Barriers to Global Stock Listing Among African Companies: Is It Cost or Compliance?

By Dr. Emmanuel Asoluka Ihejirika

As a classical empirical research study, the author investigated whether foreign investment into the U.S are hindered by SOX act, high compliance cost or high stock listing cost in NYSE and NASDAQ exchanges. This book is a practical and excellent resource for graduate academic research in business, showing how research methodology design and variables are operationalized. This book will benefit African firms and global investors listing shares overseas, including in U.S using Depositary Receipts (DRs). The increasing demand for Depositary Receipts is driven by the desire of individual and institutional investors to diversify their portfolios, reduce risk and invest internationally. While most investors recognize the benefits of global diversification, they also understand the challenges presented when investing directly in local trading markets.

These obstacles can include inefficient trade settlements, uncertain custody services and costly currency conversions.

• Language: English
• Publisher: Lulu Publishing Services
• Release date: Sep 22, 2015
• ISBN: 9781483426709

Book preview

BARRIERS TO GLOBAL STOCK LISTING AMONG AFRICAN COMPANIES

IS IT COST OR COMPLIANCE?

Dr. Emmanuel Asoluka Ihejirika

Copyright © 2014, 2015 Dr. Emmanuel Ihejirika.

All rights reserved. No part of this book may be reproduced, stored, or transmitted by any means—whether auditory, graphic, mechanical, or electronic—without written permission of both publisher and author, except in the case of brief excerpts used in critical articles and reviews. Unauthorized reproduction of any part of this work is illegal and is punishable by law.

ISBN: 978-1-4834-2671-6 (sc)

ISBN: 978-1-4834-2670-9 (e)

Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed since publication and may no longer be valid. The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.

Any people depicted in stock imagery provided by Thinkstock are models, and such images are being used for illustrative purposes only.

Certain stock imagery © Thinkstock.

