Summary:
The past 30 years have witnessed two waves of overseas cross-listings by Chinese companies. First, from 1993 to 2003, large state-owned companies, most in traditional industries, were cross-listed on the US and Hong Kong (China) stock markets. Second, since 2018, there has been a cross-listing boom of US-listed Chinese companies in Hong Kong, China. The literature largely explains the first round of cross-listings from the perspective of normalizing corporate governance. We argue that the new post-2018 wave of overseas cross-listings has substantially different characteristics from the earlier wave of overseas cross-listings. First, the companies in the first wave were mostly large state-owned companies in traditional industries, whereas the majority of those in the new round of cross-listings are US-listed Chinese companies with private capital based in the new, innovation-oriented economic industries. Second, most of the state-owned companies in the first wave were first cross-listed in the relatively mature US and Hong Kong (China) stock markets, and then cross-listed in the relatively less developed China A-share market, whereas the order of the new round of cross-listings is from the US stock market to the Hong Kong (China) stock market. If the first round of cross-listings can be explained from the perspective of normalizing corporate governance, can we explain the new round of cross-listings in the same way？ This paper links the cross-listing boom of US-listed Chinese companies in Hong Kong, China since 2018 with the key characteristics of most of these US-listed Chinese companies, namely the fact that they are innovation-oriented new economy companies. We focus on these US-listed Chinese companies as our research object for the period from 2018 to 2021 and empirically reveal that the new economy companies have incentives to seek cross-listing because of their preference for diversified financing channels under the guidance of innovation. The main conclusions and potential research contributions of this paper are summarized in the following four points. First, in contrast to the literature, which mainly examines the motivations for cross-listing behavior from the perspective of normalizing corporate governance, this paper puts forward a new hypothesis that can logically and consistently explain the new round of cross-listings since 2018, namely the hypothesis of companies' preferences for diversified financing channels under the guidance of innovation. We find that the requirement for a certain level of R&D by innovation-oriented companies increases their investment opportunities, thus increasing their future capital needs and making them inclined to cross-list to improve the stability of their equity financing channels. Second, in terms of the mechanism, the literature on the expansion of the equity financing channels of companies emphasizes that this lowers the cost of equity financing and the underpricing rate of stock issuance by reducing the information asymmetry affecting enterprise value, and thus eases companies' access to equity financing. This paper shows that for US-listed Chinese companies, the stock conversion channel accessed by cross-listing on the Hong Kong (China) stock market can largely ensure that the liquidity of the companies' stocks is not affected by a single capital market, thus improving investors' expectations of the stability of the stock liquidity and reducing the difficulties and cost of corporate equity financing. Third, in terms of economic consequences, this paper shows that cross-listing on the Hong Kong (China) stock market can relieve financing constraints and cushion the impact of negative policy events in the US stock market on these US-listed Chinese companies' stock prices. Finally, this paper uses the data of US-listed Chinese companies, most of which are innovative companies and which are homologous with the A-share stock market, to conduct research and provide a logical and empirical basis for the pilot policy of cross-listing innovative red-chip companies that are listed overseas on China's A-share market, which has been conducted by the regulatory authorities of China's A-share market in recent years. This paper argues that the new economy companies, for which market value is highly dependent on the growth opportunities yielded by innovation, can consider implementing the capital market development strategy of diversified listing places to stabilize their R&D investment. The regulatory authorities of China's A-share market can consider allowing innovative red-chip companies that are cross-listed on the A-share market and an overseas stock market to establish one-way stock conversion channels to exchange overseas stocks for domestic stocks. This would improve investors' expectations of the stability of the company's stock liquidity and help these companies to expand their financing channels and increase their R&D investment. In the future, researchers should further explore the unique corporate governance system and capital market development strategy applicable to new economy companies based on their unique characteristics.
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