On the decision of public companies to seek foreign listings the case of chinese companies

ON THE DECISION OF PUBLIC COMPANIES TO SEEK
FOREIGN LISTING: THE CASE OF CHINESE
COMPANIES

HAO JING
(Bachelor of Economics)

A THESIS SUBMITTED FOR
THE DEGREE OF MASTER OF SOCIAL SCIENCES

DEPARTMENT OF ECONOMICS
NATIONAL UNIVERSITY OF SINGAPORE

2009


Acknowledgements
It is a pleasure to thank the many people who made this thesis possible.
It is difficult to overstate my gratitude to my supervisor, Professor Yohanes Eko
Riyanto. With his enthusiasm, and his inspiration, he helped to make doing research
fun for me. Throughout my thesis-writing period, he provided encouragement, sound
advice, good teaching, and insightful ideas. He also provided me the most helpful
advices on stuffs other than my thesis writing. I would have been lost without him.
I would like to thank the many people who have taught me, especially Heejoon Han,
Jong Hoon Kim, Sun Yeneng, Indranil Chakraborty at National University of
Singapore, and the professors who attended the seminar with valuable comments to
my thesis: Julian Wright, Tilak Abeysinghe, Gamini Premaratne, Jie Zhang.
I am indebted to my many student colleagues, Xu Wei, Zhou Xiaoqing, Pei Fei, Mun
Lai Yoke, Miao Bin, Li Lei, Athakrit Thepmongkol and Yin Zihui for providing a
stimulating and fun environment in which to learn and grow.
I wish to thank my best friends and roommates during undergraduate study, Yang

Linyan, Liu Chang, Ren Sien, for all their emotional support to help me get through
the difficult times overseas. I wish all of them happy ends with their loved ones.
I am grateful to the administrative staffs in the Department of Economics, for helping
the departments to run smoothly and for assisting me in many different ways. Nicky
Kheh and Sagi Kaur deserve special mention.

i


I wish to thank my entire extended family for providing a loving environment for me.
My younger sister, Hao Hui, who brings limitless happiness and love to my life, my
cousins, and my grandparents, were particularly supportive.
Lastly, and most importantly, I wish to thank my parents, Wen Xiuyun and Hao
Weiguo. They bore me, raised me, supported me, taught me, and loved me. To them I
dedicate this thesis.

ii


Table of Contents
Summary ........................................................................................................................v
List of Tables ................................................................................................................vi
1.

Introduction ............................................................................................................1

2.

Literature review.....................................................................................................8

3.

Legal environment and listing standards ..............................................................15

4.

Hypotheses and data .............................................................................................22

5.

6.

4.1.

Hypotheses and methodology .......................................................................22

4.2.

Data ...............................................................................................................25

Pre-IPO analysis ...................................................................................................27
5.1.

All IPOs included ..........................................................................................27

5.2.

IPOs following the highest standards............................................................32

5.3.

Corporate governance ...................................................................................41

5.4.

Catalist...........................................................................................................47

Results summary and interpretation .....................................................................48
6.1.

Hypothesis I...................................................................................................48

6.2.

Hypothesis II .................................................................................................51

6.3.

Other variables ..............................................................................................52

6.4.

Catalist...........................................................................................................55

7.

Post-IPO analysis..................................................................................................56

8.

Conclusions ..........................................................................................................60
8.1.

Major findings ...............................................................................................60

8.2.

For further studies .........................................................................................63
iii


Bibliography ................................................................................................................65

iv


Summary
This thesis looks at the determinant factors to the Initial Public Offering (IPO)
location choice of Chinese firms, in particular, the location preference between the
Singapore market and the market in Hong Kong or in mainland China.
We find that firms with better financial performance or better corporate governance
prefer to have IPOs in Singapore other than Chinese domestic markets to separate
themselves from the rest as a quality signal to the capital markets and also to the
product markets. However, the findings on the effects of financial performance on the
choice between Singapore and Hong Kong are contrary with our expectations. Two
potential explanations are proposed for future study.
Industry sector, tax burden and firm size are also firms’ consideration to some extent.
The external effects of a stock market’s performance seem not significant. Lastly, all
of the testable variables fail to explain the location choice on Catalist (the NASDAQtype exchange).
Firms’ financial performances after IPOs are also examined, providing us information

on whether the firms have achieved their perceived benefits from IPOs on that
particular market.

