Question

Explain why and how a firm’s cost of capital may decrease when the firm’s stock is cross listed on foreign stock exchanges.

Answer 1

Ans) Cross listing is also known as multilisting it is a method of raising equity capital by a company through listing its  share in foreign and domestic stock exchange. For example let A is company listed in domestic stock exchange  NYSE now the company decided to list its share in London stock exchange ( LSE) through as GDR or Global depository receipt. The main advantages are the currency and trading time advantage which results in increasing  the liquidity of the company. The cost of capital is the returned required by a company to obtain the benifit of a  source of finance , in case of cost of equity capital it is the returned required to be paid to equity shreholders for   the equity investment. Cross listing help in reducing cost of issuing equity as the stocks of a company for example A is in the above case can be reduced as the share of the company are available to the foreign  investors as otherwise they would be not because of international investment barrier.Hence we can say that the  cost of issuing equity reduces through cross listing. As the other routes through which a company like A in the example can get finance is through FDI that is foreigh direct investment or by taking debt but since both of the methods required higher cost and are complex hence it is economical to cross list as a matter of fact the overall cost of capital can be reduced as there are huge investors who can purchase the shares and also there is an advantage of multiple time zones and trading in multiple currency which can have forex advantages all this help to reduce the cost of equity capital.