[rafr1.doc] Regulatory Arbitrage for Real: International Securities

90 Pages·1999·0.23 MB·English

[rafr1.doc]
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Jackson, and Philip A. Wellons. Financial support from the John M. Olin Center for Law, Economics, and
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were Canadian railway firms. Major industrial, financial, and mining foreign companies became listed
during the post-World War II years. The steep growth in the number of foreign listings on both markets
detrats ylno ni eht .0891-dim nodnoL kcotS ,egnahcxE rettel ot eht ,rohtua 13 yluJ ;6991 weN kroYkcotS
Exchange, letter to the author, 31 July 1996. For comprehensive statistics of foreign listings and turnover
around the world, see . )te nuy es t wrs,i terielfeiugaokvc nure (nkaQaRochMdocntxoSEL
2 For reasons of brevity the term “listing” is used throughout this work, although strictly
speaking, listing is limited to a voluntary reguistration of a stock in a certain stock exchange by the
gniussi .ynapmoc nI ,ytilaer srelaed nac etouq dib dna ksa secirp rof a kcots tuohtiw eht s’reussi.tnesnoc
n, ir thets tvaa.iee yw r lythodlicMn eruifsusk oicsce tesdnreeprso es) r o wRpneptoDeAesxlArsnee(utb
eht SU citse m,otdekram stock exchanges can and do formally list stocks notwithstanding the issuer’s
.snoitcejbo See Yakov Amihud and Haim Mendelson, A New Approach to the Regulation of Trading
across Securities Markets, 71 .R .LYUN VE . 121 (1996).
3 Companies also make foreign listings to increase their stocks’ liquidity, for marketing, and
other financial and business reasons. See Gary C. Biddle and Shahrokh M. Saudagaran, Foreign Listing
Location: A Study of MNCs and Stock Exchanges in Eight Coutnries, 26 J. I NT ’ L B SU . S TUD . 319 (1995);
tneK .H ,rekaB Why U.S. Companies List on the London, Frankfurt, and Tokyo Stock Exchanges, 6 J.
I NT ’ L S SEITIRUCE M STEKRA 9 1;2)29 9a1h(sU . R,oottiM Managerial Perceptions of the Net Benefits of
Foreign Listing: Canadian Evidence, 4 J. I NT ’ L F IN . M GANA . &A CC . 40 (1992).
1
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.asr eevciv

