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
Kyle W. Pine, 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
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
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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
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. In part, this growth is attributable to the
popularity of American Depository Receipts ("ADRs")3 that increased
throughout the 1990s, with the number of depository programs increasing
from 352 in 1990 to 1800 by 1999.4 More generally, though, there has been
J.D. Candidate, 2010, Northwestern University School of Law.
1 Compare John C. Coffee, Jr., Racing Towards the Top?: The Impact of Cross-listing
andStock Market Competitionon InternationalCorporateGovernance, 102 COLUM. L. REV.
1757, 1770 (2002) (noting that the number of foreign companies listed on the NYSE and
Nasdaq was 170 in 1990) with U.S. Sec. & Exch. Comm'n, Number of Foreign Companies
Registered and Reporting with the U.S. Securities and Exchange Commission,
http://www.sec.gov/divisions/corpfin/intematl/foreignsummary2008.pdf (noting that 1024
foreign companies were registered and reporting with the SEC as of December 31, 2008)
(last visited Nov. 22, 2009).
2 Marco Pagano et al., The Geography of Equity Listing: Why Do Companies List
Abroad?, 57 J.FIN. 2651, 2660-65 (2002).
An ADR is a negotiable instrument issued by a U.S. depositary bank and represents an
ownership interest in a specified number of securities that are held by the depositary bank.
They provide the ADR holder with the same income and voting rights as the underlying
shares and are treated like other securities in the United States. Id.at 2660.
4 Coffee, supra note 1, at 1770; see also J.P. Morgan,
http://www.adr.com/Home/TickerLookUp.aspx (showing that as of November 7, 2009, J.P.
Morgan had 3226 ADRs listed on its website) (click "search" for total results) (last visited
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.' These
theories postulate that firms cross-list to overcome market segmentation
caused by such factors as regulatory restrictions, taxes, and informational
constraints in order to reach more investors.' In doing so, firms are able to
spread their risk across a greater pool of shareholders, leading to a lower
cost of capital.9 These theories predict that firms initially will experience a
higher equilibrium market price upon cross-listing, with diminished returns
afterwards due to stabilization in the market.' 0 However, two observations
have called the validity of these traditional explanations into question.
First, studies have indicated that cross-listing results in significantly higher
rates of return that do not diminish over time.' Second, with the increasing
globalization of financial markets and instantaneous electronic
communications, an explanation based on tapping segmented pools of
investors seems incomplete. 12 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.13
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. 14 In effect,
Nov. 22, 2009).
5 See Coffee, supranote 1, at 1773 (comparing market capitalization growth to GDP with
a ratio increase from a mean of 31% in 1990 to 62% in 2000).
6See id. (noting that as stock markets grew, the ratio of market capitalization listed
abroad to total market capitalization grew at a greater rate than market capitalization to GDP,
particularly in emerging markets).
Id. at 1779; Larry E. Ribstein, Cross-ListingandRegulatory Competition, 1 REv. L. &
EcoN., 97, 111 (2005).
8 Coffee, supra note 1, at 1779; Ribstein, supranote 7, at 111.
9 Coffee, supra note 1, at 1779; Stephen R. Foerster & G. Andrew Karolyi, The Effects of
Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign
Stocks Listing in the UnitedStates, 54 J. FIN. 981, 1008 (1999).
10See Foerster & Karolyi, supra note 9, at 988-95 (reporting that the stock prices of
cross-listing firms seemed to initially increase and then eventually decline after listing
abroad); see also Gordon J. Alexander et al., Note, Asset Pricing and Dual Listing on
ForeignCapitalMarkets, 42 J. FIN. 151, 157-58 (1987) (reporting the same).
" See Coffee, supra note 1, at 1780 (citing Darius P. Miller, The Market Reaction to
InternationalCross-Listings:Evidencefrom DepositaryReceipts, 51 J. FIN. ECON. 103, 104
(1999)) (finding an observable trend of increasing returns from the date firms announced
their intention to cross-list, particularly for firms listing on the NYSE or Nasdaq rather than
those listing on only over-the-counter markets).
12Coffee, supranote 1, at 1757.
1 Id. at 1767 n.28.
14See id. at 1780-81 (noting that, in particular, cross-listing on a U.S. stock exchange
by voluntarily assuming the obligations set forth in strong securities
markets, firms are able to "rent" another country's securities law and
enforcement, while at the same time bypassing their home countries'
restrictions which prevent an adoption of such similar regulation." The
firms that choose to cross-list do so because they understand that regulatory
regimes that provide strong investor protection help to convince outside
investors of the firm's commitment to protecting their interests.16 This, in
turn, may reduce the discount potential investors place on a firm's shares
and lead to a lower cost of capital.17
Under the bonding theory, cross-listing has consequences for both the
home jurisdiction of cross-listing firms and the target jurisdiction.18
Crosslisting incentivizes home-country jurisdictions to modify existing laws and
regulations to complement those in the target jurisdiction in order to stem
the flow of exiting firms and to entice such firms to stay.'9 This pressure
creates both an incentive and an opportunity for convergence efforts in
disclosure requirements and corporate governance requirements across
different regulatory regimes.20 However, where divergence in regulatory
standards persists, cross-listing firms must weigh the benefits of
crosslisting against the cost of complying with the disclosure requirements and
corporate governance laws of target countries. 21 Often, target countries will
exempt foreign firms from certain regulatory obligations in order to entice
requires the listing firm to recognize minority investor rights and to provide meaningful
disclosure because: "(
) the listing firm becomes subject to the enforcement powers of the
Securities and Exchange Commission (SEC); (2) investors acquire the ability to exercise
effective and low-cost legal remedies, such as class actions and derivative actions, that are
simply not available in the firm's home jurisdiction; and (3) entry into the U.S. markets
commits the firm (at least when it lists on an exchange or Nasdaq) to provide fuller financial
information in response to SEC requirements and to reconcile its financial statements with
U.S. generally accepted accounting principles (GAAP)").
15See Ribstein, supra note 7, at 98-99 (describing this scenario as a limited type of
jurisdictional choice situation where firms choose to opt into an alternative, often stricter,
regulatory regime, while not fully opting out of their home country regime; "[o]pt-out
requires the default jurisdiction to consent not to use its jurisdiction over the moving firm to
impose its own regulation").
16 See id. at 104 (arguing that submission to strong regulatory regimes signals to potential
investors a firm's commitment to forego distributing the firm's assets to owners and
managers). But see Amir N. Licht, Cross-Listing and Corporate Governance: Bonding or
Avoiding?, 4 CHI. J.INT'LL. 141, 162-63 (2003) (arguing that many firms that cross-list may
actually be trying to avoid better governance).
17 Ribstein, supranote 7, at 104.
s Id at 99.
19Id.; see also Coffee, supranote 1, at 1804-08 (describing efforts by regulatory regimes
in both Germany and Brazil to create new "high standards" markets in an effort to stop the
migration of listings and trading in the United States).
