Journal of International Business Studies

, Volume 43, Issue 2, pp 107–122 | Cite as

The liability of foreignness in capital markets: Sources and remedies

Article

Abstract

The accelerating pace of global capital market integration has provided new opportunities for firms to raise capital abroad through global debt issues, cross-listings, and initial public offerings in foreign stock exchanges. However, existing empirical evidence suggests that foreign firms tend to be at a disadvantage compared with domestic firms, and they often suffer from investors’ “home bias”. The objective of this paper is to understand why firms are facing problems when accessing capital in foreign markets, and possible mechanisms that can help to mitigate these problems. It expands the liability of foreignness (LOF) research beyond the product market domain to include liabilities faced by firms attempting to secure resources in foreign capital markets. We identify key differences between product and capital markets related to information environment, time structure of transactions, and linkages between buyers and sellers. We analyze institutional distance, information asymmetry, unfamiliarity, and cultural differences as the main sources of capital market LOF (CMLOF). We suggest possible mechanisms that managers can employ to mitigate CMLOF and overcome investors’ “home bias”: bonding, signaling, organizational isomorphism, and reputational endorsements. We also outline directions for further theoretical and empirical development of the CMLOF research.

Keywords

liability of foreignness institutional theory institutional context capital markets 

References

  1. Aggarwal, R., Erel, I., Stulz, R., & Williamson, R. 2010. Differences in governance practices between US and foreign firms: Measurement, causes and consequences. Review of Financial Studies, 23 (3): 3131–3169.CrossRefGoogle Scholar
  2. Anderson, C. W., Fedenia, M., Hirschey, M., & Skiba, H. 2011. Cultural influences on home bias and international diversification by institutional investors. Journal of Banking & Finance, 35 (4): 916–934.CrossRefGoogle Scholar
  3. Barberis, N., Shleifer, A., & Wurgler, J. 2005. Comovement. Journal of Financial Economics, 75 (2): 283–317.CrossRefGoogle Scholar
  4. Beatty, R. P., & Ritter, J. R. 1986. Investment banking, reputation, and the underpricing of initial public offerings. Journal of Financial Economics, 15 (1): 213–232.CrossRefGoogle Scholar
  5. Beugelsdijk, S., & Frijns, B. 2010. A cultural explanation of the foreign bias in international asset allocation. Journal of Banking & Finance, 34 (9): 2121–2131.CrossRefGoogle Scholar
  6. Bhattacharya, U., Galpin, N., & Haslem, B. 2007. The home court advantage in international corporate litigation. Journal of Law and Economics, 50 (4): 625–659.CrossRefGoogle Scholar
  7. Blass, A., & Yafeh, Y. 2001. Vagabond shoes longing to stray: Why foreign firms list in the United States. Journal of Banking & Finance, 25 (3): 555–572.CrossRefGoogle Scholar
  8. Bruner, R., Chaplinsky, S., & Ramchand, L. 2004. US-bound IPOs: Issue costs and selective entry. Financial Management, 33 (3): 39–60.Google Scholar
  9. Certo, S. T., Covin, J. G., Daily, C. M., & Dalton, D. R. 2001. Wealth and the effects of founder management among IPO-stage new ventures. Strategic Management Journal, 22 (6): 641–658.CrossRefGoogle Scholar
  10. Chan, K., Covrig, V., & Ng, L. 2005. What determines the domestic bias and foreign bias? Evidence from mutual fund equity allocations worldwide. Journal of Finance, 60 (3): 1495–1534.CrossRefGoogle Scholar
