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

Abstract

The primary objective of this study is to extend the bonding hypothesis by developing what we term as the relative bonding hypothesis. We hypothesize that firms seek the advantages of stronger investor protections by listing in countries whose governance is relatively better than its own. This means that firms can achieve bonding without listing in the U.S and that the governance advantages of bonding are not only for ADRs. We investigate how relative bonding affects cross-listing behavior in the international financial markets by using a comprehensive set of cross-listings and create the relative level of governance standards between the host market and the home market. We find that firms are more likely to choose a cross-listing destination if the host country has better governance than the home country, except those firms from countries whose managers enjoy greater private benefits of control. We also find that there is valuation premium even when cross-listing occurs outside of the U.S. The premia are even stronger if the host country has better governance than that of the home country. We conclude that although bonding might explain the existence of ADRs, relative bonding helps to explain the extensive cross-listing which occurs outside of the U.S.

How Are Foreign Firms Valued in U.S. Markets? Evidence from Firm and Country Characteristics

“…However, in the last ten years, this number has soared to more than 800, which is almost four times more than 30 observed years ago. (Note 1) Prior research has provided various reasons for firms to adopt a cross-listing strategy, such as improving liquidity, overcoming market segmentation, increasing visibility, and enhancing corporate governance (Mittoo, 1992;Karolyi, 1998;Coffee, 2002;Karolyi & Stulz, 2003;Ferris & Liao, 2018). Doidge, Karolyi, and Stulz (2004) notice that foreign firms' market value increased as high as 37% when they listed stocks on the U.S. major markets.…”