Cross-Listing and Regulatory Competition

Firms can "rent" the securities laws in other countries by listing or selling securities there while remaining subject to local law. Firms thereby can reduce their cost of capital despite political and other impediments to strong securities laws in their home countries. The cross-listing market has implications for both cross-listing jurisdictions and the home jurisdictions of cross-listing firms. From the standpoint of home countries, firms' flight to other markets may result in political pressure to adopt laws similar to those in the cross-listing countries. However, this pressure is unlikely to cause convergence of international corporate laws. To the extent divergence persists, cross-listing firms' costs of complying with the internal governance law of cross-listing jurisdictions may exceed the benefits of cross-listing. In order to avoid reducing cross-listings, cross-listing jurisdictions have an incentive to exempt foreign firms from their internal governance law or to avoid regulating internal governance. This has important implications for expanding US federal regulation of internal governance: Just as the federal government is Delaware's competition, so the international market for cross-listings is Washington's competition.