Short‐Term Performance of U.S.‐Bound Chinese IPOs

Firms from emerging markets, including China, increasingly seek to raise capital outside of their home markets. We examine the short‐term performance of U.S.‐bound Chinese initial public offerings (IPOs) and find that these IPOs have significantly lower underpricing than a matched sample of U.S. counterparts. We also find that the magnitude of IPO underpricing for U.S.‐bound Chinese firms is positively related to revisions in offer price.     

CORPORATE GOVERNANCE IN AN EMERGING MARKET: THE CASE OF ISRAEL

Despite significant capital-market reforms in the mid-1980s, the Israeli government and banks continue to play an unusually dominant role in Israeli financial markets. Israeli banks operate as merchant banks and, through pyramid structures of ownership, control large segments of manufacturing, construction, insurance, and services. In addition, the banks dominate all facets of the capital market, including underwriting, brokerage, investment advice, and the management of mutual and provident funds.
Because of this dominance by the banks, several important mechanisms of corporate governance are missing. There is no effective market for corporate control; institutional investors have little incentive to monitor corporate managers; and those managers in turn have little incentive to improve firm performance and increase shareholder value.
To be sure, there has been an impressive wave of IPOs on the Tel Aviv Stock Exchange (TASE) in the 1990s. But those firms' stocks have substantially underperformed the market since going public, and many "higher-quality" Israeli firms have chosen in recent years to list their securities on the NASDAQ and not at home. The main reason the most promising Israeli firms go public in the U.S. is because that is where U.S. and other foreign investors want to buy them; such investors want the assurances that come with the U.S. corporate governance system.     

An empirical investigation of Yankee stock offerings

This paper examines the operating and investment performance of 100 foreign firms that conduct their initial public offerings (IPOs) in the U.S. (Yankee stock offerings). The uniqueness of these firms is that the U.S. IPOs are their first public equity issue in any market, including the home market. We find significant improvement in the operating performance subsequent to these U.S. IPO events and firms from countries with poor investor protection benefit more. Compared to various benchmarks, unlike the significant underperformance of IPOs documented in many countries, these firms show no significant abnormal long-run stock market performance after 1, 3, or 5 years of seasoning. The findings are consistent with signaling and selective entry hypotheses.     

The pricing of U.S. IPOs by seasoned foreign firms

We examine the pricing of U.S. initial public offerings (IPOs) by foreign firms that are already seasoned in their domestic countries. Presumably, these equity offers have less downside risk for investors than typical IPOs since domestic share prices can be used to help establish a preoffer value for the firm's equity. In spite of the presumed diminished downside risk, we find that offers by firms from countries that impose foreign ownership restrictions and capital controls are on average underpriced, experiencing an average first-day return in the United States of 12.7%. This result stems in part from the underwriter's failure to price the issue to fully reflect the postoffer premium that often arises for the U.S. shares. In contrast, offers by firms from countries without ownership restrictions have an average first-day return of 0.0%.     

Eliminating the 20-F reconciliation from IFRS to U.S. GAAP: Short-term and long-term liquidity effects

This paper examines the effects of the SEC’s 2008 decision to no longer require foreign private issuers using IFRS and trading on U.S. exchanges to reconcile their financial statements to U.S. GAAP. Extant research has found conflicting results using short event windows, while studies using longer event windows have found limited capital market impact from eliminating the reconciliation. Motivated by the SEC’s interest in understanding how disclosure rules impact market liquidity, we examine changes in effective bid-ask spreads, the price impact of trades, and quoted depth around 20-F filing dates for a sample of foreign private issuers. We find that effective spreads increase more around 20-F filing dates for filers using IFRS than for filers using U.S. GAAP, suggesting the 20-F report is more informative for filers using IFRS. We then find, in a subsample of filers using IFRS, that the increase in effective spreads for IFRS firms around 20-F filing dates is directly related to the magnitude of differences in book values between IFRS and U.S. GAAP. In sum, our results suggest a loss of useful information after the SEC’s rule change.     