v


List of Tables
Table 1 Distribution of IPOs by listing year.................................................................3
Table 2 Country distribution of listed companies at SGX (by the end of 2008) ..........4
Table 3 Country distribution of listed companies at SGX (2008 only) ........................4
Table 4 Methodology of related ex-ante analysis .......................................................12
Table 5 Summary of existing research on overseas listing.........................................13
Table 6 Comparison of listing standards in different markets....................................20
Table 7 Distribution of listings by listing periods ......................................................26
Table 8 Summary statistics: firm pre-IPO characteristics (all IPOs)..........................28
Table 9 Mean differences in firm pre-IPO characteristics (all IPOs) .........................28
Table 10 Distribution of IPOs by industry (all IPOs) .................................................29
Table 11 Logistic regression result: all IPOs..............................................................30
Table 12 Distribution of IPOs by listing year (HKEx standards)...............................34
Table 13 Summary statistics: firm pre-IPO characteristics (HKEx standards) ..........36
Table 14 Mean differences in firm pre-IPO characteristics (HKEx standards)..........36
Table 15 Distribution of IPOs by industry (HKEx standards)....................................37
Table 16 Logistic regression result: IPOs following the highest standards (HKEx
standards) .....................................................................................................................39
Table 17 Distribution of IPOs by state-ownership .....................................................42
Table 18 Distribution of IPOs by percentage of independent directors on the board.43
Table 19 Logistic regression result: with corporate governance considered ..............44
Table 20 Logistic regression result: with corporate governance considered (highest
standards) .....................................................................................................................46
vi

Table 21 Distribution of IPOs by listing year (Catalist) .............................................47
Table 22 Logistic regression result: Catalist...............................................................48
Table 23 DuPont decomposition of ROE ...................................................................51
Table 24 Distribution of IPOs by incorporation place................................................53
Table 25 Tax burden comparison by incorporation place ..........................................53
Table 26 Changes in financial performance after IPO................................................58

vii


1.

Introduction

Since 2000, Chinese companies 1 have increasingly listed their equities outside
mainland China as an alternative to Chinese comparatively less developed or efficient
domestic stock exchanges 2 , or as a way to raise the firms’ international reputation in
the globalized economy.
In September 2006, world’s largest initial public offering ever happened in Hong
Kong and Shanghai with more than US$19 billion being raised. The eye catching
entity is China’s mega-lender and biggest mainland bank, the Industrial and
Commercial Bank of China (ICBC). After going public, ICBC has embraced
remarkable growth which enables it to be recognized as world’s largest bank in terms
of market capitalization followed by Bank of American. Not only do these giant stateowned firms from China make news in stock market, but also private firms.
Alibaba.com raised US$1.5 billion in November 2007 from Hong Kong stock
exchange (HKEx), world’s largest high tech offering since Google’s offering in 2004.
Another high tech company Baidu.com soared more than 250% on the day of offering
in August 2005 at Nasdaq.

According to a report by Ernest & Young (2009), 2008 was the worst year for IPO
activity since 2001, with 61% drop in deal numbers and 67% drop in capital raised

1

Unless otherwise stated, throughout this thesis, Chinese firms/companies refer to firms originally
from mainland China, Hong Kong SAR excluded.
2
Unless otherwise stated, throughout this thesis, Chinese domestic markets/exchanges refer to stock
exchanges in mainland China, i.e. Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange
(SZSE).

