This paper examines whether firms choose destinations with stronger investor protection than those provided in their respective home markets after controlling for both firm-specific and destination-specific characteristics that affect the choice of cross-listing destination.
Using data on cross-listing decisions of firms from 28 home countries targeted toward nine destinations for the 1994–2008 period, we find that firms are more likely to cross-list in foreign markets that are less protective of outside investors relative to the home country once we simultaneously control for relevant destination-specific and firm-specific characteristics. Such preference for weak protection is mostly driven by family firms, but not observed among non-family firms.
These results suggest that the widely accepted “bonding” hypothesis, which posits that firms which cross-list in order to voluntarily commit themselves to higher disclosure standards, should be interpreted with caution. Rather, controlling families may choose to list in destinations with weaker protection to retain their private benefits.
The findings imply that exchanges in countries with stronger investor protection may not be attractive for potential foreign clientele, especially firms controlled by families. To increase foreign listings in a given exchange, regulators should consider not only the benefits of tight regulations such as “bonding,” but also their compliance costs.