4 U NITED S TATES S DNA SEITIRUCE E EGNAHCX C NOISSIMMO , M TEKRA 0002 --A N E FO NOITANIMAX
C URRENT E QUITY M TEKRA D STNEMPOLEVE II-13 (1994) (hereinafter: M TEKRA 2000).
5 sweivre veovisnet xr eoF see Mark A. Saunders, American Depository Receipts: An Introduction
to U.S. Capital Markets for Foreign Companies 17 F MAHDRO I NT ’ L .RL VE . 8 ;4s)a3l9g9u1o(.DB
,sroopS Exploring American Depository Receipts: The International Augmentation of U.S. Securities
Markets, 6 T HE T RANSNT ’ L L WA . 181 (1993).
6 sihT si eht ci ltbsuepret nwieiv fo wal .gnik armeht O,swei v,.g. ecilb uepci o,hycroeht eraerom
skeptical with regard to the goals that are actually furthered by law makers and regulators. The arguments
detneserp ni eht repaP ylppa htiw lauqe ,ecrof fi ton a fortiori ,r e hdscnwuues i sv.allew See, e.g., Enrico
ottba m donnlaaohCtan o.JR ,yecaM A Public Choice Model of International Economic Cooperation and
the Decline of the Nation State , 18 C OZODRA .RL VE . 925 (1996).
2
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3
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yletulos b ta;inoit cyarotalug elraretali ngunisses sra otfnatrop m sisiisyla nhac u.Sdeedni
lanoitanret neI h,t.g .,eeus s tiea rsaevitaiti nyirotalug elranoitanret nnie hlwaitnesse
4
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7 tuB see ,hsotn i yc.eaGrMf feJ International Securities Regulation: Of Competition,
Cooperation, Convergence, and Cartelization, Working Paper (1996), which slightly touches upon the
.deerses huscesuisdsi
8 The few existing reviews discuss international capital integration in general. See e .nMeR
Stulz, International Portfolio Choice and Asset pricing: An Integrative Survey, in .A.JR WORRA , V.
M CIVOMISKA , DNA W.T. Z ABMEI , E SD ,. 9H NI SKOOBDNA O SNOITAREP R DNA HCRAESE M LAIREGANA
S ECNEIC , F ECNANI , Ch. 6 (1995); Alan Alford, Assessing Capital Market Segmentation: A Review of the
Literature, in S TANLEY .SR LLESNAT , ED ., I NTERNATIONAL F LAICNANI M TEKRA I NTEGRATION 3 (1993);
Michael Adler and Bernard Dumas, International Portfolio Choice and Corporation Finance: A
Synthesis, 38 J. F IN . , eysslkebrha otd own ndao t i ts. tcor)5 oni ne32srtefyd89eetian9uhtcpU1stae(sopis
which are relevant to foreign and multiple listing, such as its implications on market microstructure.
9 ,eto N,revewoh taht elihw I dnetni ot , eevbisneherp mIoc od ton troprup ot edivorp ereha
lamrof weiver fo eht lanoitanr eetcnniani ferutaretil -- a ksat llew dnoyeb eht epocs dna esoprup fosiht
.krow
5
n iselu rlage lf ognicir peh tn iycneiciff elanoitamrofn itekra mlatipa cf oelo reh tsessess aC
e neonimred ntuhg ismemig eyrrotalug elranoit awn oshwo hds nganitt elsanoitanret nnia
.s endou i l.tDcrcneeohSctona
.A Foreign Listing and Capital Market Integration
1. noi tsaets nutfeaeomCkgreaSM
.ylpp uds ndanam e fdeomoct u no sasitekr asmeitiruc e fsnooitazilanoitanret neihT
e h fteom oysa wyafisrev irded r nosieitiruc ensgier orf odfnam eed hettae rscrotsevnI
mo rsfni argehg iehveih c oadt ntaekr acmitsem ordie h otgtniniatr ekps icritametsys
snosa efyroar rn.aAnrut ed rnkas ifsronoitanibm oecvitcart tear ormef ftoa hsteitiruces
rep asPi h.Tdaor bkaco trsie htts i oletk asmmr infoisic eed h,t.e .,ied iyslpp uesvird
lairegan adm nsasenis urbeh t oodtesop p so,asnoitavit olmaicnan i’fsmr i nfsoesucof
.noisice dmrif-artn ieh tn ielo rtnacifingi sayal phcih wsnoitaredisnoc 10 tI oslastcartsba
e hmto rdf nsaeitiruc ensgier o nftisev n oietv ayh asmrotsev nsinoitavit oem hmtorf
sa iebm o,h.g. ee(citca rnepimus ssatnemtsev neise hstnrettap 11 .) esehT stcepsatnarraw
.noissuc seitdarapes
noitaut isadsaenif e sdhici hnwoitatnemg etsekr a fmnooit oen hhtt itwra tesW
f osleve ltnereffi ddnammo csselehtreve nksi rf oselifor pralimi sgniva hstess aerehw

10 See supra note 1.
11 See, e.g., Raman Uppal, The Economic Determinants of the Home Country Bias in Investors’
Portfolios: A Survey, in Frederick D.S. Choi and Richard M. Levich , I NTERNATIONAL C LATIPA M STEKRA
A NI W OF ORLD A CCOUNTING D SECNEREFFI 13 (1994 ); Linda L. Tesar and Ingrid M. Werner, Home Bias
and the Globalization of Securities Markets , lanoitaN uaeruB fo cimonocE ,hcraeseR ,gnikroW repaP.oN
4218 (1992).
6
expected return. 12 )MPA Cl(ed ogmnici rtpes slaatip araced nU 13 yl neo h,tkrowema rf
e h otetvital ekrs icritamets yes h etdbluo hnsoitarget nhit ikws idrecirp dlrow .tneO kram
yl ntoa hsteilp mnioitatnemg eestelpm o,cdn arheh teoht national cits e, m.,oesd.rio tcaf
yllaitr atpsa e tlea rsatekr a fm.Istes s fagonici rep hrtet ndeluo h,sks icritametsys
ref ftoa hsteitiruc egsnisahcr u ypsbni angoitatnemg eysoj nne ascrotsev n,idetnemges
.ksi rf osleve lelbarapmo cro fsdlei yrehgih 14
stekr aemtalo s -is-reirr atbnemtsev ndiell aocs l -an-oitatnemg e fssoesu aechT
edep myie h otgsni o yd.Btsi x oestlaitnereff indrut egrnilba nyebere h,trehto nea nmoorf
ftoni oeprafl elwaic omaso r.Fsnrut esrsec xeese h ftsoevlesme hgtnilia vmao rsfrotsevni
e hrtew odl nlaatip atcnemtsev n finooitacol ltaneicif feedep msireirr atbnemtsev n,iweiv
ses uta acsh uwdsheitlk csoeadtbt ete annhotits etusq r ei.hfeTraf leelwbania tltaatot
secru olsaitnet oep hgtnisserd d naliufe s euyb aymmonox agtniwoll oef h.Tnoitatnemges
:noitatnemg efso 15