  11. Chaplinsky, S., & Ramchand, L. 2004. The impact of SEC Rule 144A on corporate debt issuance by international firms. Journal of Business, 77 (4): 1073–1097.CrossRefGoogle Scholar
  12. Coffee, J. 1999. The future as history: The prospects for global convergence in corporate governance and its implications. Northwestern University Law Review, 93 (3): 641–708.Google Scholar
  13. Coval, J. D., & Moskowitz, T. 1999. Home bias at home: Local equity preference in domestic portfolios. Journal of Finance, 54 (6): 2045–2073.CrossRefGoogle Scholar
  14. Doidge, C., Karolyi, G. A., & Stulz, R. 2004. Why are foreign firms listed in the US worth more? Journal of Financial Economics, 71 (2): 205–238.CrossRefGoogle Scholar
  15. Eden, L., & Miller, S. 2004. Distance matters: Liability of foreignness, institutional distance and ownership strategy. In M. Hitt & J. Cheng (Eds), Advances in international management, (Vol. 16): 187–221. New York: Elsevier.Google Scholar
  16. Ferreira, M. A., & Matos, P. 2008. The colors of investors’ money: The role of institutional investors around the world. Journal of Financial Economics, 88 (3): 499–533.CrossRefGoogle Scholar
  17. Filatotchev, I., & Bishop, K. 2002. Board composition, share ownership, and “underpricing” of UK IPO firms. Strategic Management Journal, 23 (10): 941–955.CrossRefGoogle Scholar
  18. Francis, B. B., Hasan, I., Lothian, J. R., & Sun, X. 2010. The signaling hypothesis revisited: Evidence from foreign IPOs. Journal of Financial and Quantitative Analysis, 45 (1): 81–106.CrossRefGoogle Scholar
  19. French, K., & Poterba, J. 1991. Investor diversification and international equity markets. The American Economic Review, 81 (2): 222–226.Google Scholar
  20. Frieder, L., & Subrahmanyam, A. 2005. Brand perceptions and the market for common stock. Journal of Financial and Quantitative Analysis, 40 (1): 57–85.CrossRefGoogle Scholar
  21. Gozzi, J. C., Levine, R., & Schmukler, S. L. 2010. Patterns of international capital raisings. Journal of International Economics, 8 (1): 45–57.CrossRefGoogle Scholar
  22. Grinblatt, M., & Keloharju, M. 2000. The investment behavior and performance of various investor-types: A study of Finland's unique data set. Journal of Financial Economics, 55 (1): 43–67.CrossRefGoogle Scholar
  23. Guiso, L., Sapienza, P., & Zingales, L. 2009. Cultural biases in economic exchange? Quarterly Journal of Economics, 124 (3): 1095–1131.CrossRefGoogle Scholar
  24. Hail, L., & Leuz, C. 2009. Cost of capital effects and changes in growth expectations around US cross-listings. Journal of Financial Economics, 93 (3): 428–454.CrossRefGoogle Scholar
  25. Henderson, B., Jegadeesh, N., & Weisbach, M. 2006. World markets for raising new capital. Journal of Financial Economics, 82 (1): 63–101.CrossRefGoogle Scholar
  26. Kang, J., & Stulz, R. 1997. Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan. Journal of Financial Economics, 46 (1): 3–28.CrossRefGoogle Scholar
  27. Karolyi, G. 2006. The world of cross-listings and cross-listings of the world: Challenging conventional wisdom. Review of Finance, 10 (1): 99–152.CrossRefGoogle Scholar
  28. King, M. R., & Segal, D. 2008. Market segmentation and equity valuation: Comparing Canada and the United States. Journal of International Markets, Institutions and Money, 18 (3): 245–258.CrossRefGoogle Scholar
  29. Lang, M., Lins, K., & Miller, D. 2003. ADRs, analysts, and accuracy: Does cross listing in the United States improve a firm's information environment and increase market value? Journal of Accounting Research, 41 (2): 317–345.CrossRefGoogle Scholar
  30. Mäkelä, M., & Maula, M. J. 2008. Attracting cross-border venture capital: The role of a local investor. Entrepreneurship & Regional Development, 20 (3): 237–257.CrossRefGoogle Scholar
