July 3, 2022 4:57 AM

Are Canadian stocks cross-listed on US exchanges anomalies or opportunities?

Canadian companies cross-list on both Canadian and U.S. exchanges for a variety of purposes including increased liquidity which may be considered a good reason to buy.

/ Published 4 years ago

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A number of Canadian and U.S. stocks are interlisted or cross-listed to exchanges in both countries. With Canada’s smaller economy and some of the world’s largest exchanges based in the U.S., Canadian companies are much more likely to seek additional listings on U.S. exchanges than the reverse. Canadian companies benefit from greater liquidity and also from a positive reputation among U.S. investors. But are the benefits of cross-listing significant enough to affect the decision to invest in a particular stock?

Canadian stocks more likely to cross-list in the U.S.

An interlisted or cross-listed stock is simply a stock listed on multiple exchanges. A big argument for trading on multiple exchanges is that it increases the number of investors able to easily purchase the stock and thus increases liquidity. That being the prevailing argument, Canadian companies are much more likely to list in the U.S. than vice versa. The U.S. offers a much larger market than does Canada and “trading volumes in the U.S. are higher than the trading volumes in Canada” so listing in the States more closely fits this argument.

Of course, listing on multiple exchanges is more expensive but even small cap stocks can be found trading on both the TSX Venture Exchange and OTC Markets in the U.S. So clearly, many companies consider multiple listings to be advantageous for growth and liquidity despite the extra expense.

Canadian companies find listing on U.S. markets advantageous for other reasons as well. Though they may be fewer, they have a stable image that benefits them in U.S. markets. For example, while Canadian companies were negatively affected by the global crash of the late aughts, they also rebounded more quickly than other markets due to their lack of exposure to the States’ mortgage bubble.

In addition, international investors are more likely to invest in U.S. than Canadian markets. So by cross-listing in the U.S. Canadian companies can find buyers in international investors beyond the already large pool of U.S. investors.

Is interlisting an incentive to buy a stock?

It is important to recognize that U.S. and Canadian investors can already purchase stocks cross-border. There are a variety of approaches, including setting up accounts in the neighboring country, that raise various tax and currency exchange issues but are normal routes to investing. Index funds that provide exposure across borders are also readily available for investing on one’s national exchange using familiar brokers. Nevertheless, Canadian stocks listed in the U.S. benefit from a greater ease of purchase. So are the benefits to cross-listed companies worth considering beyond the ability to buy interlisted stocks on one’s national exchanges?

For all the reasons above that public companies find it advantageous to cross-list, one can say that cross-listing is an incentive to buy a stock. But so are many other factors or picking stocks would be an easy task. In the case of Canadian stocks, the reasons for cross-listing align more obviously with factors that encourage trading from access to a larger market with increased liquidity to a reputation in the States for stability.

Cross-listing can increase a stock’s valuation. (Source)

As a selection of academic literature reveals, the benefits for Canadian companies cross-listing in the U.S. are in line with many of the reasons other international companies cross-list in the States. And such companies typically see a “significantly positive stock price reaction in the home market” to the news of cross-listing. However, many of these companies are viewed positively because of higher standards for listings in the U.S. This is less of a factor for larger Canadian companies though it does hold true for small cap stocks to some degree.

In fact, as any investor recognizes over time, positive buy or sell signs should always be considered in the context of the company as a whole as well as the economies in which they operate.

Identifying interlisted stocks

So if one believes that cross-listing is a possible reason to buy, how does one find interlisted stocks? Given the positive attention generally given to Canadian stocks listing in the U.S., it is not that surprising that they are a bit easier to sort out.

For those seeking Canadian stocks listed in the U.S., the Nasdaq identifies their listings by region and so one can find a list of Canadian companies on the Nasdaq. The NYSE buries the information a bit in annual documents listing all non-U.S. issuers by nation. But third parties also create such lists.

To be honest, the fact that stock screeners do not offer cross-listing as a typical category suggests the low signal many investors derive from cross-listing. To some degree, cross-listing may be generally seen as a news event, one that affects the stock when announced and then is priced in thereafter. Yet cross-listing should be considered when comparing two otherwise similar Canadian stocks even as a possible reason not to buy if the company does not seem to have benefited from an additional listing in the U.S.

In the final analysis

The effects of cross-listing Canadian stocks in the U.S. are worth considering when evaluating a stock just as many other elements are worth taking into account. If cross-listing is more a news event, then news of a possible cross-listing could be considered, especially if it has yet to be priced into a stock. Or, as noted, if a stock’s cross-listing did not lead to rewards, the extra expense may be a reason to downgrade the stock in one’s considerations. To some degree, cross-listing seems to be mostly regarded as an anomaly which means it should be evaluated as yet another potential opportunity.

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