stocks on United States-based exchanges.
Market segmentation is the practice of dividing a large market into clear segments with similar needs. Cross-listing enables firms to divide foreign investor markets into segments which are easy to access. Companies seek to cross-list because they anticipate gaining from a lesser cost of capital. This arises because their stocks become more available to foreign investors. Their access to these stocks may otherwise be restricted due to international investment barriers.
Cross-listing can decrease the cost of capital via improving the company’s information environment. Cross-listing is associated with better media awareness which increases the quality of accounting information. Listed companies can use cross-listing on markets with strict disclosure requirements to indicate their quality to foreign investors and to supply better information to potential suppliers and customers.
Cross listing acts as a linking mechanism used by companies that are incorporated in a jurisdiction with reduced investor protection. These companies commit themselves willingly to higher standards of corporate governance. Investors will therefore feel safe to invest in these companies because their investments are protected.