Emerging Markets Review 11 (2010) 183–204

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Emerging Markets Review
j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / e m r

The sequencing of stock market liberalization events and corporate financing decisions
Thomas Flavin, Thomas O'Connor ⁎
Department of Economics, Finance and Accounting, National University of Ireland Maynooth, Maynooth, Co. Kildare, Ireland

a r t i c l e

i n f o

a b s t r a c t
We examine the impact of stock market liberalization events on corporate financing choices. We analyze differences between ‘investable’ firms and those who cross-list on international markets and show that an initial act of liberalization evokes similar responses across all firms. Furthermore, we examine the importance of the order in which these events occur. We find evidence of different behavior depending on the sequence of events and across categories of listing. Level 3 ADRs confer greatest equity raising post-listing, suggesting that US lists still have benefits over and above London. © 2010 Elsevier B.V. All rights reserved.

Article history: Received 31 August 2009 Received in revised form 23 March 2010 Accepted 23 March 2010 Available online 7 April 2010 JEL classification: F30 G15 G32 Keywords: Financing choices Debt structure Investability Cross-listing

1. Introduction Financial liberalization programs became popular across many emerging markets over the past three decades. The promise of increased liquidity, deeper financial markets, enhanced efficiency of trading systems, together with greater transparency and legal enforcement of financial contracts made these programs attractive to financial market participants. Many countries and their indigenous firms have made great strides to eliminate both country-level and firm-level restrictions on the ability of foreign investors to become stakeholders in their corporations, with large global institutions encouraging these initiatives and providing the expertise for their implementation. Such programs were designed to reduce the financial constraints that may have limited the growth and expansion of emerging market firms due to an inability to raise capital domestically at internationally competitive prices. Empirical studies find that stock market

⁎ Corresponding author. Tel.: +353 1 7086667. E-mail address: Thomas.g.oconnor@nuim.ie (T. O'Connor). 1566-0141/$ – see front matter © 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.ememar.2010.03.004

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T. Flavin, T. O'Connor / Emerging Markets Review 11 (2010) 183–204

liberalizations and international cross-listings relax financing constraints, improve operating performance, and promote growth for these firms (see Henry, 2000; Chari and Henry, 2004; Gupta and Yuan, 2004; Li, 2003; and Mitton, 2006 for the stock market liberalization view, and Lins et al., 2005; Khurana et al., 2008; and Charitou and Louca, 2009 for the cross-listing view). For previously constrained firms, financial market liberalization allows them to move to their optimal capital structure and following the implementation of such programs, we frequently observe changes to corporate financing decisions. For example, corporations often re-adjust their leverage ratios due to greater access to capital markets and potentially due to a change in the relative price of debt and equity. Furthermore, the maturity structure of the debt portfolio may change as firms seek to increase the long-term debt component and hence reduce their reliance on shortterm debt and their exposure to rollover risk. We study these issues while explicitly taking account of the sequence of events that leads to the financial liberalization of the firm. Many firms pursue a direct avenue of entry to international capital markets by cross-listing their stock on larger exchanges. A popular approach is to ‘cross-list’ on US equity markets via an American Depository Receipt (ADR) program. The growth of these programs over the 1980s and 1990s verifies that many firms availed of this path to liberalization. For example, at its peak in 2000, exchange-traded Level 2/3 issues numbered 608, compared to just 176 in 1990. Non-exchange programs (Level 1 and Rule 144a issues) were even more popular. In 2000, the number of Level 1 programs stood at 717, and unlike Level 2/3 issues, maintained this level in subsequent years (see Bank of New York, 2005).1 The London market has also proven to be a popular choice for cross-listing, either via a direct listing, a Depository Receipt (DR) program, or in recent years, a listing on the Alternative Investment Market (AIM). However, not all firms choose to cross-list in order to achieve financial liberalization, but in conjunction with improved countrylevel investor protection seek to eliminate barriers to inward investment. Such firms are deemed to be ‘investable’, provided firm- and country-level restrictions on foreign ownership are eliminated.2 Interestingly, these liberalization programs are not mutually exclusive and many firms have ‘cross-listed’ their stock on larger markets subsequent to being deemed investable. The sequence of events chosen may result in different corporate decisions but this has received little attention in the extant literature. The extant literature has little to say on the effects of being deemed investable or cross-listing on the London markets for financing decisions. However, the impact of ‘cross-listing’ via an ADR program on corporate capital structure has received some attention in recent years. Reese and Weisbach (2002) predict that all ‘cross-listing’ firms will issue more equity capital post-listing, regardless of the type of ADR. Furthermore, firms from countries with relatively weak investor protection should increase their equity financing more than those domiciled in countries with strong investor protection. Lins et al. (2005) provide empirical evidence that is consistent with this hypothesis. All firm classifications in their sample issue more equity post-listing with a larger effect found for emerging market firms relative to those from developed markets. More recently, Fan et al. (2008) and Wu (2008) find evidence that firms employ more equity postlisting but the former find no statistical evidence that firm behavior differs by level of corruption in the domestic country. Less attention has been reported to the debt maturity issue. Schmukler and Vesperoni (2006) find that long-term debt and the maturity structure decrease with financial liberalization. However, Fan et al. (2008) report that firms increase the maturity structure of their debt post-listing in the US and the greater proportion of long-term debt employed is more evident in countries with high corruption. Hence, there is no consensus on this issue. We investigate the impact of financial liberalization on corporate decision-making, both in relation to the capital structure and the maturity of debt employed in financing the operations of the firm. Our sample is drawn from emerging markets whose firms have cross-listed in the more developed markets of the US and UK. It contains three types of firm; those who are deemed investable but never cross-list; those who cross-list without being previously deemed investable; and those who cross-list subsequent to being deemed investable. We analyze the differences in financing policies across these groups, paying special attention to the sequencing of liberalization events. As usual in empirical studies, we distinguish crosslistings by type, but our main innovation is to further distinguish them by their place in the sequence of
1 Others sought a strategic alliance in preference to an international cross listing. Siegel (2009) shows that under certain conditions, a strategic alliance with a foreign multinational can be a superior mechanism for improving corporate governance. 2 In addition to being free from firm- and country-level foreign ownership restrictions, stocks must also have sufficient size and liquidity to be realistically available to foreign investors to be fully deemed investable.

To ensure that we correctly identify a firm's initial listing. Using both databases. We find that firms who cross-list in London behave more like Level 2 ADRs and therefore may not be as successful in terms of attracting new equity as Level 3 and Rule 144a ADRs who have capital raising entitlements in the US.S. we source a full list of firms who have cross-listed in the United States and the United Kingdom over the period from 1980 to 2007. the maturity structure of corporate debt is largely unaffected by the sequence of liberalization events. upgrades from Level 1 over-the-counter to Level 2/3 exchange-traded depositary receipts. In addition. For each. For both types of firm. firms are classified as either. Poland. From this database. this is cross-referenced with a Citibank database in which firms that have changed their cross-listing status are highlighted by including a “successor depositary receipt” data type. we find that the first act of liberalization elicits a similar response from all firms regardless of whether the firm has become investable or it has cross-listed its stock. Greece. Russia. Taiwan. Philippines. Morocco. and ignore all subsequent listing changes e. for firms who have previously been deemed ‘investable’. Portugal. in press). Malaysia. the ADR listing is associated with a greater proportion of debt financing. Slovakia. which is currently a topical issue in the literature (see Doidge et al. classifying listings by type is crucial as the behavior of firms who bond to US governance differs from those who do not and we also see differences between firms who acquire the ability to raise capital in the US and those who return to their domestic capital markets to finance corporate expansion. or Rule 144a listings that trade on PORTAL to Qualified Institutional Buyers. Czech Republic. and Nasdaq. We show that all cross-listing firms reduce their issues of debt after liberalization and continue to do so for up to five years after the event.. we contribute to the literature on the relative merits of cross-listing in the US or the UK. Korea. This also allows us to explore differences and similarities between listing on these two markets. South Africa. Peru. Jordan. Sri Lanka. we consult the historical records from the Bank of New York (since the currently available on-line records only refer to a firm's current – and not initial – cross-listing). Our results reveal a number of interesting insights to corporate decision-making and contribute to different strands of literature. and Zimbabwe. Indonesia. Section 3 introduces our econometric methodology. The paper is structured as follows. Egypt. China. Turkey. T. the firm typically takes on more equity and reduces debt. O'Connor / Emerging Markets Review 11 (2010) 183–204 185 ‘liberalization acts’. Level 3 and 3 Sarkissian and Schill (2009) find that the sequencing of multiple international cross-listings matters in determining their impact on firm value. cross-listed firms is sourced from the Bank of New York. Secondly. These countries are: Argentina.3 Our hypothesis is that the financing decisions of these groups may differ due to the chosen route to liberalization and/or the ‘timing’ of the international listing relative to other acts of liberalization. Venezuela. Brazil. However. Initially. our results have strong implications for the literature on cross-listing in the US as we show that the sequence of liberalizations events is important in determining how the issuance of an ADR affects the capital structure. while Section 4 presents and discusses our results. we focus on firms cross-listed in the US via an ADR program but later extend the investigation to London lists to ascertain if our results are pertinent to non-US markets. Section 5 contains our concluding remarks. we identify all emerging market countries from which firms were deemed investable over our sample period. Level 2 and 3 exchange-traded. Thailand. Thirdly. Flavin. 2. All information on U. Chile. while the maturity structure of debt is largely unaffected. When the ADR represents the first act of liberalization. Pakistan. We classify crosslisted firms according to their initial listing in the U.S. We then delve deeper into the dynamics of the debt component and examine the time-series properties of new debt issues. JP Morgan. Mexico.. . Hungary. 2009 and Bianconi and Tan. Hence results of previous studies that ignore this sequence of events may mask important differences across firms. Section 2 describes the data and presents summary statistics.g. Israel. Furthermore. Furthermore. the New York Stock Exchange.T. except for Level 2 ADRs who appear to increase their proportion of long-term debt. there is a reduction in debt and increase in equity financing. when the issue is subsequent to being deemed investable. and cross-referenced with information from Deutsche Bank. Colombia. India. Unlike Level 1 and 2 lists. Data description We choose to work with firms from emerging markets and consequently begin our data collection at the Emerging Markets Database (EMDB). Firstly regarding the literature on financial liberalization. Level 1 over-the-counter.

