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Craig Doidge, University of Toronto G. Andrew Karolyi, Ohio State University

Craig Doidge, University of Toronto G. Andrew Karolyi, Ohio State University René Stulz, Ohio State University. Has New York become less competitive than London in global markets? Evaluating foreign listing choices over time. Global competition for foreign listings.

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Craig Doidge, University of Toronto G. Andrew Karolyi, Ohio State University

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  1. Craig Doidge, University of Toronto G. Andrew Karolyi, Ohio State University René Stulz, Ohio State University Has New York become less competitive than London in global markets? Evaluating foreign listing choices over time

  2. Global competition for foreign listings • London & New York are main markets for foreign listings • As of 2005, NYSE, Amex & Nasdaq attract 29% of all foreign listings, London, 19%, and no other market captures more than 10% • Recently, London’s share is increasing and New York’s share is decreasing • Many observers conclude that New York is less attractive now as a result of the Sarbanes-Oxley Act, 2002 • Committee on Capital Markets Regulation (2006) • US Chamber of Commerce Commission on Regulation of US Capital Markets in the 21st Century (March 2007) • McKinsey Report “Sustaining New York’s and the US’ Global Financial Services Leadership” (2006)

  3. What is our paper about? • How have the foreign listing flows changed over time? • Have the determinants and consequences of foreign listing decisions in New York & London changed over time? • Are the characteristics of listing firms and how they influence listing choices changing? • Have the net benefits of US and UK listings changed? • Decline in benefits of US listings? • Greater benefits of UK listings?

  4. What do we find? • Listing flows are changing, but…… • US listings have indeed declined, UK listings have increased • But decrease in UK Main Market listings; increase in UK due to AIM • Characteristics of listing firms changing little & how they relate to listing choices are not changing at all • AIM firms are different than other listing firms • Listing choices on major exchanges not changing dramatically over time • Controlling for characteristics, no evidence of a US listing “deficit” • Benefits of US listings have not declined • US listing premium persists each year and does not decrease after SOX • No listing premium for UK firms ever • US listed firms access capital markets after listing; UK firms do not

  5. Outline • Listing choices: a brief review • Motivation and background literature • Data • Results • Listings from 1990 – 2005 • Characteristics of listing firms • Determinants of listing choices • Valuation and listing premiums • Capital raising activity • Conclusions

  6. Cross-listing in the US • The primary vehicle for listing in US markets: ADRs • Negotiable certificates issued by US depositary banks on behalf of sponsoring corporations • Some firms list their shares directly (e.g. Canadian, Israeli) • Categories distinguished by capital-raising, trading location, and registration/reporting obligations • Rule 144a: Private placements (no registration, PORTAL trading) • Level 1: OTC “Pink Sheet” issues (no registration, limited disclosure) • Level 2: Exchange-listed (Form F-6 registration, 20F annually) • Level 3: Exchange-listed capital raising (same as Level 2 + F-1)

  7. Cross-listing in the UK • Main Market (UKLA admits) • Ordinary listings (minimal compliance with Combined Code of Corporate Governance, but US, UK or IFRS accounting) • Depositary receipts (no compliance, local accounting standards) • Alternative Investment Market (AIM) • Founded in 1995 to provide capital for small, fast-growing firms • Lower entry and maintenance requirements for listed companies than the Main Market; “Nomads” grant admission

  8. Our taxonomy of listing choices • US market • Rule 144a • Level 1 OTC • US exchange (Level 2/3 ADR, direct listing) • UK market • AIM • Depositary receipts • Ordinary listings

  9. Benefits of cross-listing: Old Theories • Why cross-list? Many theories offered • Lower cost of capital by accessing global capital markets from segmented markets, expand shareholder base, investor recognition, lower transaction costs... • Stapleton & Subrahmanyam (1977); Alexander, Eun & Janakiramanan (1987, 1988); Foerster & Karolyi (1998, 1999, 2000); Miller (1999), among many others • Some empirical support, but inadequate in many ways • We need a better theory

  10. Benefits of cross-listing: New Theory • Governance benefit: Improved monitoring via direct and indirect constraints on controlling shareholders → higher valuation, lower cost of capital, better access to capital • Concept: Coffee (1999, 2002); Stulz (1999) • Evidence: Reese & Weisbach (2002); Lang, Lins, & Miller (2003); Doidge, Karolyi, & Stulz (2004); Doidge (2004); Siegel (2005); Bailey, Karolyi, & Salva (2006); Hail & Leuz (2006); Doidge, Karolyi, Lins, Miller, & Stulz (2007) • Controlling shareholders of listing firms face more constraints in their ability to extract private benefits • Many such firms choose not to list • Those that find it worthwhile are fast-growing, capital-hungry • Those that list on US exchanges benefit most • Those that come from weakest legal jurisdictions benefit most

  11. Dataset and sample • Data sources: • WFE, Citibank, BoNY, CRSP, LSE, JP Morgan, Factiva - Foreign listings • Worldscope - Firm-level accounting data • Worldbank, La Porta et al. (1998), Djankov et al. (2006) - Country variables • SDC - Equity issuance data • No data constraints for foreign listing counts in Tables 1-4 • Data constraints in Tables 5-10 • Firms not in Worldscope • Financial firms • Firms with less than $100m in total assets • Firms from Bermuda, Cayman Islands, etc. as well as UK and US firms • Final sample: 82,000+ firm-year observations from 1990-2005, from 50+ countries with full data requirements

  12. U.S. listings: 1990 – 2005 • Substantial increase during the 1990s for all listings • Decrease in exchange listings starting in 2002