1


from the year before due to market turmoil. Under this condition, China 3 accounts for
the most deals overall and 4 of the 20 largest IPOs. The global second largest IPO of
the year was the US$5.7 billion offering of China Railway Construction Corp. on
Shanghai and Hong Kong, after Visa Inc.
With increasing activities of going overseas by Chinese companies and acceptance
from the world, it is interesting and meaningful to investigate the determinant factors
of their IPO location choices, to provide guidance for firms to consider and assess the
suitability and methods of overseas listing to increase firm value.
Meanwhile, global investors now are eager to accessing the emerging markets to
catch the train of rapid growth in the emerging markets, but facing barriers against
their intentions of investing in those markets, such as China who stepped on the way
of opening up its financial markets not until recently. China’s domestic stock market,
known as where A Shares are issued and traded, is inaccessible for foreign investors
and capital. Only since the late 2002, through the Qualified Foreign Institutional
Investor (QFII) program, can foreign investors get access to China’s stock market

directly although they still face strict restrictions. By the end of 2008, 76 foreign
institutions have been approved to participate in China’s stock markets, 24 of which
were approved in 2008. Barriers could also be imposed by regulations from the
foreign investor’s domicile country, such as restrictions on investment activities in
emerging markets imposed on some pension funds.

3

In Ernest & Young (2009), “China” includes both mainland China and Hong Kong SAR.

2


Thus, to meet global investors’ desires of accessing to the rapid growth of Chinese
economy and to seize the opportunity of providing services to the great capital
demands of Chinese companies, international exchanges are actively encouraging
Chinese companies to list on them. Study on firms’ decision of listing location will
also provide useful information to stock exchanges about suitable strategies to
increase their attractiveness.
Our focus will be on one of the most popular places for Chinese companies’ public
offerings, Singapore Stock Exchange (SGX). Table 1 shows the distribution of IPOs
from China since 2001 till the end of 2008, and the percentage of the contribution of
one market to the total number of IPOs in the three markets (Singapore, Hong Kong
and mainland China). According to the table, the popularity of SGX in terms of
number of IPOs is increasing and even outweighing that of HKEx.
Table 1 Distribution of IPOs 4 by listing year
SG
CH
HK
Total

Year
N
%
N
%
N
%
N
2001
4
4.76
69
82.14
11
13.10
84
2002
1
1.18
68
80.00
16
18.82
85
2003
11
11.46
65
67.71
20

20.83
96
2004
31
20.39
100
65.79
21
13.82
152
2005
24
44.44
14
25.93
16
29.63
54
2006
25
23.36
60
56.07
22
20.56
107
2007
29
18.95
113

73.86
11
7.19
153
2008
12
12.90
77
82.80
4
4.30
93
137
16.63
566
68.69
121
14.68
824
Total
Source: Singapore Stock Exchange (SGX), Hong Kong Exchanges and
Clearing Limited (HKEx), China Stock Market Trading Research
Database (CSMAR).

4

Unless otherwise stated, throughout this thesis, only the issuance of ordinary share or GDR is
discussed.

3

On the other way around, SGX is also heavily relying on business from China. As
shown in Table 2, outside Singapore, SGX attracts half of its listing business from
China till the end of 2008. Especially when the market turmoil was triggered by the
credit crunch and spread all over the world in early 2008, the IPO activity at SGX
from China was not cooled. Throughout the year, 12 out of 31 initial offerings at SGX
were from China, accounting for 38.71% of the total listings and 50% of the listings
in the mainboard (Table 3). The largest IPO of 2008 in terms of raised capital was a
fabric and textile manufacturer from Fujian province of China, Li Heng Chem Fabre
Tech.
Table 2 Country distribution of listed companies at SGX (by the end of 2008)
Total
Main Board
Origin Place
N
%
N
%
Singapore
452
58.93
342
55.07
Mainland China
151
19.69
135
21.74
Southeast Asia

55
7.17
43
6.92
Hong Kong
54
7.04
51
8.21
Taiwan
19
2.48
17
2.74
India
12
1.56
12
1.93
Japan
10
1.30
10
1.61
Europe
5
0.65
4
0.64
Australia

3
0.39
2
0.32
United States
3
0.39
3
0.48
South Korea
2
0.26
1
0.16
Israel
1
0.13
1
0.16
767
100.00
621
100.00
Total
Source: Singapore Stock Exchange (SGX).