Based on this classification. Meanwhile. Rule 144a. (2006). All information on international cross-listings in London is obtained directly from the London Stock Exchange.186 T. Thus. T. After imposing the data requirements. We follow Huang and Ritter (2009) and measure net debt issues as the change in book debt as a percentage of beginning of year book assets. we measure net equity issues as the change in book equity less the change in retained earnings.. Finally..S. so as to avoid the designation of an investable firm arising directly from the international listing. defined as the ratio of total debt to total book assets and ‘net debt’. 119 were also deemed investable prior to cross-listing in the U. Following Baker and Wurgler (2002) and Huang and Ritter (2009). Likewise. we disaggregate our depositary receipt sample into their respective listing types and report the number of Level 1. We then present the number of investable (Invest) and cross-listed firms (ADR and London). by country. and 49 firms cross-listed in London. defined as the ratio of total debt less cash to total assets. it comprises of 6797 firms from 22 countries. (2006) and more recently Bae et al. Taiwan has the greatest number of depositary receipts with 40. In addition. all countries without cross-listed firms are eliminated from our final sample. we also analyze the joint effects of investability and crosslisting on the (total) debt–equity ratio of firms (debt–equity). we identify all firms that were deemed investable over our sample period using the “investable” measure from the IFC Emerging Market Database (EMDB). Boyer et al. of which 17 are joint Invest/ADR lists. lists and 2 years for London lists. From this sample. firms are assigned to one of six industrial groups: industrial. while Venezuela has the least (9 firms and 80 firm-year observations). and our results are unaffected if we drop this firm entirely from our final sample. and the debt maturity structure of firms using longterm debt to total debt (LTD total). China and South Africa with 4 firms each provide the greatest number of ordinary listings in London. 189 firms cross-listed in the U.g. We define a firm as investable in a given year if its stock appears in the IFC investable index by December of that year. Mitton (2006).S.. the stock of equity is measured as the ratio of common equity to assets (equity/assets). The 238 cross-listed firms are well distributed across the various categories. ‘net debt issues’ is employed to capture the flow of new debt. We classify firms as either ordinary or depositary receipt lists on the London Stock Exchange. Following convention. India provides the largest number of London lists with 14. all joint investable/cross-listing firms become investable prior to cross-listing. together with the number of joint ADR/Invest and London/Invest firms. and consult historical records to ensure that we identify a firm's initial listing in London.945 firm-year observations. 5 This measure is used extensively in the academic literature as firm-specific dates of liberalization. Level 3. We characterize the debt structure of firms using long. As we don't have access to these codes. we also require that all non-investable/non-cross-listed firms have at least 3 years of data. namely ‘book debt’. Flavin. utility. we use the General Industry Classification data item provided by Worldscope. Our sample is outlined in Table 1. China provides the largest number of firms (1395 firms and 8124 firm-year observations). with ‘net equity issues’ designed to the dynamics of equity issues. The IFC also requires that the stocks have sufficient size and liquidity to be realistically available to foreign investors. bank/savings and loan. in our final sample. and the number of joint investable/cross-listed firms (ADR & I and London & I). transportation. insurance and other financial. corresponding to 49. we only use the industrial.and short-term debt to equity (LTD equity and STD equity).S. Finally. and London DR lists. O'Connor / Emerging Markets Review 11 (2010) 183–204 Rule 144a firms are entitled to raise capital in the U. 13 of these are depositary receipt listings (4 are also investable).4 For inclusion in our sample. we exclude financial firms from our final sample6 and control for firm-specific factors commonly employed in other related 4 There is a single firm in our final sample cross-listed in London on the Alternative Investment Market (AIM).S. Bae et al. e. and 21 deemed investable prior to cross-listing in London. London ordinary. (2004). We examine the joint effects of investability and cross-listing on the capital structure and the debt maturity structure of firms. Our final sample consists of 731 investable. Level 2. transportation and utility classifications. ranging from 83 Rule 144a firms (42 also investable) to 13 each for Level 3 and London ordinary lists (each with 6 previously investable). We employ two measures of the stock of corporate debt. Bae et al. From the set of investable firms. We classify this firm as an ordinary list.5 The IFC designates a firm as investable if its stock is free from country-level and firm-level restrictions on foreign investment. Of these 238 firms.and post-listing periods. To be consistent with others. we discard all those who had already cross-listed their stock prior to being deemed investable. . In the final columns. 6 Barclay and Smith (1995) and Datta et al. The median time between becoming investable and cross-listing is 3 years for U. (2009) among others. we require that firms have (financial) data available in both the pre. (2005) restrict their sample to firms with SIC codes between 2000 and 5999.

. Level 2/3 exchange-traded. as indicated. Lon Ord and Lon DR are firms that cross-list in London as ordinary or depositary receipt listings.. or Rule 144a issues on Portal. Citibank.e. Investable dates are taken from the Emerging Markets Database (EMDB). Level 2/3 and Rule 144a are firms that cross-list in the U. All information of cross-listings in London is sourced from the London Stock Exchange. For each ADR level/London list.Table 1 Sample description. Level 1. N is the number of firms. Flavin. All information on ADRs is sourced from the Bank of New York. T. O'Connor / Emerging Markets Review 11 (2010) 183–204 Sample N American depositary receipts London listings Invest ADR ADR & I LON LON & I Level 1 Level 1 & I Level 2 Level 2 & I Level 3 Level 3 & I 144a 144a & I Lon Ord Lon Ord & I Lon DR Lon DR & I 1 19 8 10 2 1 3 2 24 1 12 6 13 3 5 3 7 18 40 8 1 2 189 1 14 7 5 2 1 3 2 12 0 7 4 10 3 3 2 4 13 17 6 1 2 119 0 0 0 6 0 4 2 0 14 3 4 0 0 0 0 2 4 5 5 0 0 0 49 0 0 0 2 0 3 2 0 4 0 1 0 0 0 0 0 2 3 4 0 0 0 21 1 9 0 9 0 0 0 1 1 0 2 6 6 0 1 1 4 12 0 8 0 2 63 1 7 0 4 0 0 0 1 1 0 1 4 4 0 0 1 2 7 0 6 0 2 41 0 6 5 0 0 0 1 0 3 0 1 0 4 1 1 0 2 4 2 0 0 0 30 0 5 5 0 0 0 1 0 2 0 1 0 3 1 1 0 2 4 2 0 0 0 27 0 0 3 1 0 0 1 0 2 0 1 0 1 1 0 0 0 0 3 0 0 0 13 0 0 2 1 0 0 1 0 1 0 1 0 1 1 0 0 0 0 1 0 0 0 6 0 4 0 0 2 1 1 1 18 1 8 0 2 1 3 2 1 2 35 0 1 0 83 0 2 0 0 2 1 1 1 8 0 4 0 2 1 2 1 0 2 14 0 1 0 42 0 0 0 4 0 0 1 0 1 2 0 0 0 0 0 0 1 4 0 0 0 0 13 0 0 0 2 0 0 1 0 0 0 0 0 0 0 0 0 1 2 0 0 0 0 6 0 0 0 2 0 4 1 0 13 1 4 0 0 0 0 2 3 1 5 0 0 0 36 0 0 0 0 0 3 1 0 4 0 1 0 0 0 0 0 1 1 4 0 0 0 15 Argentina 49 11 Brazil 224 37 Chile 138 33 China 1395 37 Colombia 25 7 Egypt 20 7 Greece 219 41 Hungary 28 3 India 554 66 Israel 101 17 Korea 830 98 Malaysia 828 94 Mexico 77 19 Peru 57 14 Philippines 130 23 Poland 139 18 Russia 22 5 Sth Africa 235 29 Taiwan 1169 89 Thailand 370 49 Turkey 178 30 Venezuela 9 4 6797 731 187 . T. & I). NYSE. as indicated. The table reports summary statistics of the sample by country. I also report the number of each that was also previously deemed investable (i. and NASDAQ. either as Level 1 over-the-counter.S.

