US listing loses some of its value

Investors are paying sharply lower premiums for shares of foreign companies listed in the US, following a 2002 crackdown on corporate malfeasance, according to new academic research.

The findings are expected to be cited in a report due to be released by the Committee on Capital Markets Regulation, a private sector group studing the impact of regulation on the competitiveness of US financial markets, an issue new US Treasury Secretary Henry Paulson has emphasized.

Foreign companies whose shares are listed both in their home market and on a US stock exchange traditionally trade at a higer vlauation relative to book value, or the accounting value of its assets, than domestic peers that aren't cross-listed. That premium might result from the greater trust investors place in a company that has met US listing standards, or the deeper market for its shares a US listing brings.

The premium for listing in the US in addition to the home stockk market has dropeed sharply since 2002, according to Luigi Zingales, a finance professor at the University of Chicago's graduate business school and a member of the capitla markets committee.

He measured the advantages of listing in the US by tracking the difference between market value - the price at which a company's stock is trading - and book value. If a cross-listed company traded at 150% of book value, and a similar company from the same country that was listed only on a home market traded at 120% of book vlaue, the "valuation premium" was 30 percentage points.

The premium averaged 51 percentage points from 1997 to 2001, then dropped to 31 percentage points between 2002 and 2005, he found.

In theory, investors might pay more for shares of a company that meets more stringent rules because of good corporate governance. But Mr. Zingales found the premium fell most sharply for companies from countries with well-regarded corporate governance standards, such as Japan, Hong Kong, Canada and the UK. That implies investors saw more costs than benefits in a US listing after 2002, he said.

By contrast, companies from countries with poor corporate governance, such as Italy and Turkey, saw little change or an increase in the premium for cross-listing. That suggests investors felt the additional benefit of such companies meeting the post-2002 regulations equaled or outweighed the extra cost. Mr. Zingales measures corporate governance quality according to how well minority shareholders are treated relative to controlling shareholders....

- Wall Street Journal Exclusive