Table 3 Country distribution of listed companies at SGX (2008 only)
Total
Main Board
Origin Place

N
%
N
%
Singapore
12
38.71
6
25.00
Mainland China
12
38.71
12
50.00
Southeat Asia
3
9.68
2
8.33
Hong Kong
2
6.45
2
8.33
India
2
6.45
2
8.33
31

100.00
24
100.00
Total
Source: Singapore Stock Exchange (SGX).

4


Researchers have done a lot of valuable work regarding motives of overseas listing.
The first major motive is to eliminate barriers for foreign investors (Bancel and
Mittoo, 2001), thus to widen shareholder base for risk sharing and capital cost
reducing (Stulz, 1999; Martin and Rey, 2000). Barriers could be direct restrictions
imposed by governments and information limitation possessed by foreign investors on
domestic markets (Gehrig, 1993; Brennan and Cao, 1997; Kang and Stulz, 1997;
Alexander et al., 1987).
The other major motive for overseas listing is to pursue quality signal (Cantale, 1996;
Stulz, 1999) and market liquidity (Ashbaugh, 2001; Reese and Weisbach, 2001) by
following stricter listing standards and legal system compared with those in the firm’s
origin country. In contrast, some other research claims that stricter listing standards
require more information disclosure which would prevent private benefits from public
share trading and keep potential listings away (Huddart et al, 1999).
Other motives which have been studied mainly in empirical literature include (1)
seeking foreign expertise who can evaluate the firm value effectively (Blass and
Yafeh’s, 2000; Pagano et al., 2002; Fanto and Karmel, 1997); (2) capitalizing at low
cost in the firm’s major products or operation markets (Saudagaran; 1988; Pagano et
al., 1999); (3) strengthening the firm’s presence in strategic products market
(Stoughton et al.; 2001; Radebaugh et al.,1995); (4) facilitating identification of
potential merger or acquisition in foreign markets; (5) selling shares of existing
shareholders (Bortolotti et al., 2000).

However, earlier findings are so mixed that it is unfair to generalize conclusions on
any true motives or features which finally lead to an overseas listing. Besides, most of
5


existing research chooses to focus on exchanges or firms from Europe or US, which
have lots of differences from Asian countries, in terms of economic environment,
market development and cultural background, which would present us with
difficulties in applying those results without further study. Research scope is also
quite limited to cross-listing, which means the firm they mostly studied has already
listed on domestic market before it goes abroad, while it is not a common situation in
China.
Available studies focusing on Chinese firms are even fewer with most of them are
only focusing on the privatization issue of Chinese state-owned firms. With increasing
important role of private firms towards Chinese economy, we should pay more
attention to behaviors and choices of private firms. Furthermore, many firms
incorporate themselves on a country other than their home countries to evade revenue
tax or to smooth their way of overseas listing, and almost none of previous research
would count them as firms from their home countries even though their business is
only conducted in the home country. This is an important issue for research on
Chinese firms. For example, according to SGX, 151 listed companies are actually
from China with only four of them were registered in mainland China. More than one
third of these 151 firms were incorporated in Bermuda, and in some of the existing
literatures (Sarkissian and Schill, 2009), tax havens like Bermuda are even cut off
from their research scope even when they are studying on most extensive global
market.
We find that firms with better financial performance or better corporate governance
prefer to have IPOs in Singapore other than Chinese domestic markets to separate
6

themselves from the rest as a quality signal to the capital markets and also to the
product markets. However, the findings on the effects of financial performance on the
choice between Singapore and Hong Kong are contrary with our expectations. Two
potential explanations are proposed for future study. Industry sector, tax burden and
firm size are also firms’ consideration to some extent. The external effects of a stock
market’s performance seem not significant. Lastly, all of the testable variables fail to
explain the location choice on Catalist 5 . Firms’ financial performances after IPOs are
also examined, providing us information on whether the firms have achieved their
perceived benefits from IPOs on that particular market.
Following this introduction, section 2 gives a general review of the existing studies on
the topic of overseas listing motives and effects on the firms’ performance. Section 3
compares listing standards and legal environment between China’s domestic stock
markets and Singapore’s market as well the market in Hong Kong. Our proposed
hypotheses and econometric methodology are described in section 4, followed by the
empirical results presented in section 5 and interpreted in section 6. Section 7 presents
a description on those firms’ post listing performance, and section 8 concludes our
investigation.