12 See Alan Alford, Assessing Capital Market Segmentation: A Review of the Literature, in
S TANLEY .SR LLESNAT , ED ., I NTERNATIONAL F LAICNANI M TEKRA I NTEGRATION 3 (1993) e uf.esohsTi
segmentation should be distinguished from that of portfolio diversification. Market segmentation relates to
securities’ systematic risk while diversification (in an international setting) aims to eliminate or mitigate
htob ’smrif citametsys-non ksir and their national market systematic risk. See osla einoL ,riadsalAdivaD
Power, and Donald Sinclair, The Putative Benefits of International Portfolio Diversification: A Review of
the Literature, 15 B RIT .R VE . E CON . I SS . 1 (1993).
13 s te ai eehf echtiMh itcPTfreAoppC stnea snssoia i fte oclcalenpiehumt vtfiafesm oleethstys
risk of the asset, i.e., the degree to which it fluctuates in tandem with the whole market, compard to the
ksir fo ethetkr asma a.el orhowF , w ae eitlvrbro iehdsvsnsoaecca see J ESSE .CH REPOH , J OHN C. C EEFFO ,
J R ., DNA R DLANO .JG NOSLI , C DNA SESA M NO SLAIRETA C ORPORATIONS 196-99 ( 4th ed. 1995 ).
14 Philip Jorion and Eduardo Schwartz, Integration vs. Segmentation in the Canadian Stock
Market, 41 .JF IN . 603, 604 (1986).
15 e hyTmon osxwaatrd sdentaarob anloe ,droflA arpus note 12, 5-6.
7
la nsoe ictt etracsv auhe rimnotfen oeorSfhrhtcreatucsefttiernehvirwni
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.sredr olbanoit asnsor csaet ax rattnereff ihdt idwl r doaewled okmca l,Becnanif 16 s i rhotF
xat-re te fmeraahe stn r roe satdnngrirou txeart-ero ftenberef feirdiu qserrotse v,nniosaer
nsits oncoitcasna rltaitnereff issdiemoct uloacitne dhit iewcru orsehto n.Asnruter
ngier o:fsnosa e frroebm umano rmfe tys asmts ohcc u.Sseitiruc ensgier ogfnisahcrup
di aspe eefgareko r,bnoitcasna re thttcef fodeti aspe eefgnahc xnegier od fnkas iergnahcxe
,s eeegfarek ocribtse mnoootditi dyndriatn unogcie r eronhefitlaed-rek o erohbtt
sts oncoitcasna rdt nxa a ntsiecnereff ihdc u.Sc t,ese etfnemeltt eds nganirae llcanoitidda
rie httim i,lerofere h,td nsarotsev nr iosfeci repvitcef ftenereff iedtae rodctn edtluow
.seitiruc e fsnooitceles
sec rtu aoehSttale rot sy’ treiohlttis beeoavstnaihcr u. apyntgiireurcoefs A
lag efdlon iekm ossnsaioitarget nositreirr atbuo bkani hoy ttadwrawrofthgiarts
.dnuobt urdoonuob nriehte h,wswo llfatip alcanoitanret nosittnemidepmi 17 y asmeirtnu oC

