Reverse Cross-Listings -- The Coming Race to List in Emerging Markets and an Enhanced Understanding of Classical Bonding

This paper examines the implications for the traditional "legal bonding" hypothesis arising from future "reverse" cross-listings, meaning the cross-listing by issuers from jurisdictions with stronger investor protections into capital markets and on exchanges where investor protections are deemed less robust. We use as examples the first "Indian Depositary Receipt" or IDR IPO in May 2010, and IPOs we believe will complete on a future Shanghai Stock Exchange "international board". This analysis serves to dilute one of the long-standing negative implications of the traditional legal bonding account -- that reverse cross-listings by issuers from jurisdictions with stronger investor protections into weaker investor protection markets exhibit abnormal negative price effects, allegedly because of market expectations that the foreign listing will facilitate conduct impermissible in the home market. More importantly, this analysis allows for a more nuanced understanding of the bonding hypothesis along either vector, and why firms cross-list into foreign jurisdictions, regardless of the receiving legal and regulatory environment. Those other factors include: the simple quest for capital, the possibility of higher initial valuations in capital controls-segmented markets and eventually higher secondary market values with the easing of such controls and thus enhanced global liquidity, the reduced cost ensured by listing in a less burdensome regulatory and enforcement environment, and a cluster of reasons which we describe as "consumer-commercial markets bonding", distinct from the legal and regulatory system bonding that has featured so long in the traditional legal bonding hypothesis. This "consumer-commercial markets bonding" includes the advertising of goods, services and corporate identity into a given consumer market, identification of the issuer as a global firm but with local identity and ownership, demonstrated commitment to key markets and the customers and regulators connected with those markets, a tipping of the hat to the sovereign legal-regulatory establishment of the receiving jurisdiction, and appeals to the receiving market's regulators for the provision of franchise or licensing benefits