FACULTY OF COMMERCE
RESEARCH PROJECT PROPOSAL
IMPACT OF REGIONAL CROSS LISTING OF SHARES ON COST OF EQUITY CAPITAL: A CASE FOR KENYAN COMPANIES LISTED IN REGIONAL STOCK MARKETS.
Submitted by: kiptoo martin
CHAPTER ONE: INTRODUCTION
1.1 BACKGROUND INFORMATION.
According to Kent et al (2002); globalization of financial markets has resulted in increase in the number of firms choosing to cross list. Bruno (2004) also argues that the pressure of economic globalization is pushing companies to access foreign capital markets.
Cross listing is defined as listing of a firm’s shares in foreign stock exchanges, Bruno (2004), whileChouinard et al (2004) define cross listing as the listing of a firms stocks in exchanges indifferent jurisdictions and they go on to differentiate between dual listing (which is the listing of a firms shares in different exchanges in the same jurisdiction) and cross listing. The exchange where the firm has been registered/incorporated is the exchange of primary listing, while the exchange which is hosted by a foreign country to the firm is called the exchange of cross listing or foreign listing. According to Olatundun (2009), cross listing can be of two types 1) Government policy induced regional cross listing; this is through imposition of capital controls on portfolio flows and signing of memorandum of understanding and putting in place the necessary conditions to facilitate cross listing. She identifies cross listing in the exchanges of Kenya, Uganda, Tanzania, Rwanda as well as those of South Africa and Namibia as government policy induced. 2) Market driven cross listings; this is where firms by themselves decide to venture into foreign markets as a firm widestrategy. He identifies cross listings in Nigerian Stock exchange and Ghana Stock exchange as market driven cross listings. Ressee et al (2001) on the other hand identify two types of cross listing which exist in United States of America; that is; non USA firms can list directly on the organized exchanges or they can issue American depository receipts (ADRs) which according to Ressee et al(2001) are negotiable instruments that represent a foreign company’s publicly traded debt or equity. Ressee et al (2001) go on to point out that most firms choose to list in the USA through American depository receipts. Cross listing of a company’s stocks accrues a number of benefits, Wang et al(2008) suggest that cross listing has a number of benefits which include increase in a firm’s investor base, increase of the liquidity of stocks as well as promoting the firm’s publicity.According to Olatundan (2009), cross listing accrues several benefits to the firm which include; greater access to lower cost of equity finance from a wider investor base, enhanced business reputation through openness and more stringent disclosure, reduction in transaction cost for investors,mitigation of market segmentation through reduction in barriers to foreign investors that arise from regulation and insufficient information flows andimproved corporate governance. Cross listings of firms equity in foreign exchange however comes with some disadvantages; according to Wang et al (2008), some of the disadvantages of cross listing of firms stocks in foreign exchanges include; numerous listing requirements that the company intending to cross list must comply with,mandatory disclosure requirements to regulatory authorities,the risks associated with the global financial markets and fluctuations in foreign exchange rates that may have a negative impact on the firm. Wang et al argue that the costs of cross listing may offset the benefits making it disadvantageous to cross list a firm’s shares in foreign capital markets.Choinard et al(2004) also argue that cross listing, as much as offers many advantages for listing firms, has several costs related to enhanced disclosure requirements, listing fees and registration costs with regulatory authorities. In Kenya;...
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