Is a Listing on the NYSE Less Attractive?

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The decline in New York (and London's Main Market) appears to come from a decline in the number of foreign firms worldwide that have the characteristics that would make a U.S. listing attractive.

Since 2000, the major New York stock exchanges have been losing foreign listings while the London Stock Exchange has seen its share of foreign listings rise. What's behind the decline in the United States?

One common explanation - and worry - is that Wall Street has become less competitive in attracting foreign companies to cross-list their shares because of the 2002 Sarbanes-Oxley Act. The costs of complying with the act, and the resulting potential legal liabilities for companies and executives, have made the U.S. regulatory environment just too onerous for many foreign firms to consider listing their shares here, according to this argument.

But in Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices Over Time (NBER Working Paper No.13079), authors Craig Doidge, G. Andrew Karolyi, and Rene Stulz find that the decline in listings is not related to Sarbanes-Oxley. "[A]fter controlling for firm characteristics, there is no deficit in cross-listing counts on U.S. exchanges related to [Sarbanes-Oxley]," they write. Instead, using what the authors call "the most complete analysis of the relative valuation of U.S. listed firms to date," they find that foreign companies continue to enjoy a substantial premium by listing their shares in the United States, that that premium has persisted from 1990 to 2005, and that it has not declined in recent years.

Of course, listing on a U.S. exchange does involve a tradeoff. Typically, foreign companies attracted to the United States have a controlling shareholder and are based in countries where he or she can draw private benefits from their company, even if it hurts the interests of the rest of the shareholders. American securities laws and rules, oversight and enforcement by the Securities and Exchange Commission (SEC), and monitoring by outside analysts and institutional investors make such moves far more difficult. Nevertheless, some controlling shareholders do list their companies in the United States and agree to abide by such good-governance standards because of the benefits it brings. The main benefit is the ability to raise more capital more cheaply than companies that don't list in the United States. Simply put, American good-governance standards increase the value of companies that abide by them.

Nevertheless, something has happened to cause the decline in foreign listings for the New York Stock Exchange, the American Stock Exchange, and the NASDAQ. The three major exchanges have seen their share stagnate and, in terms of actual numbers, fall from 960 in 2000 to 866 by 2005. Interestingly, such listings have also fallen since 1998 for the Deutsche Borse, the Swiss Exchange, and Euronext (the consolidated entity, which had a smaller share of foreign listings in 2005 than its component bourses in Paris, Amsterdam, Brussels, and Lisbon had in 1998).

The exception is the London Stock Exchange, which saw its share of foreign listings climb from 16 to 19 percent during that same period. However, the exchange's traditional Main Market saw foreign listings drop even more than in New York, the authors point out. What grew dramatically is the exchange's far more loosely regulated Alternative Investment Market (AIM), where foreign listings climbed from 4 firms in 1998 to 220 in 2005. And the typical listing on the AIM is a small firm that would not have listed on a U.S. exchange, they point out. "Consequently, it is simply wrong to interpret the success of AIM and the resulting growth in market share of London as evidence of a decline in the attractiveness of U.S. exchanges."

If London hasn't stolen New York's thunder, then perhaps New York itself has become less attractive to foreign firms since the 2002 passage of Sarbanes-Oxley. To test that theory, the authors calculate the premium for a U.S. listing using various estimation techniques. Using U.S. exchange coefficients, they compute that foreign firms listed in New York were worth an average 17.5 percent more than firms that were not listed between 1990 and 2001. Take out 1999, when valuations were sky-high because of the boom, and the premium fell to 15.4 percent. Those numbers are not significantly different from the 14.3 percent premium U.S.-listed foreign firms enjoyed between 2002 and 2005, the authors conclude. Strikingly, they find no premium for listing in London throughout the period.

So, why have companies delisted in New York? Most did so because of changes or problems within the company itself: mergers and acquisitions, distress, restructuring, or failure to live up to the exchange's standards, the study finds. Voluntary delistings accounted for only 13 percent of the total delistings in New York and 33 percent of the total in London. Interestingly, the increase in delisting since 2000 has been mostly voluntary. But again, that doesn't suggest an effect from Sarbanes-Oxley, the authors argue, because the rise in voluntary delistings has been somewhat greater in London than in New York.

Instead, the decline in New York (and London's Main Market) appears to come from a decline in the number of foreign firms worldwide that have the characteristics that would make a U.S. listing attractive, the authors conclude. "There is little evidence that firms have been making listing decisions differently in recent years from how they made them from 1990 to 2001. If anything has changed in the aftermath of [Sarbanes-Oxley], it is that the non-listed firms have become smaller and are therefore less likely to list on the U.S. exchanges or the Main Market in London."

-- Laurent Belsie