Regional financial Integration in Africa: Cross-listings as a form of regional financial integration

Moses W Chisadza is a lawyer who has worked for the University of Fort Hare as a Tutor in Jurisprudence and Property law courses. In 2012/2013 he was selected as a recipient of highly competitive Australian Aid scholarship to study a unique LLM programme in International Trade, Investment and Business Law in Africa at the University of the Western Cape. Moses holds a specilised LLM degree in International Trade, Investment and Business Law in Africa from the University of the Western Cape (South Africa), an LLB from the University of Fort Hare (South Africa), and a Certificate of Proficiency from the Cape Law Society, a Certificate in Practical Legal Training from the East London School of Legal Practice: Law Society of South Africa. His research fields are International Finance and Financial Markets Regulations, Stock market development International trade, Investment and Business law.

Text Sample:
Chapter 1.3., REASONS FOR DOMESTIC MARKETS AND FIRMS TO PARTICIPATE IN CROSS-LISTING:
Academic literature has identified a number of different reasons which motivate local markets and firms to cross-list. For example, firms and domestic markets cross-list in order to expand their investor base, increase stock liquidity, improve the terms on which they can raise capital, increase visibility of stock exchanges, and achieve non-financial benefits such as increasing their customer base through the broadening of product recognition among investors of the host country. In addition, cross-listings enrich and strengthen each individual exchange by the addition of quality-level listed securities.
1.3.1, Expand Investor Base:
Cross-listings in a foreign market make the domestic market available to more investors and, consequently increase the shareholder base and risk sharing, which results in higher valuations. Foerster and Karolyi provide empirical support to this perception, namely that cross-listing increases market value by expanding the shareholder base and improving liquidity. In support of this notion, Canadian managers whose firms are cross listed in the U.S. place greater emphasis on the role of cross-listings in widening their shareholder base. As cross listings increase the shareholder base, the market s risk is shared among more shareholders and this increased diversification reduces the market s cost of capital. Baker reports that the major benefit of foreign listing is to broaden the shareholder base. It is depicted that cross-listings increase the investor base of the stock market with beneficial effects on its cost of capital. Cross-listings help to draw the interest of new investors and encourage them to start trading in both foreign and local markets. The interest may come not only from the larger scope of corporate information available after listing overseas, but also from a signal of commitment to higher governance standards which a local market sends when deciding to enter foreign markets. Furthermore, by cross-listing a domestic market could expand its potential investor base more easily than if it is traded on a single market, as cross-listings bring foreign securities closer to potential investors, and they increase investor awareness of the securities. Therefore, firms and domestic markets participate in cross-listings because this provides an avenue for portfolio diversification for a wider investor base.
1.3.2, Liquidity:
Significantly, cross-listing on deeper and more liquid equity markets leads to an increase in the liquidity of the stock and a decrease in the cost of capital. Liquidity is a crucial feature of stock market development since greater liquidity can translate into a lower cost of capital for the stock market concerned, insofar as it is valued by investors and factored into market prices. According to a World Bank study, liquidity in stock markets increases long-term economic growth by easing firms access to funds for investment. In addition, liquidity plays an important role in the ability of markets to attract trading volume. Liquid markets also experience faster rates of capital accumulation and subsequently greater productivity. Hence, it can be noted that stock market liquidity can positively influence economic growth, capital stock growth and productivity growth. It is thus contended that cross-listings generate improved liquidity which lowers the cost of capital and increases share value. Cross-listings lead to an increase in liquidity due to a pick-up in trading volumes in both the home and foreign stock market. As a result of cross-listing, the home market and the host market will compete for order flows for the cross-listed stocks and order flows will shift to the market with lower trading costs. It is established that when local markets enter foreign markets, liquidity of the domestic markets improves significantly. Therefore, secondary market liquidity increases