The results are similar when we use total assets to proxy for firm size. growth opportunities as the ratio of market-to-book value of assets. T. The right panel displays the same ratios for Rule 144a firms. (2007). and firm size as the log of sales (inflation-adjusted and in $U.188 T. taxation. Level 1 firms that were also previously investable. 1. . tangibility as the ratio of fixed to total assets. and Schmukler and Vesperoni (2006)).7 All variables are sourced 7 We prefer to use sales. The left panel displays the median book debt (to assets). before and after cross-listing in the United States. Profitability is calculated as the ratio of earnings before interest. O'Connor / Emerging Markets Review 11 (2010) 183–204 Fig.). since the latter is used to construct all of the firm-level variables employed in the analysis. and for Level 1 firms that were previously not deemed investable. studies (see Agca et al. depreciation and amortization (EBITDA) to total assets. Flavin. net debt (to assets).S. long-term debt to total debt and equity and short-term debt to equity for all Level 1 firms in the sample. rather than total assets to proxy for firm size. Mitton (2007). before and after cross-listing in the United States. debt to equity. equity to assets.

long-term debt to total debt and equity and short-term debt to equity for all Level 2 firms in the sample. together with their source is outlined in Appendix 1. Figs. O'Connor / Emerging Markets Review 11 (2010) 183–204 189 from Worldscope and are winsorized at the 1st and 99th percentiles. 3 for London lists. Fig. Each figure has the same structure with the upper panel presenting the median value of the variables in both the pre and post-listing periods. The right panel displays the same ratios for Level 3 firms. A full description of all of the variables employed in the study. debt to equity. 2. . equity to assets. Fig. 2 for Level 2 and 3 exchange-traded firms and Fig. and for Level 2 firms that were previously not deemed investable. 1 displays the ratios for Level 1 and Rule 144a lists. 1–3 display the median values of our capital structure measures and debt maturity ratios for all categories of cross-listing. Level 2 firms that were also previously investable. while the middle and Fig. before and after cross-listing in the United States. before and after cross-listing in the United States. T. Flavin. The left panel displays the median book debt (to assets). net debt (to assets).T.

net debt (to assets). and for London ordinary firms that were previously not deemed investable. debt to equity. T. London ordinary firms that were also previously investable. Likewise for our debt maturity variables. before and after cross-listing in London. In contrast. O'Connor / Emerging Markets Review 11 (2010) 183–204 Fig. They reduce both forms of debt and employ less long-term maturity instruments in the debt portfolio. we observe some general trends. The result is an overall increase in leverage. before and after cross-listing in London. Level 3 lists are again the exception. 3. The left panel displays the median book debt (to assets).190 T. long-term debt to total debt and equity and short-term debt to equity for all London ordinary firms in the sample. leading to lower leverage ratios. The right panel displays the same ratios for London DR firms. Level 3 ADRs employ less debt and more equity. equity to assets. our capital structure variables show an increase in debt and slight decrease in equity financing post-listing for all other cross-listed firms. Flavin. suggesting that long- . With the exception of Level 3 ADRs. lower panels depict the equivalent ratios for the investable and non-investable firms within that group respectively. Focusing on the entire groupings (upper panels) across all three figures.

we find much evidence that. Rule 144a. firms who were previously deemed investable behave quite differently to those who were not. Level 3. For other cross-listed firms. while Level 1 and 2 firms employ relatively more short-term debt. Level 3. London ordinary and London DR firms that were also previously investable. Flavin.T. London ordinary and London DR firms that were previously not deemed investable. Focusing on the other panels. before and after cross-listing in the United States/London. previously non-investable firms increase their equity holdings and the proportion of long-term Fig. O'Connor / Emerging Markets Review 11 (2010) 183–204 191 term debt decreases more than its short-term counterpart. there is an increase in both debt maturities except for Rule 144a firms reduce short-term debt. Rule 144a. within each category of listing. Level 1. and for Level 1. For both Level 1 and 2 firms. London ordinary and London DR firms before and after cross-listing in the United States/London. T. Equity is probably a closer substitute for longterm debt and this is what we observe here. This displays the median net debt and equity issues for all Level 1. Level 2. We observe changes to the composition of debt for all groups but there is no definite pattern with increases in long-term maturities for Rule 144a and both London lists. Level 2. . Rule 144a. Level 3. Level 2. 4.

whose listing represents a second act of liberalization. Xit is a set of firm-level controls (size. profitability.t = α + βXi. We will address this question more systematically in our econometric analysis.and country-level reforms (and not by cross-listing) in year t. once we control for observable and unobservable firm-level characteristics.t + γ4 Rule 144ai. We now examine if these differences remain. with standard errors corrected for heteroskedasticity a la White (1980). Interestingly. Controlling for investability. Flavin.S. (1) with interaction dummy variables. prior to cross-listing in the U.8 In order to examine how previously being deemed investable matters for post-listing capital issuance choice. In all specifications.t is a dummy variable. Yeart represents a full set of year dummy variables and Firmi are firm-fixed effects.t + Year t + Firmi + ei. ð2Þ . The sum of both dummies quantifies the overall effect of listing. we augment Eq.t + γ5 Invest i. 3.t + γ5 Invest i. these figures provide preliminary support for our hypothesis that the sequence of liberalization events may result in differing financing decisions after the international listing. Our results are unchanged when we adopt the latter approach and are available upon request.t + δ2 L2ÃInvesti. there is evidence of large-scale debt and equity re-purchases. Specifically.t + γ1 L1i. or one of the maturity ratios. L2. Treating all cross-listed firms alike. and tangibility).t + δ4 Rule 144aÃInvest i.t = α + βXi. the dependent variable is regressed on contemporaneous values of the independent variables.t represent the interaction dummy variables. In this specification. We begin by estimating regressions for each of our dependent variables for our entire sample of cross-listed firms. However. the interaction dummy variables quantify the impact of listing on the dependent variables for joint investable/cross-listed firms. their median debt ratios prior to listing in London were zero. these are less informative and we see very heterogeneous behavior across all groupings. which is one if the firm was deemed investable. we estimate the following: Yi. and Rule 144a ⁎ Investi. we estimate the following equation: Yi. we examine how the post-listing capital issuance choice depends on whether or not the firm was previously deemed investable. whereby we interact each cross-listing dummy variable with an investable dummy.t + γ3 L3i.t + γ1 L1i.t : In addition to the variables already defined. growth opportunities.t + γ4 Rule 144ai. London DRs also exhibit this pattern with relatively larger increases in debt for firms that were previously deemed investable. L2 ⁎ Investi. 8 Schmukler and Vesperoni (2006) do likewise. it is difficult to predict patterns of net equity and debt issues upon achieving financial liberalization. Consequently.t + Yeart + Firmi + ei. L3. Similarly.t ð1Þ where the dependent variable is one of the debt/equity ratios outlined earlier for firm i in year t. or close to zero net debt and equity issues. 4 provides the same information for net debt and net equity issues for all categories of international listing. while the corresponding effects for previously non-investable cross-listed firms are captured by the sole cross-listing dummies. using all twenty-two countries in our final sample. Methodology Our unconditional summary statistics suggest that joint investable/cross-listing firms exhibit very different post-listing capital issuance preferences relative to investable only firms and to cross-listing firms that were previously not investable. Then. T. Taken together. while previously investable firms appear to reduce equity. This is of far greater magnitude than for those who were already investable. we find that those who were previously non-investable were by and large excluded from debt markets pre-listing and consequently see a big increase in their leverage post-listing. L3 ⁎ Investi.S.t + γ2 L2i. In fact for all firms. of the indicated type in year t and zero otherwise. resulting in some instances in zero.t + γ3 L3i. Level 3 and Rule 144a firms. Investi.t + δ1 L1ÃInvesti. and Rule 144a are dummy variables that equal one if firm i cross-lists in the U. increase their debt to equity ratios much more than those who were previously non-investable. we estimate two-way firm-fixed effects regressions for every dependent variable.t.t + γ2 L2i.t + δ3 L3ÃInvest i. (2007) employ (one-period) lagged values of the independent variables. while Agca et al. for firms using a London ordinary list. which equals one if the firm is deemed investable only through firm. For these firms.t. L1 ⁎ Investi.192 T. and L1.t. Fig. O'Connor / Emerging Markets Review 11 (2010) 183–204 instruments in their debt portfolios.

