The Effects of Financial Disclosure Levels on Firms' Choices among Alternative Foreign Stock Exchange Listings*

Firms are increasingly adopting a global perspective. Nowhere is this more evident than in the accelerating internationalization of the world’s financial capital markets. In just five years the dollar volume of debt and equity securities placed annually by firms outside of their national borders has increased by 900%. ’ In the US, primary offerings of foreign debt and equity have averaged over $5 billion per year since 1975.2 Between 1974 and 1984, the dollar volume of foreign stocks traded in secondary markets in the US rose 839% (from $3.6 billion to $30.2 billion) while secondary market transactions by foreign investors in US stocks increased by more than 843% (from $14.7 billion to nearly $124 billi~n).~ A recent survey lists 472 companies as having active international trading in their equity securities. Once a firm decides to list its equity securities on a foreign exchange, available evidence suggests that the choice of listing location(s) is not random. In fact, major stock exchanges have had varying degrees of success in attracting foreign listings. The contrast between the Zurich and New York stock exchanges is particularly striking. While the Zurich Stock Exchange (ZUR) had 194 foreign firms on its roster at the end of 1986, the New York Stock Exchange (NYSE), which is considerably larger in both market value and volume of shares traded, listed a mere 63 foreign firms.’ During 1986 there were 21 new listings of foreign stocks on the Zurich exchange compared to only 9 on the NYSE. Zurich is becoming a center for the sale, listing, and trading of international equities. The NYSE, in contrast, continues to be dominated by domestic issues. Expert and anecdotal evidence suggest that when firms list their securities on foreign exchanges, financial disclosure levels are an important determinant of exchange choices. Responding to competitive pressures, the Securities and Exchange Commission (SEC) in the US and regulatory authorities in several other countries are currently engaged in public policy debates regarding appropriate accounting disclosures and listing requirements for foreign securities trading within their jurisdictions.6 These ongoing reappraisals of financial disclosure policies and the observed differences in the numbers of foreign securities listed on various exchanges raise a key question: Are choices among alternative foreign stock exchange listings significantly influenced by $financial disclosure levels ? This study addresses this question by presenting empirical evidence on the cross-sectional association between the financial disclosure levels of nine major stock exchanges (in eight countries) and the observed exchange choices of a sample of 207 US and non-US firms whose equity securities are listed on at least one foreign exchange. We interpret “financial disclosure’’ broadly to include both mandated accounting, listing and regulatory requirements and voluntary disclosures dictated by the expectations of market participants. Examining large firms with at least one foreign listing allows us to more effectively control for factors motivating firms’ decisions to list abroad and to concentrate on factors influencing choices among alternative foreign exchange listings. Results from univariate and multivariate tests are consistent with financial disclosure levels influencing foreign exchange listing decisions. The next section examines previous research and presents expert and anecdotal evidence suggesting a possible association between disclosure levels and choices among alternative foreign stock exchange listings. Section 3 develops testable propositions and describes sample selection procedures. Section 4 presents the empirical results. Section 5 provides a discussion and summary.