Contracts valuation assessment noise and cross-border listing of equities on U.S. and U.K. stock markets

This study develops and tests the hypothesis that firms in the home country have capital market incentives to cross-border list on foreign stock exchanges that have similar financial reporting with local generally accepted accounting principles (GAAP). Non-U.S. firms' contracts and the underlying GAAP are based on the home-country culture and institutional climates. This connection with culture and institution makes the local GAAP's assessment of the contracts less spurious relative to foreign GAAP. Ball et al. [J. Account. Econ. 29 (2000) 1] note that contracting with stakeholders in the home markets is based on local GAAP's numbers, while cross-border listing provides settings in which the value relevance of local GAAP-based contracts is assessed based on foreign GAAP. Therefore, foreign investors' assessment of the contracts using foreign stock exchange GAAP or mindset of foreign GAAP is likely to result in an assessment noise, which is value irrelevant. The level of assessment noise depends on the differences between foreign and local GAAP. Because of the valuation implications of the assessment noise, we expect cross-border listing to diminish as the likelihood of assessment noise increases.As predicted, we find that assessment noise undermines cross-border listing on U.S. stock exchanges. Because U.S. and local GAAPs are based on different cultural and institutional environments, assessment noise arises if U.S. investors use the mindset of U.S. GAAP financial reports to assess local GAAP-based contracts of cross-border firms. The results are robust in the London Stock Exchange in which assessment noise is induced by interpreting local GAAP contracts as if they were based on U.K. GAAP. As expected, the influences of assessment noise on cross-border listings are more robust in the United States than in the United Kingdom. Our results suggest that harmonization of financial reporting is critical in attenuating the influences of assessment noise on global capital market developments.     

Price discovery for cross-listed firms with foreign IPOs

We investigate the inter-market return and volatility linkages for an atypical case of firms with foreign IPOs that subsequently cross-listed in their domestic market. In particular, our data set consists of a unique sample of 29 Israeli firms that went public in the US (host market) and then cross-listed in the Israeli market (home market). To estimate the spillover effects, we employ bivariate GARCH models, assuming both constant and dynamic conditional correlation specifications. At the aggregate market level, we find unidirectional mean and volatility spillovers from the US to the Israeli market. For the portfolios of Israeli cross-listed stocks, we report significant spillovers, at both the mean and volatility levels, from the underlying stocks in the Israeli market to their American Depository Receipts (ADRs) but not vice versa. Thus, the home market dominates the host market in the price discovery process in this atypical international cross-listing case, providing new evidence in support of the home bias hypothesis. We also find that external shocks originating from the Middle East peace process have no impact on the conditional correlation between the two markets but external shocks originating from the world and regional markets impact the conditional correlation positively.     

International Cross‐Listings and Subsequent Security‐Market Choices: Evidence from ADRs

We study the link between the attributes of American depositary receipt (ADR)‐listed firms and their post‐listing security‐market choices. We find that developed market firms are more likely to issue equity and debt than their emerging market counterparts. Furthermore, we find that large firms are more likely to issue debt and less likely to issue equity. When we examine locations where ADR firms raise their capital, we find that firms originating from countries where the protection of minority shareholders is weak are more likely to issue debt on their home markets and less likely to issue debt on international markets (excluding U.S. markets). Furthermore, ADR firms originating from developed (emerging market) countries are more (less) likely to issue their equity on their domestic markets and less (more) likely to issue equity on international markets (excluding U.S. markets).     

Institutional affiliation and the role of venture capital: Evidence from initial public offerings in Japan

The presence of venture capital in the ownership structure of U.S. firms going public has been associated with both improved long-term performance and superior “certification” at the time of the initial public offerings (IPOs). Many of the major venture capital firms in Japan are subsidiaries of securities firms that may face a conflict of interest when underwriting the venture capital-backed issue. In Japan, we find the long-run performance of venture capital-backed IPOs to be no better than that of other IPOs, with the exception of firms backed by foreign-owned or independent venture capitalists. When venture capital holdings are broken down by their institutional affiliation, we find that firms with venture backing from securities company subsidiaries do not perform significantly worse over a 3-year time horizon than other IPOs. On the other hand, we find that IPOs in which the lead venture capitalist is also the lead underwriter have higher first-day returns than other venture capital-backed IPOs. The latter result suggests that conflicts of interest influence the initial pricing, but not the long-term performance, of IPOs in Japan.     

Foreign issuers in the U.S. PIPE market

We document that the use of private investment in public equity (PIPE) by foreign firms listed on U.S. exchanges is growing even faster than its use by U.S. firms. On average, foreign firm PIPE stock deals represent a similar proportion of the firm's market capitalization to U.S. firm PIPEs, but suffer less of a share price discount than U.S. firm PIPE issuances, a relation that is robust to consideration of exchange, deal size, share turnover and return volatility. We document that hedge funds are only small investors in foreign firm PIPEs issued in the U.S., which tend to be purchased by pensions, government funds and corporations. PIPE, in combination with the reverse merger method of going public, provides a cost-effective means for foreign firms to raise capital in the U.S. capital market.     

What drives delistings of foreign firms from U.S. Exchanges?