20 See discussion infra Part II (discussing the opportunities and impediments to
21Ribstein, supranote 7, at 120.
cross-listing.22 However, this arguably has a contrarian effect to the
bonding theory as it dilutes the bond or assurance cross-listing firms send to
investors regarding the protection afforded by the target country's
regulatory regime. Thus, 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. 24 The adoption of IFRS, as a
highquality, 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.25
This comment develops this argument as follows. Part II explains
further why firms choose to "rent" the securities laws of other countries
under the bonding theory. Specifically, Part II will describe what types of
firms look to cross-list and further develop how both home countries and
target countries react to cross-listing. Part III discusses how convergence of
disclosure requirements, specifically the adoption of IFRS, is helping to
lower the cost for firms choosing to cross-list in the context of the goals of
bonding. Part IV discusses the impediments to the convergence of
corporate governance across different jurisdictions. Part V concludes.
SETTING THE STAGE: THE EFFECTS OF CROSS-LISTING
UNDER THE BONDING THEORY
The basic premise of the bonding theory is that cross-listing on an
exchange in a market that has strong investor protection commits the listing
firm to recognizing minority shareholders' rights and to presenting
22 See id at 121-22 (discussing, from the perspective of the United States, how political
pressure in target jurisdictions may lead to regulatory exemptions for cross-listing firms).
23 See Coffee, supra note 1, at 1782 (arguing that while enhanced disclosure offered by
U.S. securities regulations increases a bond for cross-listing firms, requiring compliance of
high-quality corporate governance standards is also important).
24 See generally Holger Daske et al., Mandatory IFRS Reporting Around the World:
Early Evidence on the Economic Consequences (The Univ. of Chicago Graduate Sch. of
Bus., Working Paper No. 12, 2008), available at http://ssrn.com/abstract-1024240
(examining the economic consequences of mandatory IFRS reporting around the world).
25 Id. The data examined by Daske et al. demonstrated that the mandatory adoption of
IFRS by firms across the world resulted in market liquidity increases, lower cost of capital,
and an increase in equity valuations. However, significantly, the data showed that the
capital-market benefits occurred only in countries promoting transparency and strong legal
increased transparency and disclosure.26 In doing so, a firm is able to
increase shareholder confidence, which in turn reduces the discount
potential investors place on the firm's shares and leads to a reduction in the
cost of capital.27
One source of evidence for the bonding theory consists of studies
finding significant positive returns upon firms announcing plans to
crosslist their shares in the United States, with such returns not dissipating over
time. 28 Significantly, data indicates an added premium exists if a
crosslisting firm is listed on the NYSE or Nasdaq as opposed to over-the-counter
markets. 29 Additionally, data indicates an added premium on return from
foreign firms in emerging markets choosing to cross-list in the United
States versus foreign firms from developed markets. 30 Another study,
focusing on a comparison of foreign firms that cross-list in the United
States with those that do not, found positive valuation differences in favor
of the former.31 Essentially, these findings demonstrate that the United
States, in contrast to weaker regulatory regimes, provides the strong
investor protection that attracts foreign firms to cross-list. More
specifically, U.S. securities laws and reporting requirements build investor
) the issuer faces strict liability for material misstatements or
26 Coffee, supranote 1, at 1780.
27 Ribstein, supranote 7, at 104.
28 Miller, supranote 11, at 111.
29 See id. at 111-14 (finding that upon announcement of an intention to cross-list in the
United States, firms experienced positive abnormal returns, with returns being nearly double
for firms listing on the NYSE or Nasdaq in comparison to over-the-counter markets; foreign
firms that only did private placements under Rule 144A had insignificant abnormal returns).
30 See id. at 115 (finding cross-listing firms from emerging markets had nearly double the
cumulative abnormal returns); cf Foerster,supra note 9, at 994 tbl. 4 (finding a positive,
permanent market reaction for Asian firms cross-listing in the United States). Research on
corporate governance has found several Asian countries have corporate governance
standards that are inadequate to the protection of minority shareholders from the risk of the
influence of controlling shareholders. See Coffee, supra note 1, at 1789 (citing Stijn
Claessens et al., Disentangling the Incentive and Entrenchment Effects of Large
Shareholdings, 57 J. FIN. 2741 (2002)). This supports an explanation for why Asian firms
would experience a positive, permanent market reaction according to the bonding theory.
See generally Chen Y. Wu, Consequences of Cross-Listingin the US: Changes in Leverage
and Corporate Governance (Aug. 27, 2008) (unpublished Ph.D. dissertation, Arizona State
University) (on file with author), available at
http://wpcarey.asu.edulfin/upload/Draft082708.pdf (finding, from a sample of 510 firms
cross-listing in the United States, evidence that firms from emerging markets reduce their
leverage much more than firms from developed markets).
31See generally Craig Doidge, G. Andrew Karoly & Rene M. Stulz, Why are Foreign
FirmsListed in the US Worth More?, 71 J. FIN. ECON. 205 (2004) (finding that foreign firms
listed in the U.S. have much larger Tobin's Q ratios, a measure of growth opportunities, in
comparison to firms from the same country that are not listed in the U.S.; this phenomenon is
coined the "cross-listing premium").
omissions; (2) a powerful engine of private enforcement (e.g., the
contingent fee-motivated plaintiffs bar) stands ready to enforce U.S.
legal rules; and (3) more reliable gatekeepers (e.g., U.S. underwriters
and auditors) have conducted a "due diligence" investigation into the
offering, motivated in part by their own high liability for negligent
errors or omissio-ns-. 32
A. Characteristics of Cross-listing Firms
As indicated above, the bonding theory recognizes certain
characteristics of both the firms that choose to cross-list and the regulatory
regimes that cross-listing firms choose to use. Generally speaking,
crosslisting firms in strong regulatory markets, like the United States, usually
have higher market valuations, greater leverage, and better earnings
prospects compared to firms that do not cross-list.33 These firms
demonstrate a willingness to give up some private benefits of control in
order to obtain equity financing at a lower cost of capital.
Additionally, cross-listing firms have been observed to come from two
major sources: (
) firms from countries with inadequate reporting
requirements and accounting standards34 and (2) firms from civil law
jurisdictions that are dissatisfied with the protection afforded to minority
shareholders. Consequently, these firms have sought out regulatory
regimes that provide the greatest protection to the rights and expectations of
minority shareholders, which have been found to be in common law
jurisdictions. 36 In contrast, civil law jurisdictions have been found to
protect the rights of concentrated ownership with an emphasis on
maximizing the private benefits of control for a few controlling
shareholders, often at the expense of minority shareholders.37
32 Coffee, supra note 1, at 1788.
3 Coffee, supra note 1, at 1766 n.23.
34 See Miller, supra note 11, at 104 (finding that in the mid 1990s 73% of non-U.S.
companies establishing ADRs came from emerging market countries); see also Kent Hargis,
InternationalCross-Listingand Stock Market Development in EmergingEconomies, 9 INT'L
REv. ECON. & FIN. 101, 102 (2000) (noting that in 1989, only two Latin American
companies were cross-listed in U.S. markets, compared to 106 by 1999).