5

Catalist is a NASDAQ-type market for fast-growing companies, not requiring records of profitability
as a condition of listing. At SGX, it is previously known as SESDAQ, and at HKEx, it is named as the
Growth Enterprise Market (GEM). “Catalist” will be used hereafter to obtain consistency in
terminology.

7


2.

Literature review

Selection of securities by investors is mainly restricted by their information awareness
or availability. It is true for both direct investors and indirect investors who are
involved through ownership or beneficial claims on institutional portfolios (Merton,
1987). By expanding this incomplete information assumption to international equity
investment, Gehrig (1993) explains the observation that domestic equities accounted
for majority of investors’ portfolio, even when the effects of foreign exchange risk or
transaction costs are controlled. Informational frictions are also discussed in Brennan
and Cao (1997), Kang and Stulz (1997) and Alexander et al. (1987). By seeking
overseas investors to widen its capital resources, firms are actively improving risk
sharing and price discovering, thus to lower down the cost of capital. Stulz (1999)
highlights the opportunity diversification and international market pressure firms and
managers exposed to after listing overseas as a reason of lower risk premium thus
lower required rate of return by investors. Martin and Rey (2000)’s model also
predicts positive effects on asset price of cross-listing due to demand effects, which is
supported by several empirical analyses on post-listing effects we will introduce later.
Empirically, Bancel and Mittoo’s survey (2001) on managers of firms from six
European countries proves that reducing information or transaction barriers to foreign
investors is one of the major managerial perceptions for going overseas.
According to Huddart et al (1999), individuals who possess the discretion to the
listing location can make the decision for the benefit of security liquidity or for the
benefit of insider trading. Thus the strictness of listing standards, mainly on
information disclosure and corporate governance plays an important role to this
8


decision making process. By listing in a more strictly regulated system, potential
insider information advantage is limited thus driving up the liquidity from risk-neutral

liquidity traders (Huddart et al, 1999) and driving down the equity premium paid to
this better legal institutions (Lombardo and Pagano, 2000). In addition, it is not
unusual that firms choose to list abroad seeking high financial or operational quality
reputation by adhering to stricter listing requirements (Cantale, 1996; Stulz, 1999). In
contrast, by listing in a less strictly regulated system, insiders can have more
information advantage to increase individual abnormal return, and at the same time
the firm might have lower cost to maintain the qualified disclosure. Considerable
empirical studies have argued on which effect overweighs the other. For example,
findings in Ashbaugh (2001), Reese and Weisbach (2001) and Fanto and Karmel
(1997) are in favor of liquidity seeking and quality signaling theories, while
Saudagaran and Biddle (1992, 1995) and Radebaugh et al. (1995) stand at the
opposite side. Because of the disparity of findings in the dominant effects, disputes
about exchanges reaction exist, literally, racing to the bottom and racing to the top
(Chemmanur and Fulghieri, 2006).
Markets barriers and listing standards are two major topics in existing research,
especially in theoretical research. Other factors which affect firms’ listing decision are
more discussed in empirical literature based on specific industries or regions the
researchers are interested in.
Firstly, firms in certain industry tend to seek foreign expertise who can evaluate the
firm effectively. High-tech industries are the focus of related studies. Examples could
be Blass and Yafeh’s (2001) research on Israeli and Dutch firms which choose
9


