By Mark Hulbert, MarketWatch
Forcing Chinese companies to delist their shares from a U.S. exchange could hurt the U.S. more than it does either the Chinese government or the particular companies.
That doesn’t mean that the U.S. House of Representatives shouldn’t pass the delisting bill that the Senate unanimously passed in May. There are sound reasons why all companies whose stocks are listed on an U.S. exchange should adhere to uniform financial reporting standards.
But if your motivation to support this delisting bill is to punish China, you may want to reconsider. These are the conclusions I reached upon interviewing a number of academic experts who have long studied the investment and economic consequences of the listing and delisting of foreign company stocks.
Andrew Karolyi is one such expert. He is a professor of management at Cornell University’s SC Johnson College of Business, and for several decades he has been researching the factors that lead foreign companies to list their shares on U.S. exchanges, as well as the reasons why they subsequently might delist.
In several recent interviews, Karolyi highlighted a few themes to should keep in mind as we contemplate this legislation before Congress. First, it is important to put this legislation into the context of a long history that dates back at least to the Sarbanes-Oxley Act (SOX). That legislation, was passed in 2002 in reaction to the infamous accounting scandals involving Enron and Worldcom. It created the Public Company Accounting Oversight Board (PCAOB), one of whose mandates was increasing the reliability of the financial audits of companies whose stocks trade on a U.S. exchange.
For at least the past decade, the PCAOB has been butting heads with the Chinese Securities and Regulatory Commission, which has prevented the PCAOB from investigating whether Chinese accounting firms are adhering to U.S. standards when producing audits for Chinese firms with U.S. listed shares. “Whatever the current political motivations some may have for supporting this recent legislation, it has been a long time coming,” Karolyi said.
To be sure, this legislation goes beyond SOX in requiring that foreign companies listed on a U.S. exchange show that they are not controlled by a foreign government — or otherwise get delisted. But, given the difficulties in inspecting the books of companies that are controlled by a foreign government, it is possible to see even this requirement as not merely motivated by a desire to punish China.
Impact on Chinese stocks
It’s difficult to forecast the impact on a company’s stock price if it is eventually forced to delist, according to Karolyi. Much depends on factors such as whether the company has other sources of capital, how accurate and forthright its financial reporting already is, and the extent of shareholder protections that are provided by its corporate governance. For many companies, Karolyi says, the impact of delisting will likely be benign, since they are already global brands that will have no trouble raising capital no matter where their stocks may be listed.
The outlook is also hard to forecast for foreign-listed companies with limited access to capital and/or poor corporate governance and financial reporting. That’s because the market is filled with activists and short sellers who make a career of discovering and profiting from corporate fraud. A recent case in point is Luckin Coffee , whose shares crateredin the wake of reports of such fraud. Muddy Waters Research, the short-sale shop that initially alleged the fraud, has said that it has set its sights on other Chinese companies.
It’s entirely possible that some better-known Chinese companies will delist for reasons having nothing to do with adhering to the new Senate bill — for example, companies such as Alibaba Group Holding /zigman2/quotes/201948298/composite BABA -0.49% and Baidu /zigman2/quotes/209050136/composite BIDU -0.41% . One of the Chinese government’s goals is to have the country’s Shanghai and Shenzhen exchanges become some of the premier equity trading hubs in the world . “Many in the U.S. take for granted that the NYSE and the NASDAQ are at the top of the heap,” Karolyi said. “But it would be a blow to their status to lose such premier global brands as Alibaba and Baidu.”
In any case, U.S. investors will be inconvenienced if the stocks of Chinese companies are delisted. It will become more difficult to buy shares in these companies, as well as more expensive.
Is there any way of forecasting which Chinese companies would most likely be hurt the most by any eventual delisting? By way of an answer, Karolyi referred me to a study he conducted a decade ago entitled “ Why Do Foreign Firms Leave U.S. Equity Markets ,” co-authored with Craig Doidge of the University of Toronto and Rene Stulz of Ohio State University.
In that study, the researchers found that the foreign-listed firms that performed the worst in the two days immediately prior and the day after the passage of the SOX legislation were also those that tended to perform the worst when and if they eventually delisted. With that in mind, I calculated the stock returns from May 18 to May 21 of those Chinese firms that have at least 30% state ownership .
These are the firms that most likely will be forced to delist if this new legislation becomes law:
|Company||Ticker||Exchange||Return 5/18 to 5/21|
|Aluminum Corporation of China||ACH||NYSE||-5.7%|
|China Eastern Airlines||CEA||NYSE||-2.6%|
|China Life Insurance||LFC||NYSE||-2.4%|
|China Petroleum & Chemical||SNP||NYSE||-2.8%|
|China Southern Airlines||ZNH||NYSE||-2.6%|
|Sinopec Shanghai Petrochemical||SHI||NYSE||-3.3%|