3s See William A. Reese, Jr. & Michael S. Weisbach, Protectionof Minority Shareholder
Interests, Cross-Listing in the United States, and Subsequent Equity Offerings, 66 J. FIN.
EcoN., 65, 66-67 (2002) (finding that cross-listing firms tend to be from French civil law
countries, where investor protection is weak).
36 See Ribstein, supra note 7, at 100 (explaining that in civil law countries corporations
are predominately controlled by fewer shareholders who own a significant portion of stock
versus common law countries where corporations are generally owned by dispersed
shareholders, with none holding enough stock to have significant control).
37 Id; see also Coffee, supra note 1, at 1764-65 ("[F]irms that decline to migrate to 'high
disclosure' exchanges will be disproportionately those with controlling shareholders who
prefer to maximize their receipt of the private benefits of control rather than to maximize the
share price of their firm's publicly-held minority shares."). Coffee argues that this may lead
to a situation of competitive pressures producing specialized securities markets servicing
The benefits afforded by dispersed ownership include risk
diversification, promotion of entrepreneurial activity, and increased trading
resultinF in the reflection of pertinent information more quickly into share
prices. Furthermore, evidence has shown that firms in countries with laws
and institutions that provide greater protection of the rights of minorit
shareholders have a lower cost of capital than firms in other countries.
The United States may arguably be regarded as the best regulatory regime
for dispersed shareholder protection, and thus it has attracted the most
foreign firms looking to cross-list shares. Consequently, such migrations
by firms have had effects on an international level in terms of changes both
in local country regulatory requirements and target country regulatory
requirements, particularly in the United States.40
B. Home Country Characteristics
Under the bonding theory, cross-listing firms are seeking ways to
increase their equity financing at a lower cost of capital by utilizing stronger
regulatory laws and enforcement than what is available in their home
countries.4 1 This begs the question of why these firms are unable to rely on
changes in their own countries in order to promote laws protecting
dispersed ownership structures. 42 This can arguably be done by
crosslisting firms demanding changes in local laws or by local securities, legal,
and accounting professionals advocating change so as to encourage firms
not to cross-list in the first place. 43 However, there are several obstacles to
such changes and to the conver ence of international regulatory regimes,
including political impediments, differences in market structure and the
goals and objectives of a country's regulatory system,45 and historical and
First, firms seeking to change local laws in favor of laws advocating
varying needs of firms. Id.
38 Ribstein, supranote 7, at 100.
40 See supranotes 1-6, 29 and accompanying text.
41 See supranotes 26-31 and accompanying text.
42 Ribstein, supranote 7, at 101.
Northwestern Journal of
International Law & Business
dispersed ownership and protection of minority shareholders' interests may
face opposition from well-established interest groups. 47 For example,
incumbent firms under centralized ownership control in underdeveloped
countries may oppose change because improved disclosure rules and
enforcement may reduce the competitive advantage of incumbents' market
presence and reputation, while giving new entrants the opportunity to enter
and compete for profits. 4 8 Additionally, changes in laws may be opposed
by other interested parties, like labor organizations and banks, who cater to
controlling shareholders' needs.4 9 Thus, regulatory standards that advocate
increased disclosure and transparency are at odds with the interests of
powerful, incumbent firms with controlling shareholders.
Second, a change towards protection of minority shareholders'
interests may involve the need to overhaul a country's basic securities
regulation framework.50 In particular, underdeveloped countries often do
not have viable regulatory systems to support an initial regulatory and
corporate governance reform. As such, effective regulatory change
depends not only on formal rules, but also on broader institutional and legal
reform.52 For example, in implementing changes in regulatory reform in
support of protecting shareholders' rights, a country must also ensure that
there is an underlying legal framework and discipline that will enforce such
laws.53 Consequently, the costs of overriding an existing regulatory
framework may outweigh the benefits derived from change.
Third, historical and cultural impediments may also prevent a change
towards regulation protecting the rights of minority shareholders.54 In
general, diversified shareholders value reasonable risks by managers
because the diversification of their portfolios will ameliorate any potential
downfall in value.55 As such, supporting cultural and political systems in
countries like the United States and the United Kingdom support these
interests by encouraging efficient market requirements on managers,
47 Rajan, supranote 44, at 18-19.
48 Id at 18.
49 Ribstein, supra note 7, at 117.
5o Id. at 102.
5' Paredes, supra note 45, at 1059 ("Most developing countries lack the institutional mix
that makes a market-based corporate governance system, with an enabling corporate law,
52 Id. at 1060.
s3 See Ribstein, supra note 7, at 102 (arguing that the Parmalat fraud in 2003 occurred
due to the fact that Italy had inadequate enforcement measures, partly attributable to the
weakness of Italian courts in applying shareholder remedies, despite the fact that "Italy had
fairly strong laws on corporate governance and auditing.").
S4Licht, Legal Plug-Ins, supra note 46, at 198 ("Evidence surveyed . . . indicates that
people from divergent cultures exhibit difference in their perception and judgment-a
finding that bears directly on corporate governance.").
5 Ribstein, supranote 7, at 102.
including incentive compensation and hostile takeovers.s6 In contrast,
social democratic countries, like France, are against "such elements of
Schumpeterian 'creative destruction' . Rather, such cultures put an
emphasis on protecting individual firms and minimizing dislocation costs of
labor and other stakeholders, rather than taking on risks or growing at a
faster rate.8 Thus, such cultural dissonance may impede a change towards
regulation in favor of a dispersed ownership structure.
Despite these obstacles, countries have taken measures towards
enhancing governance and disclosure standards in an effort, in substantial
part, to stem the flow of firms cross-listing in other jurisdictions and to
attract foreign firms to cross-list in their own country. 60 A significant
example is the actions taken by governments in Latin America in the past
ten years to enhance the respective regulatory regimes of Argentina, Brazil,
Chile, and Mexico in order to address the problem of firms choosing to
cross-list in the United States.6 1 For example, in 2002 Mexico's National
Commission on Banking and Securities, working with the Mexican Stock
Exchange and the Mexican Association of Market Intermediaries,
overhauled its rules on tender offers in favor of minority shareholders to
give them a proportionate share of control in the event of takeover offers. 62
Additionally, there has been the emergence of "high standards" markets
established by exchanges in order to stop the migration of listings and
trading in the United States.63
For example, in December 2000, the Sio Paulo Stock Exchange
(BOVESPA), Brazil's largest exchange, launched Novo Mercado, a new
exchange based on the premise of high corporate governance where issuers
5 Id. at 103 (quoting MARK J. ROE, POLITICAL DETERMINANTS OF CORPORATE
GOVERNANCE (Oxford University Press 2003)).