  13. U.K. listings: 1990 – 2005 • More ordinary listings than NY in early 1990s, but little growth during the 1990’s • Recent decline in ordinary listings • Recent growth is due to AIM

  14. Listing flows: 1990 – 2005 • New US exchange listings peak in 2000 and slow thereafter; delistings outpace from 2001 • OTC and 144a new listings (not shown) outpace delistings • New UK Main Market listings slow since 1996; delistings outpace from 1999 • AIM (not shown) drives UK listings

  15. Characteristics of listing firms • New York is less competitive now if it no longer attracts listings it would have attracted in the past • If so, characteristics of firms that list in recent years should be different than they were in the 1990s • We compare valuation (Tobin’s q), sales growth, total assets, ownership, leverage, and country characteristics • What do we find? (Table 4) • AIM firms are different • Median total assets of AIM $11m vs US exchange firms ($655m) • Only 21 of the 258 AIM listings for which we have reliable data would have met one of the Nasdaq Capital Market standards • Pre/post SOX differences appear negligible • Characteristics of firms listing on US exchanges change little • Characteristics of firms that do not list, however, are different (smaller in size, lower industry q’s)

  16. Preliminary Statistics Are firms listing on U.S. exchanges different than those listing elsewhere? Are the types of firms listing in London or New York different since 2002?

  17. Determinants of listing choices • If New York is less competitive now, then: • Firms should make their listing decisions differently • A firm with characteristics that made it likely to list in the past would be less likely to list now • Proceed in two steps: • Step 1: Estimate models that simultaneously consider the determinants of new listings in New York and London (Competing risks Cox proportional hazards models) (Table 5) • Larger, faster growing without concentrated ownership from better developed countries with better legal systems are more likely to list • Step 2: Examine whether the propensity of firms to list in New York & London (given firm characteristics) changed after 2001 (Tables 6 & 7) • Estimate pooled logits over 1990-2001 and keep coefficients • Apply coefficients to firm characteristics in 2002-2005 for “Expected %” • Compute “Expected % - Actual %” to determine listings “deficit” • Perform experiment for stock of existing and flow of new listings each year

  18. Declining propensity to list? • A decline in the competitiveness of New York should result in a smaller fraction of actual relative to the expected number of existing or new listings predicted by model (i.e. positive “deficit”) US UK Listing stockListing flows

  19. Cross-listing premium • Previous literature documents a cross-listing premium • US exchange listed firms are worth more because of improved access to capital on better terms (fewer diverted cash flows by controlling shareholders) and because better existing growth opportunities make listing attractive for them in the first place • If New York has become less attractive • The cross-listing premium should decrease • Or, it should at least decrease relative to London • Estimate cross-listing premium over time • Year-by-year valuation regressions with controls (Table 8a) • Pooled valuation regressions (Table 8b) • Changes in premium pre/post SOX (Table 9)

  20. Valuation regressions Statistical significance • Rule 144a (2/14) • Level 1 (12/16) • Exchange (16/16) Size of the premium • Average Exchange premium is 85% greater than average Level 1 premium Average = 0.22 Average = 0.12 Average = 0.05 Rule 144a Level 1 OTC Exchange

  21. Valuation regressions Statistical significance • AIM (0/1) • DR (0/10) • Ordinary (1/16) No premium for UK listings AIM DRs Ordinary Average = 0.01 Average = -0.05

  22. Robustness tests • Criticisms of cross-sectional evidence • Self-selection bias • Unobserved firm characteristics • Valuation effects are transitory • Solutions • Estimate regressions that attempt to control for self-selection • Estimate panel data regressions – five different approaches, with similar results • Estimate panel data regressions with event time dummies, with one regression for each listing type

  23. Valuation event-time regressions For exchange listings • Yr-3+ is insignificant • Yr3+ is significant • Difference is significant • Similar for Yr-3 and Yr3 Permanent ↑ in q • True for U.S. exchange listings • Not for other listings

  24. SOX and the US listing premium Table 9 • No difference on exchange listing Pre = 0.26 (6.96)*** Post = 0.26 (8.21)*** • No difference on SOX between firms from stronger/weaker legal regimes Weak regimes Pre = 0.29 (5.36)*** Post = 0.23 (4.56)*** Strong regimes Pre = 0.25 (5.44)*** Post = 0.26 (6.34)*** ? ? ?

  25. Capital raising • US listings are associated with a governance benefit, but UK listings are not • Better governance improves access to capital markets • Expect to see increase in capital raising activity for US listed firms, but not for UK listed firms • Compare equity issues of firms listing in the US with firms listing in the UK • Before / after listing • Compare capital access in home market, US, UK, other markets

  26. Capital raising Table 10

  27. Is New York less competitive now? • Not given our evidence • Listing flows slowing over time • Decline in US listings, but also decline in UK Main Market listings • Growth in UK is due to AIM and these not eligible to list in US • Firm characteristics, listing choices unaffected by SOX • Decline in US listing counts explained by changing characteristics, and not a decline in the propensity to list • Listing benefits persist • Persistent premium for US exchange listings, not lower after SOX; no premium for UK listings • US listed firms raise a lot of new equity; UK listed firms do not

  28. Note: CCMR Reprised • On December 4, 2007, CCMR released its second report, which the refer to as a “second wake-up call” • Report considers now 13 different measures of competitiveness including cross-listings plus delistings, deregistrations, Rule 144a IPOs, US share of world IPOs/SEOs, US share of global market cap, value of trading, ADR trading as % of total trading – all show deterioration in 2006 and 2007 • Direct criticism of DKS (2007) on pp. 31-33 with four concerns on • If there is still a premium, why are they not coming? • Premium could still be just market segmentation • Significant self-selection problems linger • AIM shows strong number in 2005

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