Internationalization and the evolution of corporate valuation

Abstract

By documenting the evolution of Tobin's q before, during, and after firms internationalize, this paper provides evidence on the bonding, segmentation, and market timing theories of internationalization. Using new data on 9,096 firms across 74 countries over the period 1989-2000, we find that Tobin's q does not rise after internationalization, even relative to firms that do not internationalize. Instead, q rises significantly before internationalization and during the internationalization year. But, then q falls sharply in the year after internationalization, quickly relinquishing the increases of the previous years. To account for these dynamics, we show that market capitalization rises before internationalization and remains high, while corporate assets increase during internationalization. The evidence supports models stressing that financial internationalization facilitates corporate expansion, but challenges models stressing that internationalization produces an enduring effect on q by bonding firms to a better corporate governance system. JEL classification codes: G15, F36, F20

Relative Governance and the Global Cross-Listing Decision: Extending the Bonding Hypothesis

“…They contend this occurs because a U.S. listing reduces the ability of controlling shareholders to expropriate corporate wealth, thus allowing the firm to take greater advantage of growth opportunities. Gozzi, Levine, and Schmukler (2008), however, question the persistence of these higher q ratios for foreign firms listed in the U.S. or London, and contend that valuation premia are associated with a pre-listing run-up in market returns rather than bonding to a better governance system. Yet, King and Segal (2009) find that foreign firms with dual-class shares that cross-list into the U.S. experience a sizeable and permanent valuation benefit.…”

“…Consistent with Doidge et al (2004Doidge et al ( , 2013, Gozzi et al (2008), King andSegal (2009), andSchill (2012), we use Tobin's q as our measure of firm value. We estimate it as the firm's total assets minus the book value of equity plus the market value of equity divided by the book value of total assets.…”

“…Table 5 shows the regression results where the dependent variable is Tobin's q. Consistent with Gozzi et al (2008), we create an indicator variable, cross-list, that equals one if a firm cross-lists internationally and zero otherwise. We also interact cross-list with two relative governance measures: (1) D (Rule of law) which is an indicator variable that equals one if the host country has a better rule of law than that of the home country and zero otherwise; and (2) % change (Rule of law) is the percentage change in governance calculated as the host country's governance index minus the home country's governance index divided by the home country's governance index.…”

“…We also interact cross-list with two relative governance measures: (1) D (Rule of law) which is an indicator variable that equals one if the host country has a better rule of law than that of the home country and zero otherwise; and (2) % change (Rule of law) is the percentage change in governance calculated as the host country's governance index minus the home country's governance index divided by the home country's governance index. Finally, we include several control variables suggested by the literature Gozzi et al, 2008;King & Segal, 2009;Sarkissian & Schill, 2012). We show in Table 5 that the cross-listing premium persists across the listing types that a firm adopts.…”

What Does It Take to List Abroad? The Role of Global Underwriters

“…Despite their economic importance, most studies of firms that raise capital globally or list outside their home country make no distinc-tion between IPOs and seasoned firm cross-listings (see, for example, Pagano, Roell, and Zechner (2002); Claessens and Schmukler (2007); Gozzi, Levine, and Schmukler (2008) The remainder of the paper is organized as follows: The sample, the firm-and country-level variables, and the definition and use of global underwriters are presented in Section I. The interactions of world financial globalization and global underwriter activity are documented in Section II.…”