  31. Miller, D. P., & Puthenpurackal, J. J. 2005. Security fungibility and the cost of capital: Evidence from global bonds. Journal of Financial and Quantitative Analysis, 40 (4): 849–872.CrossRefGoogle Scholar
  32. Miller, S. R., & Eden, L. 2006. Local density and foreign subsidiary performance. Academy of Management Journal, 49 (2): 341–355.CrossRefGoogle Scholar
  33. Nachum, L. 2003. Liability of foreignness in global competition? Financial service affiliates in the City of London. Strategic Management Journal, 24 (2): 1187–1208.CrossRefGoogle Scholar
  34. Pagano, M., Roell, A. A., & Zechner, J. 2002. The geography of equity listing: Why do companies list abroad? Journal of Finance, 57 (6): 2651–2694.CrossRefGoogle Scholar
  35. Peterson, R. A., & Jolibert, A. J. P. 1995. A meta-analysis of country-of-origin effects. Journal of International Business Studies, 26 (4): 883–897.CrossRefGoogle Scholar
  36. Portes, R., & Rey, H. 2005. The determinants of cross-border equity flows. Journal of International Economics, 65 (2): 269–296.CrossRefGoogle Scholar
  37. Rao, H. 1994. The social construction of reputation: Certification contests, legitimation, and the survival of organizations in the American automobile industry: 1895–1912. Strategic Management Journal, 15 (S1): 29–44.CrossRefGoogle Scholar
  38. Reese, W., & Weisbach, M. 2002. Protection of minority shareholder interests, cross-listings in the United States, and subsequent equity offerings. Journal of Financial Economics, 66 (1): 65–104.CrossRefGoogle Scholar
  39. Sanders, W., & Boivie, S. 2004. Sorting things out: Valuation of new firms in uncertain markets. Strategic Management Journal, 25 (2): 167–186.CrossRefGoogle Scholar
  40. Sarkissian, S., & Schill, M. 2004. The overseas listing decision: New evidence of proximity preference. Review of Financial Studies, 17 (3): 769–809.CrossRefGoogle Scholar
  41. Saudagaran, S. 1988. An empirical study of selected factors influencing the decision to list on foreign stock exchanges. Journal of International Business Studies, 19 (1): 101–127.CrossRefGoogle Scholar
  42. Schmidt, T., & Sofka, W. 2009. Liability of foreignness as a barrier to knowledge spillovers: Lost in translation? Journal of International Management, 15 (4): 460–474.CrossRefGoogle Scholar
  43. Scott, W. R. 1995. Institutions and organizations. Thousand Oaks, CA: Sage.Google Scholar
  44. Shenkar, O. 2001. Cultural distance revisited: Towards a more rigorous conceptualization and measurement of cultural differences. Journal of International Business Studies, 32 (3): 519–535.CrossRefGoogle Scholar
  45. Tesar, L., & Werner, I. 1995. Home bias and high turnover. Journal of International Money and Finance, 14 (4): 467–492.CrossRefGoogle Scholar
  46. Zaheer, S. 1995. Overcoming the liability of foreignness. Academy of Management Journal, 38 (2): 341–363.CrossRefGoogle Scholar
  47. Zaheer, S., & Mosakowski, E. 1997. The dynamics of the liability of foreignness: A global study of survival in financial services. Strategic Management Journal, 18 (6): 439–464.CrossRefGoogle Scholar

Copyright information

© Academy of International Business 2011

Authors and Affiliations

  • R Greg Bell
    • 1
  • Igor Filatotchev
    • 2
    • 3
  • Abdul A Rasheed
    • 4
  1. 1.Graduate School of Management, University of DallasIrvingUSA
  2. 2.Sir John Cass Business School, City University LondonLondonUK
  3. 3.Vienna University of Economics and BusinessViennaAustria
  4. 4.Department of ManagementUniversity of Texas at ArlingtonArlingtonUSA

Personalised recommendations