Country of Origin and Foreign IPO Legitimacy: Understanding the Role of Geographic Scope and Insider Ownership


R. Greg Bell, tel.: 817-272-3412; e-mail:


Foreign firms from emergent economies are increasingly seeking equity capital in developed economies like the United States. Utilizing institutional, signaling, and agency theories this research examines the legitimacy of foreign IPOs (initial public offerings) in the United States. Employing the population of foreign IPOs listed on U.S. stock exchanges between 1997 and 2004, it is demonstrated that firms from countries with governmental policies and institutional practices that protect the economic freedom of its citizens are significantly less underpriced than IPOs of firms originating from countries experiencing lower levels of economic freedom. The evidence further indicates that firms from emerging economies can overcome negative country perceptions associated with lower levels of legitimacy by increasing their international scope of operations prior to beginning the IPO process as well as by retaining acceptable levels of ownership in their respective firms.