CHAPTER Emerging Market Firms and Bonding Benefi ts
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Our chapter off ers an alternative way of testing whether bonding is reputational or legal. We start out by taking the approach of Reese and Weisbach (2002) to investigate the infl uence of cross-listings and a fi rm’s home country’s legal origin on capital raisings following the cross-listing. However, we take their analysis one step further by also examining the infl uence of the method of entry, i.e., whether the fi rm chooses a high protection or low protection cross-listing.* is allows us to investigate whether bonding (if present at all) is of a legal or reputational nature. Following Reese and Weisbach’s (2002) reasoning, legal bonding should imply that higher protection entries be more valuable to fi rms with high external fi nancing needs. us, the high protection cross-listings should display more and larger subsequent capital raisings. To investigate this, we assembled a sample of 831 fi rms from 25 emerging markets (as by the Morgan Stanley capital international [MSCI]) that cross-listed in the United States for the fi rst time between 1964 and 2004. For these fi rms, we collected all capital raisings and equity issues within 2 years following the cross-listing. We thus have a data set that is on one hand more limited in the number of countries covered (emer ging market only), but on the other spans a longer period of time than Reese and Weisbach’s (2002) analysis. is allows us to replicate their results and extend their analysis by taking into account the method of entry. We confi rm their results that equity issues increase following crosslistings and that this eff ect is stronger for fi rms from countries with weaker investor protection. is suggests that fi rms can bond themselves through cross-listing. In addition, we indeed fi nd a positive relation between the entry method’s level of protection and subsequent equity issues, which suggests that bonding is primarily legal in nature.