5 See also Licht, Legal Plug-Ins, supra note 46, at 199 (discussing how the
implementation of western governance mechanisms in Korea conflict with Korea's
Confucian heritage and values).
6o Coffee, supranote 1, at 1766.
61 See id at 1766 n.24 (noting that Chile adopted a tender offer law in 2001; Argentina
and Mexico adopted new capital markets laws in 2001; and Brazil adopted revised corporate
governance standards in 2001 in order to enhance the rights of minority shareholders); see
also Hargis, supra note 34, at 102 tbl. 1 (finding that at the height of Latin American firms
cross-listing in the United States in 1995, the combined value of Mexican, Argentine, and
Chilean ADRs traded in the United States was greater than the total value of all stocks traded
in their respective domestic markets during the year).
62 See Coffee, supra note 1, at 1810 ("Under this reform, non-voting shares now enjoy
full "tag along" rights in the event of takeover offers. Specifically, the new rules preclude
partial bids for just the controlling shares by requiring that if the bidder seeks to purchase
between 30% and 50% of the voting stock, it must tender for all share classes on a similar
basis and at the same price; further, any offer for more than 50% of the voting stock
obligates the bidder to tender for 100% ofall shares in all classes.").
63 Id. at 1804.
Northwestern Journal of
International Law & Business
can only list by voluntarily electing to be subject to strict governance
standards.64 During the 1990s, Brazil faced a dramatic decline in the
number and overall value of shares listed on BOVESPA, as companies fled
to the United States in order to "rent" the credibility and depth of a better
regulated securities market. 65 To address this exodus, Novo Mercado grants
additional rights and guarantees to minority shareholders and, in exchange,
firms listing on Novo Mercado agree to obligate themselves to:
) not issue non-voting shares and comply with a "one-share,
onevote rule"; (2) maintain a free float equivalent to 25% of the
outstanding stock; (3) grant "tag along" rights under which all
noncontrolling shareholders would be accorded the same right to sell
their shares on the same terms (including price) as were to be given
to the controlling shareholders; and (
) elect all directors at each
Additionally, issuers must agree to stricter disclosure standards, including
quarterly reporting with cash flow demonstration and consolidated
statements audited by independent auditors and the use of either U.S.
GAAP or IFRS for reporting purposes. 67
Novo Mercado is segmented into two different tiers (Level 1 and Level
2), thus giving investors three different listing segments between the
traditional BOVESPA market and the two distinct tiers of the Novo
Mercado.6 8 Level 1 requirements essentially resemble traditional Brazilian
regulations with additional disclosure obligations but do not require
enhanced corporate governance standards.6 9 Level 2 essentially requires
that issuers comply with almost all of the disclosure and corporate
governance requirements of Novo Mercado." In June 2001, fifteen
companies listed on Level 1.71 By the end of 2001, nineteen companies
listed on Level 1 (representing 19.13% of the exchange's market
capitalization and 14.39% of volume traded) and zero firms were listed on
64 Maria Helena Santana et al., Focus 5: Novo Mercado and Its Followers: Case Studies
in Corporate Governance Reform, Global Corp. Governance Forum, Nov. 2007, at 1,
65 Id. at 2-9.
66 Coffee, supra note 1, at 1807.
67 Santana, supranote 64, at 14.
68 Id. at 13.
70 See id. (noting that companies may keep their preferred shares but must assign
"tagalong rights of 80[%] of the price at which control is sold, as well as the right to vote in
certain important situations").
" Id. at 22.
Level 2.72 By the end of 2005, forty-six companies listed on Novo
Mercado, thirty-six on Level I and ten on Level 2. By the end of 2007,
156 companies were listed on Novo Mercado (Levels 1 and 2), representing
57% of BOVESPA's total market capitalization, 66% of the trading
volume, and 74% of the number of trades in the cash market.74 In effect,
Novo Mercado is demonstrating Brazil's ability to attract capital and stem
the flow of financial migration to the United States by offering a stronger
disclosure and corporate governance regime similar to that found in the
In summary, cross-listing firms seeking regulatory regimes that afford
greater protection for minority shareholders' rights are impacting the
regulation in their home countries. Although these firms may face
obstacles to change,7 6 evidence shows that cross-listing is, in some markets,
leading to converging standards that stress high disclosure and corporate
governance.77 This competition benefits cross-listing firms by offering
more attractive markets to issue shares, potentially lowering their cost of
C. Target Country Characteristics
In addition to affecting home country regulatory regimes, cross-listing
also affects, to some extent, the regulatory regimes of the target countries in
which firms choose to list their shares.78 More specifically, although
crosslisting firms do not have a political voice in the target countries, they do
influence regulatory decisions because of the threat posed by such firms
choosing to cross-list somewhere else or not cross-list at all.7 9
Consequently, target countries may offer concessions and exemptions to
foreign issuers in situations where the contemplated benefit of cross-listing
may be outweighed by the perceived cost of cross-listing.80 The United
7 Santana, supranote 64, at 23.
74 Id. at 24.
7 See, e.g., Alexander Ragir, Around the Markets: Tough Rules Draw Funds to Brazil,
INT'L HERALD TRIB., Mar. 8, 2007 ("Brazil is attracting overseas investors by playing their
game. The Novo Mercado, a new stock market whose corporate governance rules mirror
those of the United States and Europe, almost doubled its listings in 2006.").
76 See supranotes 44-59 and accompanying text.
n But see Coffee, supra note 1, at 1814-17 (arguing that the effects of cross-listing may,
in fact, lead to the specialization of markets between "high disclosure" markets protecting
minority shareholder interests and "low disclosure" markets protecting the interests of
incumbent, controlling shareholder firms resistant to change). Coffee describes this as a
compromise between the "race to the top" scenario and the "race to the bottom" scenario.
78 Ribstein, supranote 7, at 119.
80 Id. at 120.
Northwestern Journal of
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States, representing the most attractive market for cross-listing firms,
provides a prime example.