We examine time dependency in the factors motivating delistings of foreign firms from major U.S. Exchanges over the period 1962–2006. For firms listing before Sarbanes-Oxley (SOX), we find that governance has no significant effect on delisting but after SOX, it becomes one of the main forces driving delisting. For firms whose delisting decision is most likely attributable to SOX, we find they realize low benefits from listing – they originate from countries with strong home market governance, and from listing onward realize low trading volume, analyst coverage, and make little use of capital raising. Our results suggest that SOX has had a large influence on the benefits seek from a U.S. listing, leading firms from well governed countries and low capital raising needs to delist.     

Cross-market information transfers of ADR firms: An investigation of emerging market economies

Level II and III ADRs permit issuers to be listed on the major U.S. exchanges with the stipulation that they comply with extensive SEC disclosure requirements. Foreign private issuers are compelled to file a set of audited financial statements prepared in accordance with U.S. GAAP, or alternatively, IFRS or Home Country Accounting Principles with attendant reconciliation to U.S. GAAP prior to 2008. Although the Form 20-F reconciliation is discontinued in 2008 for IFRS filers, non-U.S. issuers are required to satisfy other Form 20-F stipulations such as expanded Item 17 and Item 18 disclosures. We conjecture that non-U.S. firms choosing to be listed on the major U.S. exchanges will incur the added costs associated with the supplemental disclosure requirements in order to attract sufficient investor attention as to have the disclosures impounded in the home country equity share price in the manner described by Fishman et al. (1989). Because a prominent attribute of ADR firms is that they benefit from multiple-market trading, we investigate whether the Form 20-F disclosure cross-market information transfers are associated with emerging market economy status. We employ models of the cross-market ADR and equity security share returns and trading volume controlling for the emerging economy status and incremental firm-specific SEC Form 20-F accounting principles disclosures. Preliminary results indicate that (1) U.S. listed ADR firms from emerging economies experience greater cross-market information transfers associated with the SEC Form 20-F filing, and (2) that the increased cross-market information transfers associated with the SEC Form 20-F filing are proportional to the difference in quality of accounting principles employed for home country reporting purposes vis-à-vis the accounting principles employed for SEC Form 20-F reporting purposes. Results are consistent with a feedback process through which the new information disclosed by the SEC Form 20-F reporting requirements in the ADR market attenuates the price discovery process in the home country equity market when the difference in information environment quality is large.     

The decision to list abroad: The case of ADRs and foreign IPOs by Chinese companies

This paper examines the decision to list abroad by Chinese companies in the form of ADRs and foreign IPOs from 1993 to 2005. Our sample consists of 33 ADRs, 218 foreign IPOs, and a sample of 1418 domestic listings. We find evidence to support that issuers are motivated to cross-list due to the legal and accounting standards of the foreign markets, more stringent listing requirements and closer regulatory monitoring, significant demands for external capital due to rapid growth, an expanded shareholder base, and foreign expertise. The motives and firm factors differ by the type of issue (ADR versus foreign IPO) and by the market in which the foreign exchange is located (Hong Kong versus Singapore). Subsequent to the listing events, issuers experience a significant drop in profitability, tangible assets ratio, and asset turnover. There is no significant change in capital expenditure. Stock returns after the listing events are generally negative for ADR and foreign IPO stocks. More significantly, these stocks under-perform the market in the post-event window ranging from 3 days to 3 years.     

“You Can Enter but You Cannot Leave…”: U.S. Securities Markets and Foreign Firms

Although a number of prior papers have argued the benefits to foreign firms of cross‐listing their shares in the U.S., the number of foreign firms exiting U.S. capital markets has been increasing. This has occurred despite the difficulties foreign firms face in deregistering from the Securities and Exchange Commission (SEC). This paper examines the reasons underlying this trend. One of our main findings is that the passage of the Sarbanes‐Oxley Act has reduced the net benefits of a U.S. listing and registration, particularly for smaller foreign firms with lower trading volume and stronger insider control.     

Signaling effect of cash holdings adjustment before bond issuance

Using Fixed Income Securities Database bond issuance data, we examine how firms' cash holding adjustment exhibits a signaling effect prior to corporate bond issuance; we also examine the meaning of this effect on firms' capital policy. Analyzing a sample of U.S. bonds from 1981 to 2018, the results found that bond issuers adjust their cash holdings higher prior to bond issuance compared to non-issuer firms. After controlling for various firm and bond characteristics, we found that firms that adjust their cash holdings higher attract investors' attention, thus resulting in lower bond spreads. Our results also perform different patterns in subsamples when adopting accrued and real earnings management, financial constraints, and corporate opacity.     

