A Theoretical Analysis of the Investor Protection Regulations Argument for Global Listing of Stocks

Abstract

Global listing of stocks has become a major topic in international capital markets. Many argue that the U.S. investor protection system discourages foreign firms from listing and raising capital in the U.S. However, there has recently been an increase in the number of foreign firms listing their shares in the U.S. This paper analyzes managers' decision as to which international market to cross-list their firms' shares on. It is shown that when markets differ in their regulatory environment, regulatory strictness may enable managers of highly profitable foreign firms to credibly convey their private information regarding their firms' future prospects. Through listing on the market with strict regulatory environment, those managers deliberately accept additional regulatory exposure, related to investor protection. That increased exposure, however, is more than offset by higher stock prices. The general setting of cross-listing is also shown to be applicable for global public offerings. Furthermore, in contrast to the claim that the strict regulatory environment deters firms from listing on that market, it is shown that a large differential between markets with respect to the regulatory strictness may, in fact, increase the number of firms listing on the market with stricter regulations. The implications of the model are consistent with the empirical evidence regarding global cross-listing.