Institutional Distance And Foreign IPO Performance: The Moderating Effects Of Governance And Organizational Capabilities
Bell, Robert Greg
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To date scholars have examined a wide range of factors which impact the ability of firms to raise optimum levels of equity capital in their domestic markets. However, little attention has been paid to the growing number of new listings of foreign firms in Western markets. When firms attempt to raise capital in foreign markets through an IPO, firm characteristics alone fail to provide a complete explanation for the success or failure of a new issue. This study investigates how the institutional profile and legal framework of a country can interact with certain firm-level governance and organizational capabilities to enable foreign firms to attain success in western markets at IPO. Much of the problems associated with studies of foreign firms attempting to raise capital on major exchanges stems from the fact that a significant portion of the firms sampled in prior studies are already publicly held in their home market. The inclusion of listed firms in previous studies has masked the benefits certain firm characteristics bring to organizations at their initial public offering. In contrast to earlier research, this dissertation focuses on the population of foreign private issuers that are not listed on any exchange prior to issuing equity shares on the NYSE or NASDAQ. The study focused upon a hand-collected sample of 284 initial public offers of firms in 40 foreign countries between 1996 and 2006. Results show that country-of-origin, corporate governance and capability signals are not mutually independent. However they do interact with one another to impact the performance of foreign IPOs. Specifically, this study found that investor protection levels within a country-of-origin positively interact with board independence and top manager affiliations to enhance the success of foreign IPOs. As a result, the IPO firm is involved in a complex process of evaluating the costs and benefits of various signaling mechanisms in search of an optimal combination that minimizes both information asymmetry and costs of signaling (Titman and Trueman, 1986). Interestingly, this study also found that the regulatory distance of foreign IPO from the US positively interacts with board independence to adversely impact performance. This finding challenges the assumptions made earlier in this dissertation regarding the positive effect increased board independence should have upon the performance of foreign IPOs who originate from distant regulative institutional environments, and prompts a closer analysis of both the regulatory environment surrounding these foreign IPO firms and possible limitations with extant agency theory research. Post hoc analysis identified that the presence of international VC, rather than U.S. VC, is an important signal to external investors. However, post hoc results also reveal that host country regulatory changes can impact the salience of third party endorsements of foreign IPOs. In addition to the right support, foreign non High Tech private firms contemplating a new foreign issue should note that regulatory uncertainty and normative traditions in their country-of-origin are important signals to external investors. Finally, this study revealed that internally generated governance and capability related signals do not help enable foreign IPO firms in non High Tech industries overcome negative country-of-origin signals. On the other hand, governance and capability related signals are more salient among investors evaluating investments in High-Tech related foreign IPOs.