The capital structure of multinational corporations: Canadian versus U.S. evidence

Contrary to the U.S. evidence, we show that Canadian multinational corporations (MNCs) display higher leverage than domestic firms (DCs). This higher leverage is due to lower agency costs of debt associated with MNCs' U.S. operations. We also find that the Canadian firms with international bond market access have higher leverage than firms without such access. Comparison with a U.S. matched sample shows that the sensitivity of leverage to firm-specific factors differs between the two countries, especially for the MNCs samples. Our evidence indicates that capital structures of MNCs are a complex interaction of both home and host country factors and differences in leverage determinants across countries.     

The Sarbanes‐Oxley Act and the Choice of Bond Market by Foreign Firms

This paper examines the economic impact of the Sarbanes‐Oxley Act (SOX) by studying foreign firms’ choice of whether to issue bonds in the U.S. public bond market or elsewhere before and after the law's enactment in 2002. After controlling for firm characteristics, bond features, home‐country attributes, and market conditions, I find that foreign firms rely less on the U.S. public bond market after SOX. Additionally, some determinants of choosing the U.S. public bond market have changed since the passage of SOX: firms listing equities on U.S. stock exchanges, adopting International Financial Reporting Standards (IFRS), and doing large bond issuances are more likely to choose this market in the post‐SOX period than in the pre‐SOX period. Overall, these results are consistent with a shift in the expected costs and benefits of choosing the U.S. public bond market following SOX. This paper provides the first evidence about how SOX influences debt financing decisions and alters capital flows across international bond markets.     

Strategic Conservative Earnings Management of Technology Firms: Evidence from the IPO Market

In this paper, we investigate the conservative earnings management strategies of technology firms in the IPO market. We hypothesize that technology IPOs, due to their fewer tangible assets, more information asymmetry, and higher uncertainties of future cash flows, tend to have higher litigation risk. At equilibrium, technology firms are more motivated to strategically employ conservative earnings management during the IPO process, to mitigate their higher litigation risk. Using a sample of U.S. IPOs, we find that technology IPOs, on average, involve significantly more conservative earnings management, especially during the bubble periods. Our results also show that the conservative earnings management strategies of technology firms tends to have a greater impact on their underpricing than for non‐tech firms, and thus effectively reduce their risk of being a target in the securities class action lawsuits.     

The determinants of the hybrid security issuance decision for Australian firms

The Australian capital market has number of distinct characteristics that distinguish it from typical U.S. and European markets. There is a limited listed debt market where most firms use bank debt, convertible debt is not callable and stand alone warrants are used to raise capital. This paper examines the determinants of security choice for hybrid issuers in the Australian market. The results support the pecking order model and the impact of financial distress costs and taxation. Alternatively, the results provide support for the sequential financing model where firms with high profitability use convertible debt and firms with low profitability use warrants, to solve the sequential financing problem.     

Two‐Sided Matching: How Corporate Issuers and Their Underwriters Choose Each Other

In this article, the authors update and confirm the findings of a 2005 article that was the first to view corporate underwriter choices as the outcome of a two‐sided matching process in which issuers look to the abilities of the underwriters offering their services and underwriters focus on the quality of the issuers that wish to use their services. This view offers a contrast with both the conventional representation of issuer‐underwriter associations as one‐sided decisions (by either issuers or underwriters) and the classical economist's representation of a competitive market in which prices serve as the primary market‐clearing mechanism. In their examination of both initial public offerings (IPOs) and seasoned equity offerings (SEOs) during the period 1980–2010, the authors continue to find strong evidence that higher‐quality issuers associate with more reputable underwriters and lower‐quality issuers match with lower reputation underwriters. Moreover, when examining cases of underwriter switching between an IPO and SEOs by the same issuer, they find that cases involving the largest divergence in the relative rankings of issuer and underwriter were the most likely to produce a change of underwriter—and that issuers that experienced larger post‐ IPO increases in quality were more likely to find more reputable underwriters for their SEOs (than for their IPOs). The authors also find that the larger the number of offerings brought to market in a given year, the smaller the market share of the top‐tier underwriters, likely reflecting the willingness of the most reputable underwriters to turn down business to maintain quality and reputation. Finally, the most reputable underwriters appear to benefit from the fact that the issuers whose IPOs they underwrite end up raising larger amounts of capital, both at the time of the IPO and in the larger and more frequent seasoned offerings by such issuers that come after the IPO. This evidence in support of two‐sided matching suggests that, especially for high‐quality issuers, the reputation of the underwriters they contract with for security offerings is likely to be more important than the underwriting fees they incur. What's more, the authors' finding that the most reputable underwriters are less likely to lose high‐quality clients and have more stable market share—and that the higher‐quality issuers they attract end up raising larger amounts of capital over their lives as public companies—suggests that underwriters' investments in building and preserving their reputations have a large expected payoff.