16 Fisher Black, International Capital Market Equilibrium with Investment Barriers, 1 .JF IN .
E CON . 337 (1974). See ,h an neoo vsY.ul-SeaiRvA The Structure of International Taxation: A Proposal
for Simplification, 74 T X .RL VE . 1301, 1334 (1996) (citing additional sources).
17 The great majority of economic models dealing with international capital market integration
have indeed assumed investment barriers to be of legal nature. See Cheol S. Eun and S. Janakiramanan,
Bilateral Cross-Listing and the Equilibrium Security Prices, in R JA A DNA LAWRAGG C HENG F- WE L EE ,
SDE ., I NTERNATIONAL D FO SNOISNEMI F LAICNANI M TNEMEGANA -A NI SECNAVD F LAICNANI P DNA GNINNAL
F ORECASTING lov . )B(4 95 )0991(( hereinafter: Eun and Janakiramanan (1990)) ; Vihang R. Errunza and
eneittE ,qsoL Capital Flow Controls, International Asset Pricing, and Investors’ Welfare: A Multi-
,krowe myarrtFnuoC 44 J. F IN . 1025 (1989); Gordon J. Alexander, Cheol S. Eun, and S. Janakirmanan,
Asset Pricing and Dual Listing on Foreign Capital Markets: A Note, 42 J. F IN . 151 (1987); Cheol S. Eun
and S. Janakiramanan, A Model of International Asset Pricing with a Constraint on the Foreign Equity
,pihsrenwO 41 J. F IN . 897 (1986); Vihang R. Errunza and Etienne Losq, International Asset Pricing
under Mild Segmentation: Theory and Test, 40 J. F IN . 105 (1985); Rene Stulz, On the Effects of Barriers
to International Investment, 36 J. F IN . 923 (1981) (hereinafter: Stulz (1981)).
8
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gnitrop mliati p .aAscrotc arfeh tft oos d oan,haset agrniv alsanoit a,ntnempoleved
seitiruc ecsitsem o fddon u rafsoeitiruc ecsitsem o fdroebm ulnla mwasol ldalu oycrtnuoc
gnitibiho ryplsuoenatlum iesli htwekr almatip ancgier o nafdoetsil-ngier o rf-ola u edobt
latip atcrop m oidte esn’yrtnu oec h st.Aseitiruc ensgier o nfginitsev nmio rsftnedis esrti
y beno dy bna csih T.seitiruce sngiero fn itsevn io tstnedise rst iwoll aya mt i,sehsinimid
esahcr u opttnedis elrac oglniwol l ya rbtoekr almac oel h nttos i olstmr infgier ogfniwolla
.seitiruc ensgier o nftisev ntia hstdn ulfaut u fmsoti n rusoeitiruc ensgierof 18
gnisahcr umpo rsfrengier otfibiho rlpli tys asmeirtnu ogcnitrop mliatip ancevE
f orebmu ndetimi lan idetnemelpm ie bya mycilo pahcu S.smri fcitsemo df oskcots
citsem ol d logatnital e,rdra oe bhstsor cdaeilp peoabs ly a attm iu,bseirtsud nciigetarts
.seinapmoc 19 .latip ar codfe ee nhetdirre vy oasmnoitaredisn orceh t,ota hetk isles ancI
srengier otfa hetrus noeetris ee d hsrtialucitr anspieirtnu ogcnipolev egdno mnaommoC

18 selpmaxE fo siht dnik fo noitatnemges .dnuoba roF ,ecnatsni eht etatS fo learsI sah rofsedaced
prohibited its residents from purchasing foreign stocks. In the early 1990s, the restrictions were eased,
gniw osltlnaediser ot esahcrup stinu fo lacol ”dlrow“ lautum sdnuf dna skcots detsil no rojamkcots
.segnahcxe nI ylrae ,7991 ilear ssItnediser erew dewolla osla ot esahcrup skcots hcihw edart revoeht
counter. See , d roosfllaA arpus note 12 (reporting that Ireland implemented a policy which allowed
stnediser ot tsevni pu ot hsirI tnuP 0005 ,yllaunna saerehw roirp ot 7891 yeht erew yletelpmocdetcirtser
from investing abroad); P.T. Hietala, Asset Pricing in Partially Segmented Markets: Evidence from the
Finnish Market, 44 J. F IN . 697 (1989) (reporting that Finnish investors needed permission to invest
internationally and that this permission was almost never given to individual investors).
19 See, e.g., Cathrine Bosner-Neal, Gregory Brauer, Robert Neal, and Simon Wheatly,
International Investment Restrictions and Closed-End Country Fund Prices, 45 J. F IN . 523 (1990) (the
muimerp no dne-desolc yrtnuoc sdnuf sesaerced nopu eht tnemecnuonna fo a noitcuder nitnemtsevni
restrictions).
9