Nasdaq as the first listing location, and Pagano et al.’s (2002) study on European
companies that cross-list in the United States. Managerial perceptions collected by
Fanto and Karmel (1997) also support the hypothesis.
Secondly, firms tend to capitalize in the market where they have high fraction of sales,
especially in consumer products, utilizing their reputation in products or operation to
raise capital at a lower cost. Saudagaran (1988) and Pagano et al. (1999) show that the

extent of a firm’s dependency on foreign product markets is a significant factor
influencing firms’ decision on listing location choice. Besides utilizing the existing
foreign product markets to raise capital at low cost, overseas listing in turn could also
serve as a strategy of strengthening the firm’s presence in foreign market, as studied
by Stoughton et al. (2001) and Radebaugh et al. (1995) and evidenced by an anecdotal
survey of Bancel and Mittoo (2001).
Other purposes of overseas listing could be facilitating identification of potential
merger or acquisition in foreign markets, and selling shares of existing shareholders
which has a special case as privatization, a significant reason for most of Chinese
SOEs to list their shares in Hong Kong (Huang, Wong and Zhang, 2007).
In terms of location choice of going overseas, Sarkissian, Schill (2004) sample 2251
listings which are from 44 countries and listed in 25 host markets as of 1998 and then
find that risk tolerance of foreign investors and markets familiarity in terms of
geographic, economic, cultural, industrial proximities are dominant concern in
choosing the overseas market to list a firm. Portes and Rey (1999) and Tesar and
Werner (1995) also support that firms tend to list on an exchange physically or
culturally near to its origin country.
10


Over the past decades, researchers have examined the financial and operational
performance of firms after their overseas listing based on different time horizons,
regions or testing methods, to try to capture the general effects of overseas listing. The
findings are mixed either on liquidity effects in both foreign and domestic markets, or
on cost of capital and stock risk. For a general review on empirical research on
consequences of cross-listings around the world, one can further refer to the surveys
by Karolyi (1998, 2006).
Recent studies also have mixed results. Analysis by Sarkissian and Schill (2008) on
1256 listed firms from 35 countries on 24 host markets as of 1998 shows significant
cost of capital reduction in the following five to ten years of listing. Jia, Sun and Tong

(2005) examined 53 Chinese state-owned enterprises which were listed in Hong Kong
in 1993-2002 and find a significant underperformance of share returns against
benchmarks and a mild but insignificant improvement in profitability of those partial
privatized firms. Ahmed et al.’s (2006) research on 134 Australian firms with 300
listings listed between 1986 and 2000 also presents a decline in firm share returns
after the cross-listings. Levine and Schmukler (2007) indicate that cross listing
reduces the trading activity and liquidity in domestic markets by studying on 3000
firms from 55 emerging economies, while Korczak and Bohl (2005) show a
significant improvement in home market liquidity using cross listing in Central and
Eastern Europe.
With regards to the methodology used in those empirical ex ante analysis, the list of
related literature is summarized in Table 4. Accordingly, we choose the most
popularly used econometric tool, logistic regression, in our analysis. Firm
11


characteristics will be our main independent variables and because we only have one
origin place (mainland China) and three destination markets (Singapore, Hong Kong,
Chinese domestic markets) in our analysis, features of the markets or the firms’
domicile are not suitable to be included as independent variables.
Table 4 Methodology of related ex-ante analysis
Tool
Independent Variable Research Topic
Logit & OLS Firm characteristics
US, Europe, Canada
and Japan markets
Biddle and Saudagaran (1995) Logit
Firm characteristics & US markets
financial disclosure level
of firms' domicile

Reese and Weisbach (2001)
Logit
Legal system of firms' US markets
domicile
Blas and Yafeh (2001)
Probit
Firm characteristics
Israel firms on Israel
and US markets
Pagano et at. (2002)
Cox
Firm characteristics
European and US
firms and markets
Sarkissian and Schill (2004)
Tobit
Market features
Global (without
China)
Leuz and Oberholzer-Gee (2006) Probit
Firm characteristics
Indonesian firms

Literature
Saudagaran (1988)