71] 0. debt to equity.044 Net debt issues 0. The control variables are defined in the main text.182 Equity/assets − 0.023 [0. Investable is a dummy variable that is set equal to one in years in which the firm is designated as investable. net debt issues or net equity issues as indicated.035*** [19.99] − 0. equity to assets.012*** [3. Results 4. There is always a concern about potential endogeneity in this type of analysis. in parentheses.65] 0.156*** [10.90] − 0.22] 0.94] 0.010*** [2.25] − 0.1.78] 0.55] − 0. * for the 1%.128 [0.010*** [5.945 0.419*** [39.41] Yes 49.145 Debt–equity 0.010*** [8.390*** [36.16] 0.112*** [3.049** [2. For the most part.00] − 0.31] − 0. The dependent variable is book debt.020*** [13.55] 0. O'Connor / Emerging Markets Review 11 (2010) 183–204 193 At this stage.94] − 0.029*** [2.85] 0. **. T. adjusted for heteroskedasticity.93] − 0.67] 0.409*** [37.58] 0.15] − 0.23] 0.012*** [5.31] − 0. ADR variables are dummy variables that are set equal to one in years in which the firm has an ADR of the specified type. with a move away from debt to equity financing. Investability and ADR issuance Initially we focus on firms who achieve liberalization either through domestic country.e. Also estimated but not reported are a constant.010 [0.94] − 0. These results are generally in line with the extant literature.010*** [6. i.124*** [13. Ideally.303*** [23. we would like to instrument for the financial liberalization/investable measure but of course. net debt to total assets.521 0.471*** [37.064** [2.017** [2. this is virtually impossible (see Bekaert et al. We also control for time-varying firm-level characteristics in all equations and results are robust to the use of contemporaneous or lagged values.13] 0. and 10% levels. only the latter exhibits a statistically significant change in its capital structure.39] − 0. Here.064*** [8.016 [1.72] Yes 49.876 0. Both reduce their debt holdings and increase their equity levels. (1).016** [2.213** [2.014* [1.235*** [3. respectively.032*** [2. Statistical significance is denoted by ***..T.945 0. 2005). Book debt Level 1 Level 2 Level 3 Rule 144a Investable Tangibility Size Profitability Growth opportunities Time dummies # Observations R-squared 0. We adopt the standard approach to estimating the effects of financial liberalization on corporate financing decisions and estimate Eq.99] 0.60] − 0.042*** [4.83] 0.95] − 0.094 [1.001 [0.76] − 0.17] 0.13] Yes 41.044* [1.945 0. We find statistically significant evidence that investable firms reduce their debt (book and net debt) and increase equity financing upon becoming liberalized.067** [2.66] − 0.016*** [11. Fixed effects control for endogeneity arising from average firm-level characteristics.018 [1. and a one-year lagged book debt variable in the net debt issues regression as per Baker and Wurgler (2002).73] − 0. 4.22] Yes 49.005*** [4.144 Net debt 0.37] 0.268*** [10. where we control for investability and distinguish ADR issues by type but ignore their place in the sequence of liberalization acts. In contrast. a full set of year dummies.24] 0. However.27] − 0.049*** [5.47] 0.131 [1.41] 0.11] − 0.010 [0. Level 1 and 2 listings increase their Table 2 This table reports coefficient estimates from firm-fixed effects regressions with t-statistics (absolute value). our control variables are statistically significant and of the expected sign so we concentrate our discussion on the coefficients of the liberalization dummy variables.16] 0.498*** [48.98] 0.018*** [4.20] Yes 49.137*** [16. we should sound a cautionary note about establishing causality in our results. 5%.024*** [2.020*** [5.025** [2.42] − 0.49] − 0.58] 0.041*** [24.010 [1.18] 0.119 Net equity issues 0.002 [0. Table 2 presents results for our measures of capital structure.02] 0.12] − 1.024** [2.and firm-level reform or via the issuance of an ADR program in the US.73] − 0.945 0.33] Yes 30.016 [1.026*** [2. the issue is somewhat ameliorated by the fact that our measures of liberalization are firm-specific and some aspects of the endogeneity issue are overcome by our estimation technique. Flavin. A similar pattern is observed for firms who have the right to raise capital in the US via the issuance of a Level 3 or Rule 144a ADR. using firm fixed effect models.068 .51] − 0.

07] 0.96] 0.282*** [20. The ADR issue appears to confer some benefits in terms of greater financing capacity but without a change in their relative price. Taking the entire set of investable and cross-listed firms as a single group suggests that there is little impact on the maturity structure of their debt. and 10% levels. respectively.079 [1. adjusted for heteroskedasticity.52] − 0. and for cross-listed stocks.134 debt and reduce equity but in both cases there is little statistical evidence of changes to their debt to equity ratio.237*** [5.59] − 0.037 LTD total − 0. in parentheses. does the path to liberalization matter.11] 0.74] Yes 49.028 [1. .010 [0.45] 0. Firms that are deemed to be investable through firm-level and country-level reforms behave similarly to those who achieve liberalization through 9 Due to missing data. It is noteworthy that neither class of firm has the right to raise capital in the US so increases in either form of financing must be sourced in non-US capital markets.069*** [12. For Rule 144a firms this is most likely due to the increase in equity observed in Table 2.44] − 0.807*** [11.085** [2. Only Level 3 lists significantly increase their equity issues.376*** [10.35] 0. (2) and results are presented in Tables 4 and 5.44] − 0. * for the 1%.56] − 0. 5%.e.003 [0.60] 0.005*** [2.002 [0. the number of observations for net equity issues falls substantially and this may also lead to a lack of precision in our estimates. **.061 [1.43] − 0.328*** [6. we compare the coefficients on the investability dummy with those of the sole cross-listing dummies. so it may be for other types of firm that changes to equity post-liberalization are driven by higher profitability and retained earnings. T. ADR variables are dummy variables that are set equal to one in years in which the firm has an ADR of the specified type. does the sequence of liberalization acts affect corporate financing choices? These questions are answered by estimating Eq. Also estimated but not reported are a constant.26] Yes 49.060 [1. We now extend the analysis to address the main issues of our paper.012 [0.13] − 0. Again the firm-level controls are as expected but now we see little statistical significance in relation to the coefficients on the listing and investable dummies. Statistical significance is denoted by ***.57] − 0.945 0.017 [1. LTD equity Level 1 Level 2 Level 3 Rule 144a Investable Tangibility Size Profitability Growth opportunities Time dummies # Observations R-squared 0. we examine the dynamics of changes to debt and equity by focusing on ‘net issues’.028*** [11.078*** [8.38] − 0.010 [0. Table 3 reports the results of a similar analysis for the debt maturity ratios.17] − 0.945 0. and a full set of year dummies. i.059 [1. The dependent variable is long-term debt to equity.220 [1. To assess if the path to liberalization yields differential effects on corporate financing policy. Our results indicate that changes to capital structure are similar for all firms regardless of the chosen path to liberalization.47] − 0.95] − 0.75] Yes 49. or long-term debt to total debt as indicated. short-term debt to equity.98] − 0.12] 0.24] − 0. Only Level 2 and Rule 144a firms appear to re-balance their debt portfolio with a reduction in the ratio of short-term debt to equity.945 0.194 T. O'Connor / Emerging Markets Review 11 (2010) 183–204 Table 3 This table reports coefficient estimates from firm-fixed effects regressions with t-statistics (absolute value).9 The increase in debt observed for Level 1 and 2 listings appears to be driven by new debt issues. There is strong statistical evidence that Level 3 and Rule 144a ADRs as well as investable firms issue less debt.05] − 0. Table 4 reports results for our capital structure regressions.41] − 0. Next.27] 0. The control variables are defined in the main text.090 [0. Flavin. since the overall capital structure remains statistically unchanged.095*** [5. Investable is a dummy variable that is set equal to one in years in which the firm is designated as investable.043*** [9.060 STD equity 0.105** [2.089*** [13.

