The Concept of Cross-Listed Corporations
The globalization and integration of the world financial markets, and in particular, significant capital market developments such as the introduction of the Euro in the European Union in 1999, the Sarbanes-Oxley Act of 2002 (SOX) and the introduction of the Alternative Investments Market (AIM) of the London Stock Exchange in 1996, have generated considerable debate among academics and practitioners concerning the motivations for, and the benefits of, cross-listings of European companies on American, British and European stock exchanges (Yabara, 2012). With the introduction of a common currency, the Euro, the European markets have become more integrated, creating doubt as to whether cross-listings within Europe actually add wealth to shareholders.
The process of having shares listed on more than one stock market is referred to as cross listing. While companies are looking for capital to finance startups and expansion, they often look beyond their own limits for investors and lenders. There are three main reasons why the concept of cross listing is becoming more and more popular. The first one is the domestic availability of capital is limited and can be relatively homogeneous (Pandey, 2010). The second one is issuing bonds abroad increases a company's access to the number and types of lenders that are interested, reducing the amount of interest the company has to pay to attract investors. The third one is issue of shares abroad increases a company's access to investors, so that the capital that is raised upon issuance of shares increases for a given expected return for the estimated business risk.
In other words, companies look to international investors to earn more money at cheaper rates. To achieve this, companies are starting to raise capital from their home markets. From there, they often buy international capital by issuing foreign bonds, which are very similar to ordinary financial bonds. With a little extra sophistication, companies can choose to issue Eurobonds to raise their national currencies on a global market. When a company wants to issue shares internationally, the best method to attract the attention of investors is to first quote the equity on a foreign currency (Onyuma, Mugo, & Karuiya, 2012). As a result, no new shares are issued in the other country, but people from that nation can buy shares in secondary transactions (which can still provide capital for the company if it owns shares).
1.1 Research Problem
Cross-border listing is one of the topics that has been studied extensively by authors such as Doidge, Craig and Karolyi 2004, Karolyi 2006; and Adelegan, 2009. This could be attributed to the fact that many researchers have developed an interest towards understanding why companies decide to cross-list their shares in foreign markets. Tripathy and Jha (2009) state that some of the reasons why companies list their shares for trading in more than one stock exchange include: the segmentation of capital markets, which according to Moffett, Stonehill and Eiteman (2003), a national capital market is a segment if the required rate of return on securities in that market differs from the required rate of return on securities of comparable expected return and risk that are traded on other national securities markets.
Eun and Resnick (2009) held the views that by cross listing its shares, a company will enjoy benefits such as higher stock prices and lower cost of capital, creation of secondary market for the company's shares, enhancing of the liquidity of the company's stock, and cross listed shares may be used as the "acquisition currency" for taking over foreign companies. It therefore worth noting that to understand if understand whether cross listing can have effect on the value of the firm cross-listing its shares (Adelegan, 2009). Investors can maximize their wealth by cross listing their shares. The current study seeks to contribute to this discussion by answering the question "What will be the expected effects of cross-listing Saudi Aramco Company?" The secondary research question will be, "What are the effects of insider trading on cross-listing of shares?"
1.2 Objective of the Study
To determine the effect of cross-listing on Saudi Aramco Company and the effects of insider trading on cross-listing.
The main research question will be:
What will be the effect of cross listing on Saudi Aramco Company?
The secondary research question will be:
What will be the effect of insider trading on its decision to be cross-listed?
The following are the two major research hypotheses
Hypothesis 1: Cross listing will have great benefits for Saudi Aramco Company.
Hypothesis 2: Insider Trading will negatively affect cross listing decision by Saudi Aramco Company.