Foreign issuers in the United States trade through ADRs1 at four
different levels. Level I trades of ADRs are executed through
over-thecounter markets and are exempt from issuer registration under Rule
12g32.82 Level II and III ADRs, which trade on a securities exchange, Nasdaq,
or OTC-BB, are required to register under Section 12 of the Exchange
Act.83 However, such issuers are provided the benefit of filing one annual
report, Form 20-F, instead of the additional periodic disclosures required of
U.S. issuers. 84 Form 20-F provides additional accommodations including a
longer filing deadline and less restrictive disclosure requirements.85 Level
IV ADRs trade on an exchange called "PORTAL," and are exempt from
U.S. reporting standards under Rule 144A of the Securities Act because
they are traded solely among Qualified Institutional Buyers ("QIBs").86
An additional accommodation is the exemption of foreign issuers from
the proxy rules and the liability rules associated with the short-swing profits
81 See supranote 3 (defining American Depositary Receipts).
82 See 17 C.F.R. § 240.12g3-2(a)-(b) (2008) (exempting non-listed foreign private issuers
("FPIs") from registration and reporting under the 1934 Act if they furnish disclosure
documents filed under their home country laws or if held by fewer than 300 U.S. residents at
the end of the firm's fiscal year). In 2008, the SEC adopted rules amending Rule 12g3-2(b),
) eliminating the paper submission requirement, (2) allowing the exemption if
the average daily trading volume of the FPI is no greater than 20% of the average daily
trading volume of that class worldwide, (3) requiring the FPI to maintain a listing of the
subject class of securities traded in the United States on one or more foreign exchanges, (
requiring the FPI to publish in English specified non-U.S. disclosure documents on its
website, and (5) requiring that the FPI not have any reporting obligations under the
Exchange Act Section 13(a) or 15(d). Securities Act Release No. 34-58465, 73 Fed. Reg.
57252 (Sept. 10, 2008). A "foreign private issuer" is defined as:
[A]ny foreign issuer other than a foreign government except an issuer meeting the
following conditions: (
) more than 50% of the outstanding voting securities of
such issuer are held of record either directly or through voting trust certificates or
depositary receipts by residents of the United States; and (2) any of the following:
(i) the majority of the executive officers or directors are United States citizens or
residents, (ii) more than 50% of the assets of the issuer are located in the United
States, or (iii) the business of the issuer is administered principally in the United
A QIB, among other things, must own at least $100
17 C.F.R. §
million in securities of issuers that are not affiliated with the entity.
provisions of the Securities Act and the Exchange Act.87 Also, under Rule
15a-6 of the Exchange Act, foreign brokers and dealers are exempt from the
registration requirements of Sections 15(a)(
) and 15B(a)(
) of the
Exchange Act if certain prerequisites are satisfied.88 Furthermore, U.S.
exchanges, including the NYSE and Nasdaq, have effectively exempted
foreign issuers from important regulatory provisions, including certain
independent audit committee obligations, shareholder approval of certain
stock option plans, and shareholder approval of the issuance of 20% or
more of a listed company's common stock used to protect shareholders
against dilutive issuances. 89 Although these provisions are intended to
protect minority shareholders, the Securities and Exchange Commission
("SEC" or "Commission") has, to a great extent, approved of such
disparity. 90 However, such accommodations impede the efforts of the home
countries of cross-listing firms to improve their regulatory regimes and call
into question the benefits attributed to the bonding theory.
Specifically, when foreign markets, like Novo Mercado, seek to
upgrade their governance standards, they face the problem that the firms
they seek to attract have the option to by-pass such exchanges by listing in
the United States and obtaining greater liquidity at a lower governance
threshold. 91 In effect,
[t]he unwillingness of U.S. exchanges to impose governance or
voting listing requirements on foreign listed firms thus surfaces as a
barrier to improved governance in emerging markets; indeed, it may
create a perverse form of regulatory competition in which U.S.
exchanges in effect underbid their competitors in terms of
substantive governance requirements. 92
Such exemptions represent a disservice to the potential investors that
crosslisting firms seek under the bonding theory because, in the absence of
strong requirements, such investors may not be able to discern high quality
firms from low quality firms. Yet, the argument remains that firms will not
" 17 C.F.R. § 240.3al2-3(b) (2008).
8 17 C.F.R. § 240.15a-6(a)(
89 Coffee, supra note 1, at 1821-22.
90 Id. at 1822; see also Exchange Act Release No. 7053 [1993-1994 Transfer Binder],
Fed. Sec. L. Rep. (CCH) 85, 203-04 (Apr. 19, 1994) (arguing accommodations to foreign
issuers as "part of [its] ongoing efforts . . . to ease the transition of foreign companies into
the U.S. disclosure system, enhance the efficiencies of the registration and reporting process
and lower costs of compliance, where consistent with investor protection").
91 Coffee, supranote 1, at 1821.
92 Id.; see also id. at 1768 ("[A]lthough some [foreign] markets have actually leapfrogged
the United States in terms of the governance and disclosure standards that the United States
now mandates for foreign issuers, they have encountered a ceiling on their ability to upgrade
standards because of the laissez-faire attitude of U.S. exchanges toward foreign issuers.").
cross-list if the cost of bonding exceeds the benefits of cross-listing. The
solution to this predicament lies in the convergence of high-quality
disclosure and governance standards that would equalize the cost of
compliance across jurisdictions while still maintaining the benefits firms
seek under the bonding theory.
III. THE EFFECT OF IFRS ON CROSS-LISTING UNDER THE
The acceptance and convergence of International Financial Reporting
Standards ("IFRS") provides a solution to the disconnect between balancing
the costs associated with cross-listing and the benefits sought under the
bonding theory. Specifically, the convergence of IFRS across jurisdictions
would decrease the cost of compliance for firms choosing to cross-list while
still providing a high-quality reporting regime to potential investors.94
The adoption of IFRS and push towards international convergence has
been at the forefront of debate among international regulatory institutions,
including the International Accounting Standards Board ("IASB"),95 the
SEC, and the International Organization of Securities Commissions
("IOSCO"),96 among others.97 The origins of IFRS date back to 1973 with
the establishment of the International Accounting Standards Committee
("IASC"), which was formed to begin the creation of a comprehensive set
of international standards favorable to national securities regulators.9 8 The
IASC began as a part-time standards setter and made relatively modest
efforts in developin a core set of standards that were presented to securities
regulators in 1998. However, in 2000, the IOSCO failed to endorse the
standards presented which, in turn, led to the transition of the IASC into the
The IASB implemented changes, including the adoption of a new
constitution that created a board designated to build upon and issue
interpretations about IFRS.1 o' Central to the IASB's efforts is the concept
of convergence, with a goal "to identify the best in standards around the
world and build a body of accounting standards that constitute the 'highest
common denominator' of financial reporting."'102 Since its inception, the
IASB's efforts have accelerated towards convergence of IFRS.10 3 However,
success without U.S. participation would be incomplete and, as U.S. capital
markets are the deepest and most liquid in the world, would fail to capture
the full benefits that international reporting standards could offer. 104 Thus,
the IASB has been working with the U.S. Financial Accounting Standards
Board ("FASB")'05 since 2002 in an effort towards eventual financial
reporting standards convergence. o0
In 2005, the European Union adopted a regulation that requires all
publicly traded companies to use IFRS for their consolidated accounts
beginning January 2005.107 Countries across the world have quickly
followed suit, with over 100 countries requiring or allowing the use of IFRS
for reporting purposes.'s Recently, the United States took two important
steps towards the adoption of IFRS. First, in December 2007, the SEC
adopted rules permitting foreign private issuers to file financial statements
with the Commission that comply with IFRS, as issued by IASB, without
reconciliation to U.S. GAAP. 1 Second, in November 2008, the SEC
proposed a roadmap for U.S. issuers to switch over to IFRS by 2014.110
101Mark J. Hanson, Becoming One: The SEC Should Join the World in Adopting the
InternationalFinancialReportingStandards, 28 Loy. L.A. INT'L & COMP. L. REv. 521, 525
(2006). See generally David S. Ruder et al., Creationof World Wide Accounting Standards:
Convergence and Independence, 25 Nw. J. INT'L L. & Bus. 513 (2005) (discussing the
significance of the creation of IASB as an independent professional organization).