021 [0.005*** [4.11] 0.064*** [8.30] 0. the coefficient signs are the same though some are not statistically different from zero.64] − 0.471*** [37.419*** [39.945 0.044 [0. we compare the coefficients of the joint investable/ cross-listing dummies (δ's) with those of the sole cross-listing dummies (γ's).945 0.14] − 1.64] − 0.14] − 0.13] 0. net debt to total assets.68] − 0. 5%.154 [0.181 Equity/assets − 0.010*** [2.010*** [8. We seek to quantify the potentially different effects of an ADR issue on corporate capital structure by focusing on whether the issue represents a first or second act of liberalization.60] − 0.57] − 0. ADR variables are dummy variables that are set equal to one in years in which the firm has an ADR of the specified type.050 [0.003 [0.012*** [5.99] − 0. equity to assets. or net equity issues as indicated.95] 0.129** [2.010*** [5.043 [1.124*** [13.119 Net equity issues 0. The control variables are defined in the main text.57] 0.83] − 0.05] − 0.70] Yes 49.323** [2.945 0. In the case of ‘investable’ firms and Level 2 ADRs.79] 0.211*** [3.22] Yes 49.T.010 [0.36] Yes 30.38] − 0.390*** [36.010 [0.012 [0.163*** [4.010*** [6.018 [1.12] − 0. When the ADR issue is their initial liberalization event. and 10% levels.001 [0.129*** [2.044 Net debt issues 0.025 [0.50] − 0.06] − 0.052 [0.010 [1. net debt issues. there is strong statistical evidence that they reduce both ‘book’ and ‘net’ debts.041*** [24. a full set of year dummies.45] 0.04] 0.42] 0.62] − 0.73] − 0. we observe a shift towards their desired financing mix.001 [0.012*** [3.214* [1.137*** [16.16] 0.51] 0.067 the issuance of an ADR.017 [1.035*** [19.010 [0.17] 0. Statistical significance is denoted by ***.090 [0.017*** [4.021 [0.85] 1. It also implies that the route to liberalization does not overly concern financial markets and all newly liberalized firms have greater access to equity markets after the event. As firms become less constrained in their ability to raise equity capital. Then the pattern is reversed and they take on more debt financing while reducing their equity holding. * for the 1%.010 [0.001 [0.232*** [3. We surmise that the initial act of investability gives firms more credibility in their domestic equity markets (since they are unable to raise capital in the US) while the subsequent ADR listing (and bonding to US governance . Flavin.37] 0.038* [1.034 [0.049*** [3.59] − 0.58] 0.12] Yes 41.016 [0.44] − 0.409*** [37. Book debt Level 1 Level 2 Level 3 Rule 144a Level 1 ⁎ Investable Level 2 ⁎ Investable Level 3 ⁎ Investable Rule 144a ⁎ Investable Investable Tangibility Size Profitability Growth opportunities Time dummies # Observations R-squared 0.65] 0.01] − 0.33] 0.003 [0. in parentheses.93] − 0. Also estimated but not reported are a constant.019*** [5.321** [2.89] 0.145 Debt–equity 0. **.55] 0.023 [0.303*** [23.052* [1.024 [0.156*** [10.93] − 0.70] − 0.164*** [3.945 0. This finding leads us to naturally explore the second issue raised in this paper.56] − 0.93] 0.40] Yes 49. Both sets of firms (with the exception of Level 1 ADR listings) reduce the debt component and increase the proportion of equity employed in financing operations.080** [2.40] 0.68] − 0.95] 0. Rule 144a and investable firms in that they reduce their debt holdings while increasing the equity component.247* [1.81] − 0.498*** [48.001 [0.267*** [10. Thus.55] 0.94] − 0.29] 0. while increasing equity. The dependent variable is book debt. debt to equity.82] − 0. The change in sign is explained by focusing on the behavior of this type of firm who issue an ADR having already being deemed ‘investable’.57] 0.30] − 0.014 [0.048*** [5.20] 0.002 [0. T.22] 0. This is consistent with firms having restricted access to equity markets pre-liberalization and therefore being forced to operate with a sub-optimal capital structure.015 [0. Investable is a dummy variable that is set equal to one in years in which the firm is designated as investable.24] − 0.057 [1.010 [0.017 [0. For Level 3 and Rule 144a listings.30] − 0.24] 0. O'Connor / Emerging Markets Review 11 (2010) 183–204 195 Table 4 This table reports coefficient estimates from firm-fixed effects regressions with t-statistics (absolute value).41] 0.144 Net debt − 0.016*** [11.36] 0.02] − 0.029*** [2.31] 0.177*** [2. The most striking change from the standard approach (Table 2) is for Level 2 firms.53] − 0.876 0.021*** [13.088 [1. adjusted for heteroskedasticity.20] 0.92] − 0.031 [0.82] 0.521 0.14] − 0.92] − 1.012 [1.31] − 0.22] Yes 49. respectively. they then behave similarly to Level 3.45] − 0.126*** [3.50] 0. and a one-year lagged book debt variable in the net debt issues regression as per Baker and Wurgler (2002).65] 0.

38] 0.945 0.22] − 0. The dependent variable is long-term debt to equity. **. .79] 0. then these firms behave more akin to the aforementioned Level 2 firms.04] 0. behave differently to other cross-listed firms.28] Yes 49.945 0.028*** [11. ADR variables are dummy variables that are set equal to one in years in which the firm has an ADR of the specified type. adjusted for heteroskedasticity. * for the 1%. In most cases the coefficients on the joint investable/cross-listing dummies are not significantly different to zero.945 0. then there is some evidence that the proportion of debt financing increases but when the ‘cross-listing’ occurs subsequent to being ‘investable’. T. Emerging market corporate bond markets are generally small and thin.283*** [20. so the ADR issue subsequent to being investable raises the international profile of the firm and increases recognition among international bond investors.13] 0.374*** [10. and 10% levels. Level 1 firms. in parentheses.097** [2.51] − 0.265 [1.079 [0. O'Connor / Emerging Markets Review 11 (2010) 183–204 Table 5 This table reports coefficient estimates from firm-fixed effects regressions with t-statistics (absolute value).060 STD equity 0. This second liberalization act sends a stronger signal of the firm's credit-worthiness to larger foreign debt markets.807*** [11. Also estimated but not reported are a constant.072* [1.055 [1.001 [0.02] − 0.72] Yes 49. there is little statistical evidence that listing subsequent to being deemed investable leads to different financing policies.41] − 0.133 regimes) allows them to take on more (possibly cheaper) debt.239*** [5.572** [2.46] − 0. Arguably.10 10 Cross-lists that confer capital raising rights tend to be more expensive and thus more accessible to large corporations.42] 0.604** [2. respectively.166** [2.005*** [2. When the issuance of an ADR is the first act of liberalization.028 [1.11] 0.95] − 0.689** [2.050 [0.036 LTD total − 0.81] − 0.002 [0. Flavin.99] − 0.12] 0. 5%.010 [0. this is due to the fact that these firms are likely to be the largest domestic firms and are already operating close to their optimal capital structure prior to the listing in the US.037 [0.40] − 0. This shows that failing to account for the sequence of liberalization events can result in very mis-leading conclusions for certain categories of firm.71] − 0. with increases in debt and less equity employed in the corporation.069*** [12.089*** [13.92] 0. For Level 3 and Rule 144A listed firms.75] Yes 49.129 [1.10] 0.27] − 0.017 [0.31] − 0.47] − 0. who do not adhere to US accounting standards or disclosure requirements and thus enjoy limited increases in shareholder protection post-listing. or long-term debt to total debt as indicated.001 [0.03] − 0.004 [0.91] 0. and a full set of year dummies.001 [0.59] 0.196 T. The control variables are defined in the main text.28] 0.64] 0.076** [2. Statistical significance is denoted by ***.328*** [6. Investable is a dummy variable that is set equal to one in years in which the firm is designated as investable.043*** [9.60] − 0. LTD equity Level 1 Level 2 Level 3 Rule 144a Level 1 ⁎ Investable Level 2 ⁎ Investable Level 3 ⁎ Investable Rule 144a ⁎ Investable Investable Tangibility Size Profitability Growth opportunities Time dummies # Observations R-squared 0.98] − 0.093 [0.078*** [8.19] − 0.79] − 0.724*** [2.090 [0. It appears that this type of listing is not sufficient to convince equity investors of the firms' future security but debt providers who enjoy more senior claims are willing to extend more capital.01] 0.141 [1.099*** [2.64] − 0.40] − 0.10] 0.095*** [5.059 [1.13] − 0. short-term debt to equity.