Huang, Wong and Zhang (2008) Logit & Cox Firm characteristics

Chinese SOEs

12


Motives
1 Reducing
barriers for
foreign investors
and sharing risk

Hypotheses
Cheaper capital
due to wider
shareholder base
and competitive
pressure

Liquidity
improvement

2 Commitment to
stricter disclosure
and governance
standards

Higher liquidity,
lower spreads,
and higher
trading volume
Quality signal

Table 5 Summary of existing research on overseas listing
Theoretical literature Ex ante evidence
Empirical literature Ex post evidence
Merton, 1987; Gehrig, Any barriers to
+: Bancel and Mittoo, Lower market beta,
1993; Brennan and
foreign investors:
2001 (M)
expected return and
Cao, 1997; Kang and
regulation,
cost of capital
Stulz, 1997; Alexander transaction,
et al., 1987; Stulz,
information
1999; Martin and Rey,
2000
Increase in media
coverage
Higher share turnover
volume, turnover
ratios; lower bid-ask
spread
Huddart et al., 1999;
Lombardo and Pagano,
2000
Cantale, 1996; Stulz,
1999

Low domestic

regulatory
standards;
weak protection to
minority
shareholders

3 Access to foreign
expertise

High tech sector,
large R&D
spending

4 Capitalizing on
product market
reputation or
operation

High fraction of
foreign sales,
especially in
consumer products

+: Ashbaugh, 2001;
Fanto and Karmel,
1997 (M); Reese and
Weisbach, 2001;
-: Saudagaran and
Biddle, 1992, 1995;
Radebaugh, 1995

+: Blass and Yafeh,
2001; Pagano et al.,
2002; Fanto and
Karmel, 1997 (M)
+: Saudagaran, 1988;
Fanto and Karmel,
1997 (M); Pagano et
at., 2002

Issue more equity
after listing

Empirical literature
+: Sarkissian and Schill, 2009;
Foerster and Karolyi, 1999,
2000;
0: Karolyi, 1998, 2006 (survey);
-: Jia, Sun and Tong, 2005;
Ahmed et al., 2006
+: Baker, Nofsinger and
Weaver, 1999
+: Korczak and Bohl, 2005;
0: Mittoo, 1997; Pulatkonak and
Sofianos, 1999; Smith and
Sofianos, 1997;
-: Levine and Schmukler, 2007
+: Reese and Weisbach, 2001

Higher profitability
Lower market beta,

expected return and
cost of capital
Higher profitability,
higher share turnover

(Continued)

13


Motives
5 Strengthening the
company's output
market

Hypotheses
As an
advertisement

6 Access to larger
shareholder base
7 Exploring
relative
mispricing
8 Facilitating
identification of
potential target
companies
9 Stock sales by
existing

shareholders
Special case:
privatization

Large firms'
needs

Table 5 Summary of existing research on overseas listing (Continued)
Theoretical literature Ex ante evidence
Empirical literature Ex post evidence
Stoughton et al., 2001
Product market
+: Bancel and Mittoo, Higher foreign sales
Radebaugh et al., 1995 competitors have
2001 (M)
and profits
already crosslisted in exchange
Large size
+: Saudagaran, 1988

Empirical literature
+: Teoh, Welch, and Wong,
1998; Pagano et al., 2002

Lower domestic E/P
ratio relative to
foreign one
To use bidder's
share as an
acceptable

currency
To increase
market value of
their shares

Higher share turnover
Policy indication

+: Huang, Wong and
Higher share
+: Megginson et al., 2000
Zhang, 2008;
turnover, better
-: Jia, Sun and Tong, 2005;
Bortolotti et al. (2000) performance
Huang, Wong and Zhang, 2007
Notes: 1. Under the columns of Empirical Literature, + denotes that the empirical result is consistent with the hypothesis; - denotes that the empirical result is inconsistent
with the hypothesis; 0 denotes that the empirical result is mixed or insignificant.
2. Literature followed by (M) means that the result is based on managerial perception.

14


3.

