Lowering the Cost of Rent: How IFRS and the Convergence of Corporate Governance Standards Can Help Foreign Issuers Raise Capital in the United States and Abroad

Pine, Kyle W. | January 1, 2010

Since the early 1990s the United States has experienced a dramatic growth in the number of foreign firms choosing to trade their shares in U.S. markets. Meanwhile, Europe and other markets have not experienced this effect to the same extent. there has been an observable worldwide growth in stock market capitalization since the 1990s with an increasing number of foreign issuers choosing to cross-list their shares abroad, usually in the United States. Traditional explanations for why firms choose to cross-list have focused primarily on access to trade in more liquid markets. A more convincing theory for why firms cross-list, attributed to John C. Coffee and accepted by numerous scholars in recent years, is the bonding theory of cross-listing. The bonding theory postulates that firms cross-list their shares in order to voluntarily subject themselves to a market and a jurisdiction that has stricter disclosure standards and a greater threat of enforcement. There is an overall benefit created by the convergence in high-quality regulatory standards in that it equalizes the cost of compliance across jurisdictions while still maintaining the benefits to firms attributed to the bonding theory. Specifically, the adoption of International Financial Reporting Standards (“IFRS”) and the push towards corporate governance convergence provides an opportunity for cross-listing firms to further benefit under the bonding theory. The adoption of IFRS, as a high-quality, transparent regulatory standard, coupled with convergent corporate governance standards, can eliminate additional costs of compliance across jurisdictions. This, in turn, will allow firms to reduce their cost of capital and increase liquidity within the framework of the bonding theory.