Cross-Listing and Corporate Governance: Bonding or Avoiding?

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I. INTRODUCTION

In their seminal survey of corporate governance, Shleifer and Vishny distill the issue into a blunt question: "How do [the suppliers of finance] make sure that managers do not steal the capital they supply or invest it in bad projects?"1 The Enron/Arthur Andersen debacle and the ensuing waves of scandal vividly proved that American investors may face this question in the most acute form. Yet even today, many would argue that in a global comparison, American securities markets provide public investors with a more hospitable and protective environment than most other markets around the world. American markets still fare better in terms of the legal rules governing them, the legal professionals that work to enforce the regime, and a sophisticated court system that provides the necessary infrastructure for a well-functioning corporate governance system. The 2002 wave of scandal tarnished the reputation of the American market,2 but has not eroded it completely.

The American governance environment is out for rent. Foreign firms wishing to enjoy the benefits of being subject to the American regime can readily do so by cross-listing their securities on an American market-even without raising capital in the United States. The idea that foreign firms actually engage in cross-listing with a view towards improving their corporate governance is often attributed to Jack Coffee.3 Bernard Black generalized this insight in several dimensions and coined the metaphor "piggybacking" to describe such renting of a country's corporate governance system by foreign corporations.4 In this view, cross-listing on a foreign stock market can serve as a bonding mechanism for corporate insiders to commit credibly to a better governance regime. Cross-listing could thus become a vehicle for international convergence towards globally desirable governance regimes.

This article questions the bonding role of cross-listing. Based on a comprehensive survey of the literature, I argue that this role has been greatly overstated. A large body of evidence, using various research methodologies, indicates that the bonding theory is unfounded. Indeed, the evidence supports an alternative theory, which may be called "the avoiding hypothesis." To the extent that corporate governance issues play a role in the cross-listing decision, it is a negative role. The dominant factors in the choice of cross-listing destination markets are access to cheaper finance and enhancing the issuer's visibility. Corporate governance is a second-order consideration whose effect is either to deter issuers from accessing better-regulated markets or to induce securities regulators to allow foreign issuers to avoid some of the more exacting domestic regulations. Overall, the global picture of cross-listing patterns is best described by a model of informational distance, which comprises elements of geographical and cultural distance.

A key weakness in some bonding-by-cross-listing theses-common among finance scholars-is that they are insensitive to crucial features of the US securities regulation regime.5 As it happens, the regulatory regime that is out for rent by foreign issuers differs markedly from the regime that applies to domestic American issuers. The shortcomings of the domestic American regime that recently came to light notwithstanding, the regime that governs foreign issuers is inferior to the former regime in significant respects. Generally speaking, the foreign issuer regime "cuts corners" exactly on the issues of corporate governance relating to corporate insiders. The Securities and Exchange Commission ("SEC") has cut these corners on purpose. Evidence further suggests that the SEC complements this strategy with a "hands-off" informal policy of nonenforcement toward foreign issuers.6 The evidence surveyed in this article indicates that cross-listings in the US fail to reflect positive effects that could be attributed to corporate governance improvements. …