102 Tweedie, supra note 98, at 592 (citing INTERNATIONAL ACCOUNTING STANDARDS
COMMITTEE, IASC FOUNDATION CONSTITUTION 5 (2002)).
The trend towards adoption of IFRS has important implications both for
investors and cross-listing firms in the context of the bonding theory.
A. Benefits to Investors
Under the bonding theory, firms cross-list in order to utilize stricter
disclosure obligations and governance standards to bond their promise with
potential investors that they will protect minority shareholder rights."'
Therefore, firms looking to establish that bond will not support IFRS unless
it provides sufficient regulation and disclosure. The majority of concerns
surrounding the adoption of IFRS are related to whether the standards can
afford protection at a similar level to U.S. GAAP.11 2 However, two
observations challenge this notion.
First, U.S. GAAP's thorough accounting standards have failed to
prevent recent widespread accounting standards, including the Enron and
WorldCom debacles. 1 Lessons from Enron have shown that under U.S.
GAAP, firms may potentially be able to play "regulatory arbitrage" by
structuring inappropriate transactions that may comply with bright-line tests
as specified under U.S. GAAP.11 4 This is the strategy Enron employed by
using Special Purpose Entities ("SPEs") to record amounts off their books
while, in effect, materially overstating earnings."'
Second, in the wake of such scandals, the SEC has conducted a study
of U.S. GAAP's rule-based approach and has identified its potential
shortcomings.116 Three of the most significant shortcomings with
ruleRelease No. 34-59350, 74 Fed. Reg. 6359 (proposed Feb. 9, 2009); cf Matthew G.
Lamoreaux, SEC ChiefAccountant Promises "Clarity" on IFRS Road Map This Fall, J.
AccT., Oct. 30, 2009, http://www.joumalofaccountancy.com/Web/20092279.htm (noting
that the SEC's Chief Accountant announced plans to clarify the SEC's position on the
proposed IFRS roadmap during the Fall of 2009). But see e.g., Remi Forgeas, SEC's Leap
Toward JFRS: Has the Momentum Gone?, AICPA, Feb. 23, 2009,
9/CPA/Feb/TowardIFRS.jsp (noting that "the newly-appointed SEC Chairperson, Mary
Schapiro, indicated that the move to IFRS is not a priority"); IASB ChairMeets with New
SEC Chair, WEBCPA, Feb. 12, 2009, http://www.webcpa.com/news/30745-1.html (noting
that Schapiro does not feel bound by the roadmap drawn under former Chairman Christopher
11 Ribstein, supra note 7, at 104.
112See Hanson, supra note 101, at 531 ("[S]ome commentators believe the SEC will
never adopt IFRS because the SEC believes that U.S. GAAP is the world's 'golden
standard'.") (citing Janice Grant Brunner, Comment, All Together Now? The Quest for
InternationalAccounting Standards,20 U. PA. J.INT'L EcoN. L. 911, 913 (1999)).
113Id. at 534.
116See U.S. Sec. & Exch. Comm'n, Study Pursuantto Section 108(d) of the
SarbanesOxley Act of 2002 on the Adoption of the United States FinancialReporting System of a
Principles-Based Accounting System,
http://www.sec.gov/news/studies/principlesbasedstand.htm (July 25, 2003) (comparing
based standards identified by the SEC are that they:
Contain numerous bright-line tests, which ultimately can be misused
by financial engineers as a roadmap to comply with the letter but not
the spirit of the standards; Contain numerous exceptions to the
principles purportedly underlying the standards, resulting in
inconsistencies in accounting treatment of transactions and events
with similar economic substance; and Further a need and demand for
voluminously detailed implication guidance on the application of the
standard, creating complexity in and uncertainty about the
application of the standard.1 17
Thus, the SEC concluded that a principle-based accounting system provides
benefits not offered under a rule-based accounting system.
Additionally, the IASB has demonstrated a willingness to incorporate
beneficial provisions of U.S. GAAP into IFRS, and IFRS has met the
criteria set forth by the SEC for adoption."'9 For example, since the
Norwalk Agreement in 2002, the FASB and the IASB have been carrying
out "joint projects" to reduce differences regarding issues such as revenue
recognition, business combinations, and to build a common conceptual
basis between IFRS and U.S. GAAP.12 0 IFRS has also satisfied criteria set
forth by the SEC for the adoption of international standards, including: (
the inclusion of a core set of accounting pronouncements that constitute a
comprehensive, generally accepted basis of accounting, (2) high-quality
standards based on comparability and transparency, and (3) standards that
are rigorously interpreted and applied. 12 1
As such, the provisions of IFRS have demonstrated high-level
disclosure requirements that complement the transparency demanded by
investors under the bonding theory. Additionally, the adoption of a
principle-based standard arguably shows that countries, including the
United States, want an accounting standard that is "investor-centered rather
than accountant-centered." 22 By reducing the complexity of financial
standards of financial reporting established on a rule-based basis and standards established
on a principles-only basis).
119 Hanson, supranote 101, at 543-54.
120 Id at 546-47. For example, one difference between IFRS and U.S. GAAP concerned
the issue of when a corporation could engage in "uniting of interests or pooling accounting
for a merger or acquisition." Id. at 547. Convergence efforts have now eliminated this
difference under both IFRS and U.S. GAAP by prohibiting uniting of interests in favor of
just the acquisition treatment. Id
121 See id at 548 (citing International Accounting Standards, Act Release Nos. 33-7801,
34-42430, International Series No. 1215; 65 Fed. Reg. 8896, 8900 (Feb. 23, 2000) (codified
at 17 C.F.R. Pts. 230, 240)).
122 See id. at 555 (arguing that IFRS "improve[s] investors' access to information for
making investment decisions" while "reduc[ing] the complexity of financial statements and
Northwestern Journal of
International Law & Business 30:483 (2010)
disclosure, auditors, in turn, will have an easier time testing financials and
asking direct questions about a company's accounting treatment.123
Furthermore, with the adoption of IFRS, investors face benefits
) more accurate, thorough, and timely financial statements in
comparison to national standards in other countries, (2) the reduction of
adverse selection between minority investors and professionals, (3) a
reduction in the cost to investors of analysts processing multiple reporting
) a resulting increase in the efficiency with which the stock
market incorporates processed financial information in stock prices, and (5)
a reduction in barriers to cross-border acquisitions and divestitures, which,
in theory, will reward investors with increased takeover premiums. 24 In
total, these benefits make IFRS an attractive standard for firms looking to
lure investors by cross-listing under the bonding theory.