while firms who issue an ADR after becoming ‘investable’ increase their debt portfolio in constant proportions.010 [1.14] 0.010 [0.030 [1. a full set of year dummies.31] 0.945 0.097** [2.e. The key insight of Table 4 is that treating all firms issuing ADR's as a single group can mask the true impact on capital structure decisions when the group mixes those who were previously deemed investable with those who are attaining this status for the first time.05] Yes Included 41.021 [0. there is little evidence that the composition of the debt portfolio is affected by the path taken to liberalization.90] − 0. However.003 [0.018*** [4.876 0.14] 0. Book debt Panel A London ordinary London DR Investable Time dummies Firm controls # Observations R-squared Panel B London ordinary London DR London ordinary ⁎ Investable London DR ⁎ Investable Investable Time dummies Firm controls # Observations R-squared 0.058 [1.018*** [4.633*** [3. we know these firms increase their debt to equity ratios) but it's predominantly at the short-end of the maturity spectrum. in parentheses. adjusted for heteroskedasticity. or net equity issues as indicated.013*** [4.945 0.167*** [4. both forms of debt fall relative to equity for previously noninvestable firms.35] − 0.T. The control variables are defined in the main text.67] − 0.945 0. T.17] − 0.876 0.05] Yes Included 49. respectively.945 0.044 − 0. the timing of the ADR issue in the sequence of liberalization events has little effect on the choice of debt maturity. i.07] − 0.21] 0. debt to equity. while the second act leads these firms from emerging markets to behave more like developed market firms. equity to assets.075* [1.010*** [3.30] Yes Included 30. **. net debt to total assets.181 Equity/assets 0. London ordinary and London DR are dummy variables that are set equal to one if the firm has a listing in London of the specified type. This is consistent with our findings for the first act of liberalization.154* [1.54] 0.020*** [6.945 0.010 [1.61] 0.05] Yes Included 41. net debt issues.30] Yes Included 30.146 Debt–equity − 0.29] 0.45] − 0.042 [0.067 − 0.406*** [3.02] Yes Included 49.30] − 0.82] Yes Included 49. illustrated by Level 2 lists.063 [1.79] − 0.144 Net debt 0.044 Net debt issues 0.44] − 0.048** [2.069* [1.146 − 0. Similarly.08] 0.83] − 0.650*** [3.34] − 0. 5%.053* [1. Our results for the maturity structure of corporate debt are reported in Table 5.09] Yes Included 49. the first act appears to allow firms greater access to debt markets (from Table 4.139*** [3.31] − 0.83] − 0. For such firms.77] 0.033* [1.023 [0.92] 0.23] 0. and 10% levels.945 0.052 [0. the importance of investigating the sequencing of events is. Also estimated but not reported are a constant. smaller equity increases and relatively larger proportions of debt financing.99] − 0.020 [1.010*** [3. Flavin.09] − 0.118 0. For Level 1 firms.945 0. the signs suggest that the first act of liberalization reduces debt issues and increases equity issues with this pattern largely reversed by another subsequent act. there is no statistical evidence of any rebalancing in the debt portfolio. Statistical significance is denoted by ***.40] − 0.097** [2.104*** [3.82] 0.079 [1.521 0.70] Yes Included 49. and a one-year lagged book debt variable in the net debt issues regression as per Baker and Wurgler (2002).440** [2.022 [0.144 − 0.144 [1.02] − 0. signaling that debt Table 6 This table reports coefficient estimates from firm-fixed effects regressions with t-statistics (absolute value).05] Yes Included 49.19] − 0.021 [1.067 .020*** [6. (2005) analyze differences between markets with different levels of financial development and show that the largest post-listing increase in equity issuance is associated with emerging market firms.053 [1.34] 0. This is consistent with the results reported in Table 4.016 [0. In fact.181 0. again.079** [2. In contrast to capital structure.945 0. Lins et al.143 [1.015 [0.139 [1.23] 0. for Level 3 and Rule 144a firms. Neither route has a statistically significant impact in our debt maturity regressions.085** [2.59] 0.013*** [4.72] Yes Included 49.65] − 0. The dependent variable is book debt.33] 0.06] 0.118 Net equity issues 0. * for the 1%. O'Connor / Emerging Markets Review 11 (2010) 183–204 197 Though not many of the coefficients on the ‘net debt issues’ and ‘net equity issues’ variables are statistically different from zero.77] Yes Included 49.082*** [2.024 [1.521 0.

30] 0. i.36] Yes Included 49. London ordinary and London DR are dummy variables that are set equal to one if the firm has a listing in London of the specified type.248*** [3. and a full set of year dummies. only Level 1 listed firms show a statistically significant change in behavior. Also estimated but not reported are a constant.061 STD equity − 0. We cannot identify differential effects between groups.44] − 0.2. Results are reported in Tables 6 and 7.060 − 0.135 .12] 0. When the cross-listing represents an initial Table 7 This table reports coefficient estimates from firm-fixed effects regressions with t-statistics (absolute value).018 [0.153*** [3. Focusing on the ratio of long-term to total debt. ignoring the sequence of liberalization events.06] − 0. 4. It also provides some insight into the debate as to the competitiveness of the US and UK markets (see Doidge et al. short-term debt to equity. or long-term debt to total debt as indicated.135 − 0.021 [0. as there is little statistical evidence of changes to our ratios. Panel A reports results from the standard approach (Eq.101** [2. **.025 [0.43] − 0.945 0.01] − 0. In fact.645*** [3.29] − 0.160 [1. ignoring the sequencing of ADR issues is less important for the composition of debt than the overall capital structure. T. 2009).91] 0.036 LTD total 0.945 0. possibly due to stronger reputation benefits.135*** [3.37] Yes Included 49.003 [0.17] Yes Included 49.17] Yes Included 49. The findings for investable firms is the same as before.496*** [3.02] − 0..036 0. London is also a popular destination for many firms.945 0. Investability and London cross-listed firms As stated earlier.71] 0.031 [0.945 0. In contrast.198 T.14] Yes Included 49.018 [0. Overall.73] 0.105* [1. The control variables are defined in the main text. post-listing. adjusted for heteroskedasticity.027 [1.e. in parentheses. * for the 1%.57] − 0.69] 0.23] 0. Flavin.12] − 0.945 0.19] 0. O'Connor / Emerging Markets Review 11 (2010) 183–204 holders still require the monitoring benefits of short-term debt.001 [0. Rule 144a firms who reduce their debt do so by shedding some short-maturity instruments.001 [0. Specifically. respectively. LTD equity Panel A London ordinary London DR Investable Time dummies Firm controls # Observations R-squared Panel B London ordinary London DR London ordinary ⁎ Investable London DR ⁎ Investable Investable Time dummies Firm controls # Observations R-squared − 0. 5%. Statistical significance is denoted by ***.148** [2.75] 0.945 0. Results in panel B. take account of the sequence of liberalization events and once more shows that it is very important.002 [0.027 [1. (1)). not all cross-listed choose to go to the US.087 [0.19] Yes Included 49.047 [0.54] − 0.278** [2. while it now appears that listing on the London market has little impact on either debt or equity variables. The dependent variable is long-term debt to equity. There is some limited statistical evidence that the coefficients on ‘ordinary’ dummies are non-zero but results seem contradictory and difficult to reconcile. they tend to reduce the proportion of long-term debt after the ADR listing when this constitutes an initial act of liberalization and the opposite effect is observed for those who are already ‘investable’. and 10% levels. Table 6 consists of two panels. it is second only to the US in terms of numbers of cross-listed companies that they host.082 [0. We investigate if our previous results are relevant for other markets by repeating our analysis for Londonlisted firms.

010 [0. panel B reveals much richer insights into corporate financing policies.002 [0. panel B also reveals that it is long-term debt that explains most of the changes in the debt portfolio reported in Table 6.95] − 0.876 .036 [1.073** [2.010 [0.010 [0.876 − 0.26] − 0.023 [0.10] − 0.09] − 0.028 [0.04] − 0. Panel A suggests that a London listing is associated only with a reduction in short-term debt relative to equity. as observed for Level 2 lists in the US.53] − 0.86] Yes Included 49.015 [1. Furthermore.48] − 0.36] − 0. There is less newly-issued debt following a crosslisting for a previously non-investable firm. This is an interesting result that is entirely hidden by treating all London-listed companies as a homogeneous group.035** [2.010 [0.97] − 0.51] 0.876 − 0.06] − 0.051 [1.013 [1.25] 0.43] − 0.068** [2.876 − 0.20] Yes Included 49.26] − 0.021* [1.72] − 0.20] − 0.30] Yes Included 41.010 [1.117 [1.11] 0. leading to lower leverage ratios.61] 0.033 [1.51] 0.83] − 0.016 [0.98] − 0.013 [0.55] − 0.42] 0.83] − 0.03] 0.034** [2. Furthermore.012 [1.109*** [3.945 London DR − 0.003 [0.62] − 0.23] 0.23] 0.46] 0.07] − 0.22] − 0.41] − 0.021 [1.010 [0.61] − 0. respectively. and a full set of year dummies.067 [1. T.71] 0.047** [2.62] − 0.18] Yes Included 49.51] 0.021* [1.071* [1.046* [1.64] Yes Included 41. adjusted for heteroskedasticity.004 [0.35] − 0.017 [0.020*** [2.42] 0.020 [1.17] − 0. firms reduce debt and increase equity. O'Connor / Emerging Markets Review 11 (2010) 183–204 199 liberalization event.17] − 0.031** [2.57] Yes Included 41.041* [1.024* [1.003 [0.034 [0.032** [2.945 Level 2 − 0.025** [2.030 [0.945 Level 3 − 0. a constant.010 [0.002 [0.56] − 0. **.010 [0.069** [1. It appears that the fall in short-term debt observed above is driven exclusively by firms who are not previously investable.071** [2.018 [0.109 [1. However. 5%. and 10% levels.018 [1.010 [0.41] − 0.11] − 0.45] − 0.55] 0.31] 0.015 [1.876 − 0.010 [1.043 [1. The “list/invest N five years after” dummy equals one after the fifth year of cross-listing/becoming investable. The single year crosslisting/investable dummies equal one in the indicated year and zero otherwise.010 [0. Interestingly.028 [1.96] − 0.02] Yes Included 49.029 [1.08] − 0. while the opposite is true for firms who were deemed investable prior to the dual listing.53] − 0.92] − 0.031 [1.25] 0.106*** [2.013 [1.037* [1.876 0.86] 0. long-term debt Table 8 This table reports coefficient estimates from firm-fixed effects regressions with t-statistics (absolute value).015 [1.39] − 0.69] Yes Included 41.68] − 0.51] 0.31] − 0.001 [0.45] − 0. Level 1 Book debt List/invest year List/invest one year after List/invest two years after List/invest three years after List/invest four years after List/invest five years after List/invest N five years after Time dummies Firm controls # Observations Net debt issues List/invest year List/invest one year after List/invest two years after List/invest three years after List/invest four years after List/invest five years after List/invest N five years after Time dummies Firm controls # Observations 0.001 [0.027 [1. When cross-listing represents an initial liberalization event.002 [0.010 [0.001 [0.73] 0.57] Yes Included 41.34] 0.05] − 0. Flavin.876 0.154** [2.017 [0.014 [0.81] − 0.43] − 0. and net debt issues.062] 0.80] − 0.071** [2.945 0. Increases in debt and lower equity holdings result in higher debt to equity ratios.024 [1.032*** [3. in parentheses.016 [0.032 [1.016** [2. as indicated. The dependent variable is book debt. firms tend to reverse this choice when the cross-listing occurs subsequent to being deemed investable.06] Yes Included 49.098** [2.95] − 0.17] Yes Included 41.04] − 0. we find statistically significant evidence (for Ordinary lists) that it is through changes in new debt issues that the observed behavior emerges. * for the 1%.05] 0.187** [2.64] − 0.023* [1.945 Investable − 0.88] − 0.010 [1.010 [0.945 Rule 144a − 0.010 [0.026 [1.09] 0.08] 0.83] 0.021 [0.69] − 0.010 [0.88] − 0.50] Yes Included 41.073* [1.010 [0.T.010 [0.18] 0. Also estimated but not reported are firm-level control variables.26] 0. Statistical significance is denoted by ***.49] − 0.003 [0.023** [2.945 London ordinary − 0. This is consistent with our US results (excluding Level 1 lists).017 [0.07] Yes Included 49.63] Yes Included 49.17] − 0.012* [1.44] − 0.038*** [3. Table 7 reports results for the debt maturity variables and has the same structure as Table 6.06] 0.039 [0.23] − 0.040* [1.10] − 0.69] 0.65] 0.002 [0.

