Intermediaries as Arbitrageurs: Revisiting the Motivations Behind Overseas Listing

Abstract

This article reviews the existing literature in law and finance on overseas listing. Accordingly, it focuses on four different theoretical frameworks in the chronological order of their evolution in this literature:

(1) Portfolio theory;

(2) Market segmentation theory;

(3) Legal bonding theory;

(4) Consumer commercial market bonding theory.

Although these theories throw light on the possible motivations for firms to list overseas, this article argues that two crucial strands are missing from the existing literature. First, the underlying assumption across all these theories that it is the firm's motivation that determines whether its securities will be listed overseas or not, does not hold true for unsponsored programs. Instead, intermediaries like depository banks and exchanges are key players who shape the unsponsored depository receipts market. Second, the existing literature overlooks the arbitrage role played by these intermediaries. This article addresses these lacunae in the present literature on overseas listing by proposing a new theoretical framework – the intermediary arbitrage theory – to explain the dynamics of the unsponsored depository receipts market. This theory is based on the premise that issue of unsponsored depository receipts is independent of motivations of firms against whose securities these depository receipts are issued. Instead, this theory shows that it is the incentive of the intermediary as an arbitrageur that helps understand the recent surge in unsponsored depository receipt market globally.

Keywords: overseas listing, depository receipt, financial sector reforms, ADR, GDR