B. Benefits to Cross-listing Firms
From the perspective of cross-listing firms, the adoption of IFRS and
the push towards international convergence provides additional benefits
under the bonding theory. The primary advantage is economies of scale:
firms choosing to cross-list do not have to incur the compliance costs of
reconciling financials to different reporting standards (absent an exemption)
when issuing shares abroad.125 Additionally, IFRS eliminates informational
externalities that may arise from a lack of comparability between different
sets of financial reporting standards.1 2 6 In other words, when countries
impose different accounting standards, firms incur additional costs due to
lack of comparability of financial information even if such differences are
disclosed to investors.'2 7 Thus, in the context of the bonding theory, IFRS
allows firms to cross-list shares using a high-standard disclosure system and
avoid additional costs of compliance while still signaling to potential
investors a bond towards transparency and protection of minority
In summary, IFRS provides the high-level disclosure requirements that
123 Id. See also Ray Ball, InternationalFinancialReporting Standards (IFRS): Pros and
Cons for Investors, 36 AcCT. & Bus. REs. 5, 7 , available at
http://www.abrjournal.com/pdf/005-028.pdf ("The . . . advantage ofuniform standards is the protection they
give auditors against managers playing an 'opinion shopping' game. If all auditors are
required to enforce the same rules, managers cannot threaten to shop for an auditor who will
give an unqualified opinion on a more favourable rule.").
124 Ball, supranote 123 (manuscript at 15-16).
125 Id. (manuscript at 6).
126 Id. (manuscript at 7).
127 See id. ("To the extent that firms internalize these effects, it will be advantageous for
them to use the same standards as others.").
128 Recent data has confirmed this notion. See Daske et al., supra note 25, and
investors seek while reducing the costs cross-listing firms may face when
looking to issue shares abroad. Thus, IFRS equalizes the cost of
compliance across jurisdictions while still maintaining the benefits to firms
attributed to the bonding theory.
IV. IMPEDIMENTS TO THE CONVERGENCE OF CORPORATE
The convergence of corporate governance standards across
jurisdictions may provide similar benefits as those provided by IFRS to
cross-listing firms. However, a push towards the convergence of corporate
governance standards poses a much more difficult scenario in contrast to
the convergence of disclosure standards, such as IFRS.' 29 More
specifically, deep-seated political and cultural differences across
jurisdictions create an impediment towards corporate governance
convergence. 130 The enactment of the Sarbanes-Oxley Act of 2002131
("SOX") and resulting foreign issuer response illustrates this
In general, SOX requires companies to upgrade their disclosure and
governance in a number of ways, including:
regulation of firms providing audits for companies publicly traded in
the U.S.; requirement of independent audit committees; certification
of financial statement accuracy and internal controls by executive
and financial officers; executive reimbursement of incentive
compensation from any accounting period for which earnings had to
be restated; lawyers' duty to report evidence of securities violations;
prohibition of issuer loans to executive officers or directors; annual
report disclosures of managers' responsibilities for setting up internal
control and financial reporting structure and procedures; disclosures
regarding an issuer's code of ethics, disclosures regarding the audit
committee's "financial expert"; and whistle-blower protection. 33
However, SOX has created many new problems for foreign based
firms cross-listing in the United States. For example, SOX prohibits loans
to executives,134 while German law simply restricts similar loans in larger
129 Ribstein, supra note 7, at 120.
131Id. at 98.
01 Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745.
132 See Ribstein, supra note 7, at 124-29 (discussing the impact of the Sarbanes-Oxley
Act on the cross-listing market); Coffee, supra note 1, at 1824-27 (describing the responses
of foreign issuers to SOX).
133 Ribstein, supranote 7, at 125.
134 See Sarbanes-Oxley Act of 2002 § 402, 15 U.S.C. § 78m(k)(
) (2006) ("It shall be
unlawful for any issuer ... to extend or maintain credit, to arrange for the extension of
credit, or to renew an extension of credit, in the form of a personal loan to or for any director
or executive officer . .. of that issuer.").
Northwestern Journal of
International Law & Business
public companies unless they are approved by the supervisory board.13 5
Additionally, SOX's independent audit committee requirement represents a
revolutionary reform for companies incorporated under civil law regimes,
where there is often a requirement of a two-tier board, "with the lower or
'managing board' having no independent directors and the upper or
'supervisory board' being half composed of representatives of
employees."13 6 Consequently, because codetermination laws result in
supervisory boards consisting of employee and union representatives, "civil
law corporations have generally resisted giving the supervisory board
significant substantive responsibilities."l 37 This is in direct conflict with
SOX, which assigns to the audit committee all responsibility "for the
appointment, compensation, and oversight of the work of any registered
public accounting firm employed by that issuer (including resolution of
disagreements between management and the auditor regarding financial
Another example of where SOX conflicts with forein goveance
standards involves SOX's oversight of corporate executives. Under U.S.
law, executives wield significant power, subject only to oversight by the
company's board.140 So, it is reasonable to regulate potential conflicts of
interest that may arise between executives and shareholders.14' However, in
many other countries, corporate hierarchies may be structured differently so
that executives have less power.14 2 This is the case in Japan, where
Japanese corporations do not have executive officers as conceived under
SOX regulations, but are run by a complex hierarchy of committees.143
These examples illustrate the significant corporate governance differences
that arise across jurisdictions.
The SEC, in response to such differences and out of a concern that
foreign firms would stop cross-listing in the United States, created several
exemptions for foreign issuers under SOX. For example, the SEC permits
foreign private issuers to comply with the requirement to include in their
annual reports management's report on the company's internal control over
135 Ribstein, supra note 7, at 125.
136 Coffee, supranote 1, at 1825.
138 Id. at 1825-26 (citing Sarbanes-Oxley Act of 2002 § 301, 15 U.S.C. § 78f(m)(2)
139 Ribstein, supranote 7, at 126.
143 See id. at 126-27. ("This suggests potential difficulty in applying Sarbanes-Oxley
provisions dealing with executive certification of financial reporting and monitoring devises.
It also raises questions about applying Sarbanes-Oxley's prohibitions on trading during
restrictions on pension plans participants, and various provisions imposing liability on
financial reporting and the auditor's attestation on a delayed basis compared
to U.S. issuers.' Also, foreign private issuers are permitted to report
changes in their internal controls over financial reporting on an annual
basis, rather than on a quarterly basis as is required of domestic issuers. 145
Additionally, with respect to the audit committee independence
requirements, foreign private issuers listed on U.S. exchanges are accorded
certain accommodations that recognize non-U.S. practices and
The illustration of how SOX affects foreign issuers looking to
crosslist provides significant insight under the bonding theory. Most
importantly, the example demonstrates that deep-seated differences in
corporate governance laws pose a significant impediment to the
convergence of corporate governance standards. As such, the goal of
international regulatory regimes and the IOSCO should be towards
identifying how to maintain high-quality corporate governance standards
while still accommodating underlying political and cultural differences.