Legal environment and listing standards

As indicated in existing literature, listing standards and legal systems in potential
listing destinations do play an important role in a firm’s financing decision. We would
firstly have a general review and comparison of the listing standards and legal

systems among mainland China, Singapore and Hong Kong which is the biggest
competitor in attracting IPOs from mainland China.
The current legal framework in Singapore and Hong Kong are based on the English
common law system. In contrast, legal system in the mainland China follows its
German civil law origin. According to La Porta et al. (1998), investors generally have
weaker legal rights, such as voting rights, in the civil law countries than in the
common law countries. Hong Kong gets higher grades than Singapore in their
research.
La Porta et at. (1998) further finds that as a partial substitute to the weaker rights
protection, the quality of law enforcement is generally higher with German civil laws.
The substitute could also be mandatory dividends, legal reserve requirements,
restriction on ownership concentration. However, as a developing country
implementing gradualist reform approach, China has not established a strong law
enforcement system to compensate the lack of legal rights protection. For example,
China has an index on “Legal Structure and Security of Property Rights” equal to 5.16

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by Gwartney et al. (2008) 6 , while this index is 8.43 for Hong Kong and 8.13 for
Singapore.
Thus, it is reasonable for Chinese companies to choose to list in Singapore and Hong
Kong instead of mainland China, seeking higher liquidity and reputation, which is
consistent with La Porta et al.’s (1997) finding.
With the new Chinese Company Law coming into effect on 1 January 2006, Chinese
regulators made efforts in improving the environment for capital markets. This new
company law amends and creates regulations on shareholder rights protection. For
example, the new version imposes shareholder the rights to request to dissolve the
company with 10% approval of total shares under certain circumstances, while it is
not allowed in the old version. The new version also imposes requirements on the

independence of the accounting agency. One can refer to Gu (2006) for a detailed
understanding on the changes. It should be expected to influence the pattern of listing
locations of Chinese companies.
With the information extracted from the websites of the four exchanges, Table 6
presents us the current requirements and differences in listing standards of the markets.
Generally speaking, requirements in Singapore and Hong Kong are much more
flexible than in the mainland China, with different sets of criteria to satisfy needs or
features of different firms. Despite their mature Catalists which could effectively
satisfy the financing needs of medium and small enterprises, even their main boards

6

Source: Gwartney, James and Robert Lawson with Seth Norton (2008). Economic Freedom of the
World: 2008 Annual Report. Vancouver, BC: The Fraser Institute. Data retrieved from
www.freetheworld.com.

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also have three sets of criteria. In Singapore, two of the three sets of criteria focus on
testing firms’ profitability while another one focuses on market capitalization. Hong
Kong Stock Exchange has one profit test, one combination test on market
capitalization and revenue, and one combination test on market capitalization, revenue
and cash flow. The standards are less adjustable in Shanghai and Shenzhen markets
with one single set of criteria.
The other aspect is that under each criterion the requirements in Singapore and Hong
Kong are more stringent than those in Shanghai or Shenzhen. In terms of profitability,
Shanghai and Shenzhen do not explicitly ask for a certain amount of profit or revenue,
while Singapore requires cumulative pre-tax profit of at least S$7.5 million and Hong
Kong requires profit contributable to shareholders of at least HK$50 million (S$9.29

million) 7 or revenue of at least HK$500 million (S$92.94 million) for the last 3
consecutive years.
In terms of cash flow, only Hong Kong requires positive cash flow from operating
activities of at least HK$100 million (S$18.59 million) in aggregate for the 3
preceding financial years under its Market Cap/Revenue/Cash Flow test, with no
comparable requirements from Singapore, Shanghai or Shenzhen.
The last important factor is related to a firm’s financial position. The required market
capitalization in Singapore and Hong Kong are more than four times of those in
Shanghai and Shenzhen, with Hong Kong has the highest market capitalization
requirement under its Market Cap/Revenue test.

7

The exchange rate applied is the closing rate of January 2, 2009 cited from DataStream.

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