The Chameleon Effect: Beyond the Bonding Hypothesis for Cross-Listed Securities

This paper is based on a presentation made at the New York Stock Exchange Conference on the Future of Global Equity Trading, March 12, 2004, Sarasota, FL. Looking back, was it a momentary enthusiasm? The dramatic increase in cross-listed securities, particularly in the United States, was one of the remarkable phenomena of the 1990s capital markets. The bonding, or corporate governance, hypothesis was one of the more intriguing theories to surface to explain the phenomenon. Cross-listing, the hypothesis suggested, might be a bonding mechanism by which firms, incorporated in a jurisdiction with weak protection of minority shareholder rights or poor enforcement mechanisms, could voluntarily subject themselves to higher disclosure standards and stricter enforcement of the US markets in order to attract investors. By focusing on shareholder protection as key to cross-listing, the bonding hypothesis became inextricably linked to an important and influential body of academic work, the law and finance literature. As intriguing as the bonding hypothesis is, this article argues that it offers only a partial explanation for the cross-listing phenomenon in the United States in the 1990s. Largely overlooked has been the main motor driving the exponential growth of cross-listings on the NYSE and NASDAQ in the 1990s: Canadian-based interlisted corporations (CBIs). CBIs form the largest single group of interlisted foreign corporations in the United States, by a huge margin, representing over 25% all interlistings on the NYSE, NMS-NASDAQ and AMEX in 2004. In fact, Canadian issuers form the largest single group of foreign private issuers (FPIs) in the United States, period. In 2004, there were nearly five times as many Canadian FPIs as the next largest national group, United Kingdom issuers. The bonding hypothesis does not explain CBIs easily. CBIs do not come from a weak investor protection jurisdiction and, for a variety of reasons and in a number of ways, tend not to signal their entry into the US market. Rather than bonding, CBIs have been adroitly exploiting what financial economists have described as the home bias of US portfolio investors. CBIs have been, at least until very recently, chameleons, deliberately blending into the woodwork of the US markets. This article will look at what makes CBIs different from most other interlisted companies and why the bonding hypothesis may not be explanatory of their behavior. In doing so, the article questions some of the underlying assumptions of the law and finance literature which supports the bonding hypothesis. Finally, the article considers implications of the CBI experience which may merit further consideration going forward.