Over the past twenty years there has been an observable worldwide
growth in stock market capitalization. Additionally, more and more
companies are choosing to cross-list their shares in markets abroad in order
to raise equity at a lower cost of capital. The bonding theory postulates that
cross-listing on an exchange in a market that has strong investor protection
commits the listing firm to recognize minority shareholders' rights and to
increase transparency in disclosures. In doing so, a firm is able to increase
shareholder confidence, which in turn reduces the discount potential
investors place on the firm's shares and leads to a reduction in the cost of
However, where the cost of compliance seemingly outweighs the
perceived benefit of cross-listing, some foreign firms will avoid
crosslisting. In response, target countries may provide exemptions to regulatory
requirements in order to entice foreign firms to cross-list. This arguably has
a contrarian effect to the bonding theory as it dilutes the bond or assurance
cross-listing firms send to investors regarding the protection afforded by the
target country's regulatory regime. Thus, 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.
144 Securities Act Release No. 33-8392, 69 Fed. Reg. 9722 (Mar. 1, 2004) (codified at 17
C.F.R. Pts. 210, 228, 229, 240, 249, 270 & 274 (2009)).
145 Securities Act Release No. 33-8238, 68 Fed. Reg. 36636 (Jun. 18, 2003) (codified at
17 C.F.R. Pts. 210, 228, 229, 240, 249, 270 & 274 (2009)).
146 Securities Act Release No. 33-8220, 68 Fed. Reg. 18788 (Apr. 16, 2003) (codified at
17 C.F.R. Pts. 228, 229, 240, 249 & 274 (2009)).
Northwestern Journal of
International Law & Business
As a solution to this problem, the convergence of disclosure
requirements provided by IFRS gives the high-level disclosure
requirements that investors seek while reducing the costs cross-listing firms
may face when issuing shares abroad. Thus, IFRS equalizes the cost of
compliance across jurisdictions while still maintaining the benefits to firms
attributed to the bonding theory. The convergence of corporate governance
standards may also provide the same benefit, but deep-seated political and
cultural differences make it difficult to achieve such convergence.
Therefore, the goal of international regulatory regimes and the IOSCO
should be towards promoting IFRS and identifying how to maintain
highquality corporate governance standards while still accommodating
underlying political and cultural differences.
43 Id. at 117.
4See generally Raghuram G. Rajan & Luigi Zingales , The GreatReversals: The Politics ofFinancialDevelopment in the Twentieth Century , 69 J. FIN. EcON . 5 ( 2003 ) (suggesting that influential incumbent interests impede regulatory change in underdeveloped countries).
45 Ribstein, supra note 7, at 102; Jane C. Kang , The Regulation of Global Futures Markets: Is HarmonizationPossible or Even Desirable? , 17 Nw. J. INT'L L . & Bus . 242 , 244 - 45 ( 1996 ) ; Troy A. Paredes, A Systems Approach to Corporate Governance Reform: Why Importing US CorporateLaws Isn't the Answer, 45 WM . & MARY L. REV . 1055 , 1058 - 59 ( 2004 ).
46 Ribstein, supra note 7, at 102-03; Amir N. Licht , Legal Plug-Ins: CulturalDistance, Cross-Listing ,and CorporateGovernanceReform, 22 BERKELEY J. INT'L L . 195 , 198 ( 2004 ) [hereinafter Licht, Legal Plug-Ins] . 56 Id 17 C.F.R. § 240 .3b- 4 (c) ( 2008 ).
8 17 C.F.R. § 240 .12g- 1 ( 2008 ).
8 17 C.F.R. § 249 . 220f ( 2008 ) ; see also Exchange Act Release No . 34 - 16371 , 44 Fed. Reg. 70132 ( Dec . 6, 1979 ) [hereinafter Form 20- F Adopting Release ] (noting the goal of alleviating certain disclosure impositions on foreign issuers).
85 Form 20- F Adopting Release , supra note 84.
86 17 C.F.R . § 230 . 144A ( 2008 ).
93 Ribstein, supranote 7, at 120.
94 See Daske , supra note 24 , at 4-5 (finding that the mandatory adoption of IFRS decreased the cost of capital and increased liquidity for firms in countries where firms have an incentive to be transparent and where legal enforcement is strong).
95 The IASB is a worldwide institute with the goal of bringing about convergence of accounting standards . IASB, General Information about IASB , available at http://www.iasb.org/The+organisation/IASCF+and+IASB. htm (last visited Mar. 8 , 2010 ).
96IOSCO consists of securities regulators from 189 countries (consisting of ordinary, associate, and affiliate members) who are committed to working together to "promote high standards of regulation in order to maintain just, efficient and sound markets . " IOSCO, General Information about IOSCO , http://www.iosco. org/about/ (last visited Mar. 8 , 2010 ).
9 See, e.g., John W. White, Dir., Div. of Corp. Fin., U.S. Sec . & Exch . Comm'n, Remarks at the Fin . Executive Int'l Global Fin. Reporting Convergence Conference (June 5 , 2008 ), http://www.sec.gov/news/speech/2008/spch060508jww.htm.
98 Sir David Tweedie & Thomas R. Seidenstein , Setting a GlobalStandard: The Casefor Accounting Convergence,25 Nw . J. INT'L L . & Bus . 589 , 591 ( 2005 ).
9 Id. at 591-92.
'" Id. at 592.
10 See id . at 594 ( noting that U.S. capital markets accounted for 46% of the world's market capitalization in 2003, compared to the combined market capitalization of the European Union at 25.3%).
1os The U.S. Financial Accounting Standards Board ("FASB") is a private standards setting organization that is subject to oversight by the Financial Accounting Foundation ("FAF") . FASB, General Information about FASB , http://www.fasb.org/faf/index2.shtml (last visited Mar. 8 , 2010 ).
106 See Tweedie , supra note 98 , at 597-98 (describing the initial agreement between the FASB and the IASB (the "Norwalk Agreement") in 2002 along with subsequent efforts).
107 Council Regulation 1606 / 2002 , On the Application of International Accounting Standards, 2002 O.J. (L 243) 1, 2 (EC).
108 IAS Plus (Deloitte Touche Tohmatsu ), http://www.iasplus.com/country/useias. htm (last visited Mar. 8 , 2010 ).
109 Securities Act Release No. 33 - 8879 , Exchange Act Release No. 34 - 57026 , 73 Fed. Reg. 986 ( Jan . 4, 2008 ).
110 Securities Act Release No. 33 - 8982 , Exchange Act Release No. 34 - 58960 , 73 Fed. Reg. 70816 ( proposed Nov . 21 , 2008 ); Securities Act Release No. 33 - 9005 , Exchange Act