Lulu Publishing Services rev. date: 9/11/2015

TABLE OF CONTENTS

CHAPTER ONE: THE PROBLEM INTRODUCTION

The Problem Statement

Problem Background

Purpose Of The Study

Research Questions

Research Hypothesis

Independent And Dependent Variables

Operationalization Of Variables

Limitations Of The Study

Importance Of The Study

Definition Of Terms

CHAPTER TWO: LITERATURE REVIEW

Introduction

Historical Background/Overview

Adr Program Types

Theoretical Perspectives Of Cross Border Listing

Bonding Hypothesis Theory Analysis

Sox Disclosures And Accounting Standards

Sec Listing Requirements

Benefit Of Cross Border Listing

Liability Or Cost Of Cross Border Listing

Impact Of Sox On Sub Saharan Africa Cross Border Listing

Behavioral Philosophy

Laws And Regulations

CHAPTER THREE: METHODOLOGY

Research Questions And Hypothesis

Data Collection

Research Design

Selection Of Samples

Validity And Reliability

Instruments

Data Processing And Analysis

Summary

CHAPTER FOUR: DATA ANALYSIS

Findings/Results

Research Question One Analysis

Research Question Two Analysis

Research Question Three Analysis

Descriptive Statistics Analysis

Data And Methodology

Sample Description

Empirical Tests

Event Study Results

Multiple Regression Results

Event Study Results

Multiple Regression Results

Poisson Regression Results

The Logistic Regression Results

CHAPTER FIVE: SUMMARY AND DISCUSSION

Summary

Conclusions

Implications For This Research Study

Recommendations For Future Study

REFERENCES

APPENDICES

TABLE OF TABLES

1. Number of Cross-listed firms in the African Region, 1995 – 2009

2. ADR Types and Trading Applications

3. Sample Composition

4. Descriptive Statistics

5. Comparison of Average Abnormal Returns Pre-SOX and Post-SOX for Cross-listed Firms

6. Multiple Regression Analysis

7. Compliance Cost Regression Analysis

TABLE OF FIGURES

1. Road Map

2. Graphical Representation

3. Latest figures on Non-U.S. Companies Registered with the SEC (WFE, 2009)

4. Summarized figure of ADR types and their applications

5. Summary of ADR types and their applications

6. Percentage allocation of African countries in the total cross-listed firms, 1995 – 2009

7. Percentage allocation of South African countries in the total ADR types and trading applications, 1995 – 2009

8. African countries ADR types and Listed Exchanges 1995- 2009

TABLE OF APPENDICES

A:    Sample Tables 1-3

B:   Panel B: Industry Breakdown

C:   Panel C: List of Sample Firms

D:    Panel A: Country Level Characteristics

E:    Panel B: Firm Level Characteristics

F:    Panel C: Firm Characteristics by Country

G:    Panel D: Comparison of Pre/Post SOX Compliance Cost

INTRODUCTION

This book will discuss the benefits and barriers to global stock listing among African companies in the major financial markets of the world, such as U.S New York Stock Exchange, NASDAQ and London Stock Exchanges. The book will provide insight as to what types of opportunities exist for companies to list stocks in the global market. Some of the benefits and costs tied to cross listing are also explained in the book. Global listing will help foreign investors to have the opportunity of accessing the largest pool of world capital thereby increasing liquidity of the stock as well as opportunity for acquisition currency. Also global listing will help the investor to enjoy the credibility of customers and visibility on the US and world markets. On the contrary, some of the barriers are high cost of listing in the world biggest stock exchanges; high compliance cost to the strict rule and regulations in listing; Sarbanes-Oxley internal control compliance costs; perceived increased liability and legal cost for listing. Other barriers that pertain to cost of accounting convergence with IFRS; significant cost increase in Rule 144A offerings; heightened delisting/deregistration interest. With all the challenges of cross listing as evident above and incidentally this situation affecting the underdeveloped countries such as African continent, the author finds it necessary to investigate and explain the relationship between that and why African companies that are successful in regional stock market cross listing cannot compete globally in the US or the UK market. The United Nations Development Program statistics on African stock markets show that the 54 countries of the African continent have over 29 active stock exchanges. Africa hosts one of the largest stock markets in the world, with a market capitalization of over 180 U.S billion dollars in South Africa alone (UNDP, 2003; Ntim et al, 2011). The author conducted a research that investigated whether decreases in cross listing of foreign firms from Sub-Saharan African (SSA) countries are caused by rigid governance standards or cost requirements for listing in the US. The findings were mixed after three tests. The multiple regression analysis showed that while compliance cost may provide incentives for firms to delist, the number of African firms cross-listing increased during the sample period. Also, standard event study test showed some evidence that the market perceives SOX as a negative factor to firm valuation in the U.S.

Therefore, the research concluded that firms switch to over-the-counter (OTC) and/or other trading markets (e.g. London Stock Exchange) to avoid the effects of Sarbanes Oxley Act (SOX). The author is using this book to share the important findings of his research and to investigate other additional problem areas that the research could not prove such as the effects of political climates and corruption on cross-listing decisions on African firms. The enactment of Sarbanes Oxley to foreign private issuers completely changed the legal framework of foreign stock listing. The costs associated with accounting and controls of the PCAOB are unbearable for medium sized companies. Moreover the post 9/11 anti terrorist measures increased the compliance costs. Experts argue that the Exchanges need to rethink their trading model for foreign private issuers; Improve the trading volume by reviewing the trading system applied to foreign private issuers; amending the regulation to accept the equivalency of some foreign practices for the purpose of US listing and IFRS recognition in the US as acceptable.

In crafting this text, the author investigated current developments in stock exchange in the African markets. For instance, the number of active African stock markets increased from 5 in 1960 to 18 by the end of 2002 (UNDP, 2003; Ntim et al, 2011). Currently, there are 29 formal stock markets in Africa, and great a number of new proposals are still emerging. According to United Nations Development Program statistics handbook of 2003, African equities represent a vastly underutilized option for international investors. These are growing markets that have provided attractive returns in the last several years and can achieve the goal of portfolio diversification as they offer a superior risk/return profile that is not affected by trends in the more developed markets (UNDP, 2003).

Many African equity funds have very attractive Price/Earnings ratios. Two of the top five world best performing stock exchanges were African markets; Sub Sahara Africa indices, weighted by country market capitalization, have outperformed most developed and emerging markets indices (UNDP, 2003). The cumulative returns in the last five years in US dollars for sub-Saharan-Africa has been 4.3% in comparison to –3.9% for the S&P 500 and –15.5% for the UK FTSE 100 (UNDP, 2003). The author’s primary purpose in this book is to try to tie the relationship between decreases in African stock listing in U.S to whether the Sarbanes Oxley Act (SOX) was a deterrent for African companies listing shares in the US market.

For African firms to list shares overseas, including U.S it will go through Depositary Receipts (DRs) which include ADRs, GDRs, Euro DRs and NYSs, negotiable U.S. securities that generally represent a non-U.S. company’s publicly traded equity. Although typically denominated in U.S. dollars, Depositary Receipts can also be denominated in Euros. Depositary Receipts can be eligible to trade on all U.S. stock exchanges as well as on many European stock exchanges. The increasing demand for Depositary Receipts is driven by the desire of individual and institutional investors to diversify their portfolios, reduce risk and invest internationally in the most efficient manner possible. While most investors recognize the benefits of global diversification, they also understand the challenges presented when investing directly in local trading markets.

These obstacles can include inefficient trade settlements, uncertain custody services and costly currency conversions. Depositary Receipts overcome many of the inherent operational and custodial hurdles of international investing. In fact, cost benefits and conveniences may be realized through Depositary Receipt investing, thus allowing those who invest internationally to achieve the benefits of global diversification without the added expense and complexities of investing directly in the local trading markets. Increasingly, investors aim to diversify their portfolios internationally. However, obstacles such as undependable settlements, costly currency conversions, unreliable custody services, poor information flow, unfamiliar market practices, confusing tax conventions and internal investment policy may discourage institutions and private investors from venturing outside their local market.

Depositary Receipt advantages may include: Quotation in U.S. dollars and payment of dividends or interest in U.S. dollars. Depositary Receipt is a negotiable security, which represents the underlying securities (generally equity shares) of a non-U.S. company. Depositary Receipts facilitate U.S. investor purchases of non-U.S. securities and allow non-U.S. companies to have their stock trade in the United States by reducing