1.3 Value of the Study
A number of stakeholders will greatly benefit from the findings of the current study. Investors will also benefit from the findings of this study by using them as a guide in making informed investment decision and realizing if cross listing will give them the desired benefits that will enable them maximize their wealth and reduce the risk that they would suffer if they list in a single market. Policy makers shall also benefit from the findings of this study. They shall be in a better position to understand the reason why formulating policies which promotes integration of the capital markets by relaxation of stock markets controls shall be of enormous benefit to the their country. Academicians and Researchers can also benefit from the findings of this study because they will use the findings as reference for future researches on cross listing of securities. The findings will also contribute to the existing body of knowledge in fields of finance and economics. Saudi Aramco will also benefit from the findings of this research by knowing the effects of selling its shares to foreign markets and how insider trading may negatively affect their cross-listing decision.
1.4 Purpose Statement
The main aim of carrying out this research study will be analyze the cross-listing concept and its various effects, especially on insider trading. The case study will be Saudi Aramco Company. The findings of the study will contribute by providing additional information on cross listing, its benefits, and its adverse effects.
2. LITERATURE REVIEW
In an increasingly competitive global environment, companies have ample options to look for cheaper financing and those that best suit their time horizons. Many companies have been taking advantage of these opportunities, complementing their local sources with international ones. In the midst of the rebound in many capital markets, an interesting mechanism of "cross-listing of shares" has emerged. This consists of issuing primary shares in the local market and, subsequently, issuing them (or listing them) in the secondary market of another country (Nassaka & Rottenburg, 2011). In the United States, this mechanism is known as the American Depositary Receipt (ADR) and in Europe; it is called the European Depositary Receipt (EDR).
An ADR is a title that represents shares of a non-American company, which can be traded in the United States stock exchanges. These shares have the same conditions as those negotiated in one's local market, but the dividend must be paid in dollars. The objective of these instruments is to reduce the cost of capital. The objective will be to illustrate the benefits and costs that derive from the use of said instruments. We will also refer to cases of Saudi Aramco Company that intends to issue ADRs as a strategy to complement their financing schemes with international markets. An ADR is a title that represents shares of a non-American company, which can be traded on the US stock exchanges (Muchae, 2010). These actions have the same conditions as those negotiated in your local market, but your dividend must be paid in dollars. The objective of these instruments is to reduce the cost of capital. This is achieved through obtaining a better price for the issue and / or decreasing the systemic risk, known as the "beta" factor. Frequently, this is the result of broadening the investor base, going to markets with greater depth and liquidity. The number of shares represented in an ADR must be significant enough to avoid price deterioration because of the illiquidity risks, typical of low amount issues (Mageto, 2010). To issue ADRs, companies must sign an underwriting contract with a US investment bank, which acts as an underwriter, guarantor and subscriber of the shares. Said underwriter acts under a mandate that allows him to place the shares in the markets and guard them. Likewise, these institutions transfer the captured resources to the issuers in their countries of origin.
Additionally, in order to be listed in the United States, it is necessary for companies to comply with certain regulatory requirements, especially those related to the disclosure rules of the Securities and Exchange Commission (SEC) and US-GAAP accounting standards (Generally Accepted Accounting Principles). These requirements serve as a "seal of quality" for companies that issue ADRs, which increases investor confidence and it tends to increase the demand for these actions and, therefore, their value. The issuance of ADRs can be done in three levels (King, 2004). Level I is the simplest, because their negotiations take place in the "counter-market" (Over-The-Counter, OTC); that is, their values are not recorded in the stock exchange. On the other hand, at level II, shares can be listed on the stock exchange (not through public offerings), which requires issuing companies to make annual financial reports, following the accounting principles used in the United States (Gikonyo, 2009). Level III is the most demanding, since it includes strict and costly rules for companies in terms of information and monitoring of their operations, where the actions go to the market through an offer
However, cross listing also has some associated costs. On the one hand, additional efforts are required in marketing plans, information disclosure and underwriting contracts. In these cases, the prospectuses of issuance must be more detailed and due diligence (due diligence) is more exhaustive. On the other hand, as mentioned Companies must comply with regulatory requirements in terms of internal control and corporate governance (Sarbanes-Oxley Act), as well as accounting standards (US-GAAP).
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