The Corporate Governance Case for Listing on Major Stock Exchanges

2/24/2020

A listing on a major Stock Exchange can provide firms in less developed markets a new source of capital. That source of capital will come with strings: more transparency and a push for better corporate governance. It is worth it.

There is a debate whether companies should list on the world's main stock exchanges. For those headquartered in Europe, there is likely little benefit from listing in New York given the high extra expense, little extra liquidity, and marginal greater transparency that it would provide. But, for those in developing countries, the benefits would likely outweigh the costs.

A NYSE or Euronext listing does not guarantee excellent corporate governance by executives or better performance by firms. Managers throughout firms listed on both are experts at massaging their results and negotiating their targets. Many misallocate capital and overpay on acquisitions. However, there is enough transparency over time so that investors can hold them to account. Such markets have reduced the need for conglomerates and encouraged many governments to offload most of their holdings.

Investors from the United States and Europe can buy the shares of most companies in developing countries on their local exchanges. More information and the IFRS accounting standard allows them benchmark firms across markets.

This was much harder twenty years ago. Few databases held their data. Each country had its own accounting practices. Annual reports were in the local language. Few firms were audited by major accounting firms. Reporting standards were opaque.

Yet a listing on a major exchange still provides a signal from executives to markets that they are courting more sophisticated investors, want to increase the liquidity of their shares, and are open to greater scrutiny and benchmarking. The biggest firms in developing countries may look magnificent locally, but they likely look below average when measured against the world's best.

These firms that choose to list on a major exchange are saying that they want to be judged on their own merits rather than by the markets where they operate. Those markets and their industry will still have the greatest impact on their shares, but on the margin, the choices of executives make a difference.

A foreign listing is expected to be the beginning: The launch and the introduction. These firms should choose to operate according to world-class best practices. And this should reduce - or even eliminate - any discount that results from operating according to lower standards, but possibly those standards acceptable in their own market. The higher share price and more liquid markets can allow a firm to raise more capital. If they allocate the capital well, they will enhance their reputation and brand, reducing their cost of capital and thus further raising their share price.



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