14*** [2. and 10% levels.004 [0.02 [1.15*** [2.04] 0. these results suggest that in terms of financing policy post-listing.876 0.004 [0. There is a striking parallel between the London lists and Level 2 ADRs.002 [0.03] − 0.66] − 0.46] − 0. This suggests that the US market remains more attractive and is consistent with the conclusions of Doidge et al.02 [0.20] − 0.010 [0.048 [0.87] − 0.03 [0. firms who list on the London market behave similarly to those who bond to the US governance regime.05] − 0.27] − 0.42] 0.048 [0.05] − 0.876 − 0.27] − 0.010 [0.945 L3 ⁎ Inv − 0.36] − 0.07] − 0.88] − 0. * for the 1%.40] − 0.058 [1.33] 0.02 [1.022 [0.086** [2.016 [0. firms increase long-term debt relative to equity.01 [0.02 [0.01] − 0.10** [2.30] 0.022 [0.41] − 0.67] − 0.76] − 0.03] − 0.068** [2.17] − 0.07 [1.012 [0.077 [1. in parentheses.06] 0.17] Yes Included 49.02 [0.64] − 0.44] 0.010 [0.03 [1.200 T.94] − 0.01 [0.001 [0.15] − 0.92] − 0. This could imply that London lists are less successful at sourcing foreign equity relative to ADRs with capital raising rights in the US and hence behave more akin to Level 2 ADRs.89] 0.945 0.003 [0.03 [1.945 Level 2 − 0.44] − 0.01 [0.54] 0.010 [0.13** [2.876 − 0. a constant.16] 0.13*** [2.06] − 0.36] − 0.06] − 0.50] 0.53] − 0.05 [1.001 [0.084* [1.876 − 0.43] − 0.07 [1.03 [0.03 [0.876 − 0.25] 0.10] Yes Included 49.031 [0.68] − 0.07] Yes Included 41.022 [0.03] − 0. we further explore the time-series properties of book debt and net debt issues.11] 0.12*** [2.01 [0. **.12] Yes Included 41.04 [0.945 Level 3 − 0.09] − 0.96] 0.07] 0. as indicated.013 [0.010 [0.65] 0. 4.01 [0.93] Yes Included 41.09* [1.051 [1.80] 0.42] Yes Included 49.57] Yes Included 41.64] 0.010 [0.18] − 0.75] 0.55] Yes Included 49.79] − 0.010 [0.20] Yes Included 41. Flavin.043 [0.84] − 0.27] 0.15] 0.013 [0.01] Yes Included 41.95] Yes Included 49.003 [0.014 [0. We analyze these variables Table 9 This table reports coefficient estimates from firm-fixed effects regressions with t-statistics (absolute value).018 [1.03 [0.82] − 0.18*** [3.37] Yes Included 49.010 [0.017 [0.41] 0.015 [0.3. Dynamics of debt issues Since we have found statistical evidence of changes to both the levels and dynamics of corporate debt. The “list/invest N five years after” dummy equals one after the fifth year of cross-listing/becoming investable.02 [0.27] Yes Included 49.08 [1.10] − 0. Statistical significance is denoted by ***.876 − 0. particularly longer-maturity instruments.90] − 0.45] Yes Included 41.69] − 0.58] − 0.04 [0.18*** [3.053 [0.72] 0.07] 0. As in the US case. respectively.031 [1.876 .017 [0.48] − 0.001 [0.023 [0.22*** [4.03] 0.002 [0.048 [1.06] − 0.15*** [2.82] − 0.03 [1.77] 0.42] 0.018 [1.004 [0.010 [0.18*** [3.66] 0.09] 0.010 [0.945 L1 ⁎ Inv − 0.876 − 0.02 [0.014 [0.12] Yes Included 49.945 144a ⁎ Inv − 0.03] 0.32] − 0.010 [0.64] 0.37] − 0. a second act through cross-listing leads mainly to increases in debt.82] − 0. The dependent variable is book debt and net debt issues.82] − 0.30] − 0. it seems that an initial act of financial liberalization is associated with greater access to equity but if already investable.02 [0.02 [0. 5.03 [1.019 [1.23] 0.029 [0.034 [0.01 [0.05 [0. adjusted for heteroskedasticity. Also estimated but not reported are firm-level control variables.01 [0.002 [0.17*** [3.75] − 0.38] 0.063 [1.36] − 0.03 [1.01 [0.07] − 0. (2009).66] − 0.85] Yes Included 41.03 [0.71] 0.66] − 0. Level 1 Book debt List/invest year List/invest one year after List/invest two years after List/invest three years after List/invest four years after List/invest five years after List/invest N five years after Time dummies Firm controls # Observations Net debt issues List/invest year List/invest one year after List/invest two years after List/invest three years after List/invest four years after List/invest five years after List/invest N five years after Time dummies Firm controls # Observations 0. and a full set of year dummies.022 [0.16] − 0.42] − 0. O'Connor / Emerging Markets Review 11 (2010) 183–204 falls relative to equity but when it occurs subsequent to becoming investable.121* [1.02 [0.22] − 0.25] 0.023 [1. Taken together.05] − 0.42] 0.945 L2 ⁎ Inv 0.03 [1. T.61] − 0.66] − 0.945 144a − 0.03 [0. The single year crosslisting/investable dummies equal one in the indicated year and zero otherwise.12** [2.01 [0.01 [0.35] − 0.17] − 0.02 [0.02 [0.

Net debt issues exhibit less persistence with coefficients becoming statistically insignificant in the second year post-liberalization.15] − 0.99] 0. T.164 [1. Statistical significance is denoted by ***.029 [0.038 [0.043 [0.876 .084 [1. and a full set of year dummies. The dependent variable is book debt.012 [0.63] Yes Included 41.027 [0.18] 0.049 [0.068 [1.09] 0.054 [0.108 [1.044 [0. London ordinary Book debt List year List one year after List two years after List three years after List four years after List five years after List N five years after Time dummies Firm controls # Observations Net debt issues List year List one year after List two years after List three years after List four years after List five years after List N five years after Time dummies Firm controls # Observations − 0.012 [0.074 [0.038 [0.058 [1.78] 0.115 [1.132 [1.12] 0.945 London DR ⁎ Investable 0.09] Yes Included 41.038 [0.945 London ordinary ⁎ Investable 0.41] − 0.876 − 0. we conduct the analysis without taking account of the sequence of liberalization events.876 − 0.99] Yes Included 49.021 [0.039 [0. The single year crosslisting/investable dummies equal one in the indicated year and zero otherwise.34] − 0.00] − 0.060 [1.064 [0. While their results suggest that internationalization has no long-term permanent effect on firm value. a constant.024 [0. namely book assets.56] − 0. Level 3 ADRs who have direct access to US exchanges are the exception.199* [1.945 London DR − 0. market capitalization.87] − 0.876 0.945 − 0.85] − 0. they do show that internationalization does have a long-term enduring effect on the components of Tobin's q. but now with individual post-liberalization event year dummies.64] − 0.78] − 0.58] Yes Included 41.82] − 0.055 [0. **.41] 0.74] − 0.012 [0.054 [0. Firstly.026 [0.45] − 0.49] − 0. * for the 1%. O'Connor / Emerging Markets Review 11 (2010) 183–204 201 from the year of their first act of liberalization up to five years after and beyond by re-estimating Eqs.48] 0.144 [1.09] − 0. in parentheses.004 [0.076 [0.77] − 0.21] − 0.77] Yes Included 41.010 [0.38] − 0.119 [0.017 [0. (1) and (2).032 [1.79] − 0. Flavin.T.039 [0. (2008) perform a similar exercise in their paper. instead of a single dummy which represents the entire post-liberalization period.16] − 0. Gozzi et al. as indicated.260** [2.28] Yes Included 49.046 [0.100 [1.21] − 0. We find strong statistical evidence that both the level of debt and new debt issues fall over time for firms who acquire the right to raise capital in their host market.030 [1. The “list/invest N five years after” dummy equals one after the fifth year of cross-listing/becoming investable.64] − 0.010 [0.31] − 0. Also estimated but not reported are firm-level control variables.39] − 0.107 [1.014 [0.07] − 0.53] − 0. 5. Investable firms who never cross-list also reduce debt levels and new issues in the Table 10 This table reports coefficient estimates from firm-fixed effects regressions with t-statistics (absolute value).62] − 0.61] 0.16] − 0.30] − 0.39] − 0. and 10% levels.026 [0. Level 3 and Rule 144A ADRs as well as both London lists exhibit persistent declines in debt levels for at least two years after liberalization and up to five years in the case of London DRs.050 [1.027 [0.54] − 0.100 [1.60] Yes Included 49. with evidence that their new debt issues continue to decline for at least five years after the event.032 [0.11] − 0.65] 0.12] Yes Included 49.67] 0.75] − 0. respectively. and book debt.079* [1.65] 0.043 [0.023 [0.046 [1.010 [0.30] − 0.78] 0.63] 0. and net debt issues.065* [1.043 [1.62] 0. adjusted for heteroskedasticity.03] 0.

