RPT-IPO VIEW-Risks mount from U.S. exchanges big China push
By Clare Baldwin and Alina Selyukh
NEW YORK, May 20 (Reuters) - U.S. stock exchanges make a lot of money from listing Chinese companies, but that business may come back to haunt them.
The revenue that these companies generate is so tempting that NYSE Euronext (NYX.N: Quote, Profile, Research, Stock Buzz) and Nasdaq OMX Group (NDAQ.O: Quote, Profile, Research, Stock Buzz) are scouring China for new companies to list.
But more listed Chinese companies are being accused of fraud, which could drag down the reputations of the stock exchanges that list them.
"The only thing the exchanges have, really, is their brand image," said James Angel, associate professor of finance at Georgetown University's McDonough School of Business. "If their brand image gets tarnished by fraudulent companies, it's going to make it really hard to attract listings."
Chinese listings have become more important to U.S. exchanges. They made up a quarter of U.S. initial public offerings last year, compared with 5 percent in 2006, according to University of Florida finance professor Jay Ritter.
When a company lists shares, the exchange gets steady fees, which can make a big difference to a market's profits. The major United States-based exchanges generate about one-fifth of their global net revenue from listings.
The exchanges might not have much direct legal liability when Chinese companies fail. Underwriters, lawyers and accounting firms, which do most of the due diligence on companies interested in listing in the United States, have a much bigger risk of getting sued.
But exchanges rely on their reputations to win new business. Companies want to list on the NYSE or Nasdaq because they believe there is prestige associated with such a listing.
"(NYSE and Nasdaq) have decided to sacrifice reputation for their short-term competition purposes, short-term listing revenue purposes," said John Hempton, chief investment officer at hedge fund Bronte Capital Management in Australia, which has shorted Chinese stocks.
The exchanges acknowledge the importance of their image, and stress that listing in the United States is not easy.
"Some companies are going to want to come to the U.S. markets for the global imprimatur that it brings to a Chinese company," Nasdaq head of listings Bob McCooey said at a China-focused investment conference in New York this month.
"The SEC sets standards, the exchanges set standards -- they're the highest listing standards in the world," he said.
Nasdaq said in a statement it has rigorous listing criteria. "That doesn't prevent situations from arising," it said, adding that this is true of companies from any jurisdiction.
NYSE's co-head of U.S. listings Scott Cutler acknowledged that fraudulent accounts can shake confidence in markets.
"This is not an issue of the reputation of the exchange. This is an issue that goes to the veracity of financial statements," Cutler said, adding that the exchanges rely on financial statements that have been certified by company management, auditors and lawyers. "If fraud is not rooted out it will create a larger problem for China."
"The whole system relies on trust," he added. "We're looking at (it) for China and for all other markets, quite frankly, because this goes to confidence in the entire system."
reuters.com
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