How do Companies Choose which Exchange to List on?

Uber and Pinterest are amongst the hottest tech start-ups in the world right now. This is why the fact that both of these companies have chosen the New York Stock Exchange (NYSE) to list their shares on is being seen as great news for the exchange. The NYSE has beaten the NASDAQ as well as many foreign stock exchanges in order to achieve this feat. This is remarkable from the point of view of NYSE. However, it also raises questions about how companies choose the stock exchange where they plan first to list their shares.

In this article, we will have a closer look at some of the factors which are commonly considered by companies before they zero down on a stock exchange.

The History

About a century ago, the entire world was not well developed. This is the reason that there was a lot of difference in the operational performance of different stock exchanges. The operational charge at some stock exchanges was much higher when compared to the others. Also, there was a substantial difference in the liquidity offered at different exchanges.

However, in the past couple of decades, these differences have all but vanished. Stock exchanges across the world now work electronically. This allows buyers to trade seamlessly without experiencing much of a difference.

Hence, the factors which affect a company’s choice of stock exchanges has undergone a huge change over the past few years:

Factors Which Affect the Choice of Exchange

The factors which now play an important role in the choice of stock exchange have been listed below

• Where Do The Shareholders Live? It is possible for investors to trade in securities all across the world. However, most still prefer to trade in securities in their home country. This is the reason why American investors still invest the biggest chunk of their savings in the American market. The same logic applies to the European or even Australian market. Hence, the choice of a stock exchange largely depends upon which investors are likely to invest in the company. Alternatively, some companies also list in markets where their industry is well established. For instance, many tech companies from other countries also list in America. On the other hand, many American companies which deal in mining and other natural resources list in Canada since the Canadian investors prefer these industries.
• Accounting Standards: The choice of exchange also determines the accounting policies which need to be followed. For instance, if a company lists in the US, it will have to follow the US GAAP. On the other hand, if it lists in another country, it may have to follow IFRS. In a lot of cases, the choice of accounting standard does not make any difference whatsoever. However, in some cases, the difference can be substantial. For instance, if a company has a lot of fixed assets, then the depreciation policy can have a huge impact on its profitability. Therefore, some companies prefer to list on certain exchanges since they allow them to post better financial results in the future which eventually leads to a better stock price.
• Type of Exchange: All exchanges might appear to be similar. However, they are actually not the same. For instance, the NASDAQ is a broker-dealer market. This means that for every trade that is made on the NASDAQ, the exchange is the counterparty. Hence, when people sell their shares, NASDAQ buys it from them even though it has no seller at that time to sell the shares back to. This means that the NASDAQ always has to hold on to a certain number of shares until they find a seller. On the other hand, the NYSE is a facilitator, this means that the NYSE only matches the highest buyer bid with the lowest seller bid in order to facilitate the sale. Under normal circumstances, this does not make a difference. However, when the prices become extremely volatile, a broker-dealer driven market is where the liquidity is higher.
• Listing and Compliance Costs: Lastly, the listing and compliance costs are also a major factor for companies to decide the exchange that they want to list on. For instance, the New York Stock Exchange charges a listing fee of about $225000 whereas the NASDAQ only charges about $75000. Because of the lower listing fee, smaller and mid-size firms often choose to list on the NASDAQ. Hence, the perception that smaller firms list on the NASDAQ. The reality is very different though. Bigger firms like Apple, Amazon, Microsoft, and Facebook are also listed on the NASDAQ.
• Number of Shareholders: Some companies want to keep their shareholding closely held. This is the reason they ensure that the number of shareholders does not increase too much. If a company has fewer than 300 shareholders, then it won’t be allowed to list on either the NYSE or on the NASDAQ. In such cases, the companies can choose to list on one of the several Over the Counter exchanges that are present in the world. These exchanges are not regulated. Hence, only accredited investors or high net worth individuals are allowed to participate in such investments.

However, the listing of shares on one exchange does not mean that it cannot be traded on the other exchanges. It just means that the company first chose to sell their shares on a certain exchange. Over a period of time, the shares of big companies are usually sold at all exchanges at almost the same price. Every minor price differences are exploited by arbitrageurs looking to make a quick buck.