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"Legal System and Rule of Law Effects on US Cross-Listing to Bond by Emerging-Market Firms"

Paul M. Vaaler and Burkhard N. Schrage


First Author :

Paul M. Vaaler
Business Administration
University of Illinois at Urbana-Champaign, College of Business
1206 S. Sixth Street
350 Wohlers Hall, MC 706
Champaign, IL 61820

217-244-7969 (Fax)

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Second Author :

Burkhard N. Schrage
Singapore Management University
50 Stamford Road
Singapore 178899

65 6822 0755
65 6822 777 (Fax)

Abstract :
An emerging “bonding hypothesis” holds that a firm’s geographic domicile may not determine its corporate governance destiny. Firms from countries with weaker corporate governance regimes can internationalize their legal (but not necessarily operational) presence by cross-listing their securities on overseas financial markets. They can “bond” with legal systems and enforcement policies in foreign corporate governance regimes providing stronger investor protection. Cross-listing to bond increases firm value by decreasing corporate misconduct, broadening the investor base, and lowering the cost of capital. We document evidence of cross-listing to bond with stronger legal systems and rule of law by more than 700 firms from 23 emerging-market countries cross-listing their securities on US financial markets from 1996-2002. We find that: 1) US cross-listing levels are lower for firms from Common Law countries providing stronger investor protection, but only in Common Law countries with weaker rule of law; and 2) US cross-listing levels are higher for firms from Civil Law countries providing weaker investor protection, but only in Civil Law countries with stronger rule of law. Emerging-market firms exhibit behavior consistent with bonding hypothesis considerations and cross-list as a commitment to a more rigorous corporate governance regime, but the behavior is contingent and depends on examination of both legal system and rule of law effects individually and in interaction. Our empirical results highlight the importance of broadening investigating of firm internationalization to consider legal dimensions. Firms have discretion to choose foreign corporate governance regimes with less or no regard to where their operations are located.
Keywords :
bonding, corporate governance, cross-listing, finance, internationalization, law
Footnotes & Acknowledgements :
Please contact Paul M. Vaaler regarding this paper. We received helpful comments, criticisms and suggestions on earlier versions of this research from Ruth Aguilera, Steven Block, Jeff Brown, Murillo Campello, Donald Gonson, Michael Klein, Robert Kudrle, Paul Lansing, Joe Mahoney, Jeffrey Rubin, Jordan Siegel, Joel Trachtman, Sushil Vachani, Michael Weisbach, and seminar participants at Boston University Graduate School of Management, the University of Pennsylvania Wharton School, the University of Minnesota Humphrey Institute for Public Affairs, the University of Illinois at Urbana-Champaign College of Law and the 2006 JIBS Frontiers Conference. All remaining errors are ours.
Manuscript Received : 2006
Manuscript Published : December 22, 2006
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