Information-Hungry US Investors Favor Cross-Listed Foreign Stocks

A recent study by the Federal Reserve found that foreign companies cross-listed on U.S. stock exchanges receive a disproportionate amount of investment from Americans, mainly due to increased transparency, highlighing the crucial role that information plays in financial markets.

For U.S.-based investors, who at the end of 2007 owned $5.3 trillion in foreign stocks, cross-listing on U.S. exchanges is the most important factor behind their trading of foreign equities, the Fed study found.

Cross-listing boosted U.S. shareholders' ownership by 8 percent to 11 percent of a company's market capitalization.

Other traits that attracted American investors were a company's size (big is better), liquidity and how well established its business is, according to the study, which was written by Fed economist John Ammer and colleagues.

The most obvious benefit of cross-listing is that U.S. investors can buy such equities in dollars and at cheaper rates than if they bought strictly foreign-traded shares. The study, however, found this explanation inadequate, since most U.S.-originated investments in foreign equities are in the form of foreign-traded shares.

Cross-listed companies that trade only on over-the-counter markets in the United States -- such stocks have minimal regulatory disclosure requirements -- don't enjoy the same degree of boost in U.S. ownership as provided by U.S.-listed foreign companies, which must file annual earnings reports to the Securities and Exchange Commission that adhere to U.S. Generally Accepted Accounting Principles or International Financial Reporting Standards.

Those factors led the Fed economists to conclude that the boost comes from the information transparency demanded of U.S. exchange-listed foreign stocks.

One implication of the study is that companies could potentially attract more investors and achieve higher stock prices by providing more-accurate disclosures, such an emerging-market company adopting stricter U.S. accounting rules.

Besides providing investors with more information, such moves could even lead to better corporate governance.

From an investor's viewpoint, the study suggests the presence of market inefficiencies in foreign stock markets for U.S. investors in the form of information, or lack thereof. Those willing to do the work of digging up obscure data, financials and other tidbits could, arguably, gain advantage over their domestic peers.