Treating all cross-listing firms as a homogeneous group masks important differences between firms who take out the international listing at different stages of their liberalization. Conclusion We examine the effects of financial liberalization on both corporate capital structure and debt maturity choices for emerging market firms. T. other than Level 1 ADRs. namely domestic reforms and improvements in corporate governance versus cross-listing on the more developed markets of the US and UK. the ‘timing’ of the crosslisting matters. Furthermore. Given that there is no greater protection afforded to shareholders. Our approach is to control for time invariant firm characteristics via estimating firm-fixed effects models and to use time-varying firm-specific controls to account for potential endogeneity. the increase in debt for firms who are not previously deemed investable is predominantly in short-term debt (as argued above) while firms who had been liberalized prior to the cross-listing take on more long-term debt. It appears that the initial act of . Corporate financing strategies pursued post-listing depending crucially on whether or not the firm has previously been deemed investable. O'Connor / Emerging Markets Review 11 (2010) 183–204 year of liberalization but there is little persistence. Furthermore. Given that other studies. such as Bekaert et al. an international cross-listing that constitutes an initial act of liberalization is associated with an increase in equity and declining debt. We find corporate financing decisions do not differ between the two approaches. Once more. the issuance of an ADR program for non-investable firms leads to a long persistent decline in debt. We contrast two paths to liberalization. post-liberalization. Mitton (2006). debt measures decrease but if it occurs subsequent to being deemed investable. Likewise Level 1 and 2 ADRs show little persistence but the sign suggests increases in both variables over time (Table 8). we are confident. However. Once more. While we find a strong correlation between the act of liberalization and corporate financing decisions. then we see a reversal of debt policy with levels increasing over time. However. firms tend to increase the proportion of equity financing and reduce their reliance on debt. there is no evidence of re-balancing between long. Level 1 ADRs only change their behavior when the ADR is the initial means of liberalization but in contrast to the other types of cross-listing. changes in debt holdings appear to be roughly constant. that our results represent true causal effects of financial liberalization on corporate financing decisions. For Level 1 listings. Perhaps. With the exception of Level 2 firms. they may not experience an increase in the demand for their equity. there is little statistical significance attached to our coefficients but in general the signs are in the same direction as the previous table for both US and UK listed companies. However. For the levels of debt. However. for Level 2 firms we again see the importance of accounting for the order of liberalization events. We repeat the analysis for all ADR firms (results reported in Table 9) and London-listed firms (results reported in Table 10). the second act of financial liberalization convinces debt market participants of the credit-worthiness of the firm and perhaps the enforceability of financial contracts. all find that the causal relationships in their studies remain when controlling for endogeneity. the results of Level 2 ADRs confirm the necessity of accounting for the sequence of liberalization events. When this is a first act of liberalization. Schmukler and Vesperoni (2006). (2005). but cautious. we should be cautious about interpreting this as causality. 5. the sequence of liberalization events has less impact on the debt maturity decision. ADRs with capital raising rights in the US show little change in corporate financing but Level 2 ADRs and London-listed firms exhibit a strong tendency to revert towards their earlier capital structure by taking on higher levels of leverage. endogeneity issues are a common feature of this kind of study and there is no widely accepted solution to the problem. However. these firms carry more debt.and shortterm instruments. Relative to capital structure choices. then firms increase their leverage and hold more debt. they are able to access more short-term debt due to the monitoring benefits of the listing. As stated earlier. In this instance. Flavin. taking account of the sequence of liberalization events. the benefits of our approach are best seen by the behavior of Level 2 ADR lists. In both cases. this is not true when the cross-listing occurs subsequent to the firm already being deemed investable.202 T. so even when there is an expansion of the debt portfolio. For all firms. debt maturity choice is largely unaffected by either event. we explore the evolution of debt post-listing and find strong evidence that firms who gain the right to raise capital in their host market experience persistent declines in their levels of debt and new debt issues over time. For other firms. for firms that issue this type of ADR and are already investable.

Financial Reforms. All remaining errors are our own.. C. even though they have the right to raise capital in their host market. IMF working paper no. H. then the increase in debt may be from non-domestic bond markets given the firm's greater international profile and recognition. 2006. 186... W.. We outline a description and source for all variables. Net debt to total assets. Flavin. Investibility and return volatility. Ozoguz. Equals 1 if the firm is cross-listed in the United States as a Level 1 ADR Equals 1 if the firm is cross-listed in the United States as a Level 2 ADR Equals 1 if the firm is cross-listed in the United States as a Level 3 ADR Equals 1 if the firm is cross-listed in the United States as a Level 4/rule 144a ADR Equals 1 if the firm is cross-listed in the United Kingdom as an ordinary listing on the London Stock Exchange Equals 1 if the firm is cross-listed in the United Kingdom as a depositary receipt on the London Stock Exchange Equals 1 if the firm is deemed investable/open to foreign ownership. Detragiache. Short-term debt to common equity.. and LSE is the London Stock Exchange.T. Washington. Long-term debt to total debt. If the ADR represents a second liberalization event. Acknowledgements The authors are grateful for the helpful comments received from participants at the 7th INFINITI Conference on International Finance held in Trinity College Dublin. E. Common equity represents common shareholder investment in the company.. Working paper. Ng. June 2009. A. 239–263. Long-term debt to common equity. Though not the main focus of our study.. Bae. Stock market liberalization and the information environment. T.. Bae. Variable description This table presents a detailed description of all of the variables employed in the paper. Book equity to book assets The change in book equity less the change in retained earnings scaled by book assets. Total debt represents all interest bearing and capitalized lease obligations. K.. Mao. Tan. International Monetary Fund. S. O'Connor / Emerging Markets Review 11 (2010) 183–204 203 liberalization is associated with greater access to domestic equity (since they cannot raise capital in the US) through better corporate governance and enhanced reputation. De Nicolo.and long-term debt. Journal of Financial Economics 71. US lists still appear to hold an advantage. behave more like Level 2 ADRs. Do Foreigners Facilitate Information Transmission in Emerging Markets? York University. At least in terms of accessing equity financing. University of North Carolina at Chapel Hill. Bae. 2007. Net debt is total debt less cash. it is interesting to note that London-listed firms. 2009. A.. Variable Book debt Net debt Net debt issues Equity to assets Net equity issues Long-term debt to total debt Long-term debt to common equity Short-term debt to common equity Total debt to common equity Tangibility Firm size Growth opportunities Profitability Level 1 ADR Level 2 ADR Level 3 ADR Level 4 ADR London ordinary London DR Investable Description Total debt to total assets.. Earnings Before Interest & Taxation (EBIT) to total assets. University of Waterloo. and Corporate Borrowing: International Evidence.. K. Bailey. Fixed to total assets Log of real sales (US$) Tobin's q is measured as book debt plus market capitalization divided by book assets. K. Source Worldscope Worldscope Worldscope Worldscope Worldscope Worldscope Worldscope Worldscope Worldscope Worldscope Worldscope Worldscope Worldscope BNY/CB BNY/CB BNY/CB BNY/CB LSE LSE S&P/IFC References Agca. K. . Financial Openness. Journal of International Money and Finance 25. 404–428. G. 2004. BNY is the Bank of New York. CB is Citibank. It is the sum of short. Chan. The change in book debt scaled by book assets. This indicates that they cannot fully exploit all of the benefits available to Level 3 and Rule 144a firms. Appendix 1. Total debt to common equity.

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