Thesis: Analysis of the Efficiency and the Future of the Foreign Cross-Listing

I. Theoretical Approach of the Foreign Cross-Listing

I.1. Preamble

Definition of the foreign cross-listing:

In this research, a company is considered as foreign cross-listed, if and only if its own shares are officially listed on one or several foreign stock exchanges, in addition to the stock exchange of its incorporation country.

By the term officially listed, we consider cross-listing initiated on the behalf of the company.

Nowadays, foreign cross-listing may complete the hierarchy of financing sources, the Pecking Order Theory developed by S. Myers and N. Majluf in 1984.

#1: Successive Process of Global Financing^l

Domestic Capital
Market Operations

International
Bond Issue

Foreign Equity
Issue

Foreign Equity
Listing

1

R. Nyvltova, 2006, "The Effects of Cross-Border Listings on the Development of Emerging Markets: the Case of Czech Republic⁰

Holders

Stock Exchange

Barcllys ADR 1::

NYSE

AXA
ADR 1:1 11

Tel 'talia
ADR ¹:¹0110

Sanof I ADR 2:1

Depositary Receipts System

Trust

arcla Barclays

tock
Stock

Tel Italie
tock
Stock

Sanof I

tock Stock

AXA
toc Stock

Bank

I.2. Different Methods of Foreign Cross-Listing

In addition to the simple and direct listing through shares, the financial engineering for corporate finance has developed complementary ways to perform a foreign cross-listing.

I.2.a. Depositary Receipts (DRs)

Depositary receipts (DRs) are an indirect mean to list foreign shares. DRs are tradable certificates issued by a "sponsoring bank" (or "depositary bank"), representing the ownership of stocks in the capital of a foreign company and compliant with the local financial markets laws. This product replicates an underlying stock of a company, which is in fact held by a trust vehicle in a foreign bank. A DR may represent a fraction of a stock, a single stock, or several stocks. For instance, foreign companies aiming at a listing in the United States or the United Kingdom may respectively use "American Depositary Receipts" or "Global Depositary Receipts". In a lesser extent, there are also "European Depositary Receipts", "International Depositary Receipts" in Brussels, "Dutch Depositary Receipts" in Amsterdam, "Swedish Depositary Receipts", "Singapore Depositary Receipts" and so on.

The sponsoring bank provides all the services regarding the registration, the agency services, the broker trading, the conversion of dividends into the DR holder's currency, and so on. As a consequence of the utilisation of a trust vehicle, DR holders are not considered as shareholders of the company and do not have voting rights; but they may instruct the DR depositary bank how to vote the stocks underlying their DRs.

There are four types of DR (I, II, III, unsponsored), each one corresponding to different classes. A sponsored level I DR trades over-the-counter (OTC) and implies the minimal requirements for companies (e.g. neither obligation to publish quarterly/annual reports nor to meet the U.S. GAAP). Level II DR (no capital is issued), is different from level III DR (new capital is issued), but both have the highest disclosure and fulfilling requirements. At these two levels, companies with DRs listed in the United States must annually fill forms (registration statements and financial statements) for the American S.E.C. and fully meet U.S. GAAP.

Most of time, DRs are issued according to the will of a company to be listed on a specific market with the aim to become accessible to new investors and thus to attract additional pool of capital. However, a bank may also issue unsponsored DRs, that is to say not realized on the behalf of the company but of an investor. Nowadays, there are no formal requirements to seek companies' authorisation to issue unsponsored DRs, since such operation is completely passive, i.e. presents no risks, no future implications, no costs for the company.

Today DR is the most used method for a listing abroad, in particular in the United States and in the United Kingdom. According to the Bank of New York, issues of DRs exceed US$50.0bn in 2007 vs. US$44.5bn in 2006, which had already set a record high². Most of DRs issued in 2007 had been realized on the Nyse, Nasdaq, Nyse Alternext (former Amex) and L.S.E; with two third of issuers originating from the BRIC countries (Brazil, Russia, India, China).