Research On The Liability Of Foreignness In Capital Markets

As the global capital market becomes more active, the institutional barriers among various capital market are no longer insurmountable, thus it provides a new opportunity for companies to raise capital in foreign market. However, more and more studies suggest that foreign firms tend to be in a disadvantaged condition compared with domestic firms. Because of their foreignness identity, the local investors are not optimistic about the securities which issued by foreign companies:the securities are more likely to be underestimated, shorted. Compared with local companies, foreign companies experience more litigation and the possibility of forced delisting is greater. All of this proves that there is the liability of foreignness in capital markets as well.Based on existing researches, we will build a theoretical model about the source of the capital market liability of foreignness (CMLOF) and the strategy to overcome it. In this model, institutional distance, information cost, unfamiliarity cost are major sources of CMLOF. We further present the possible mechanisms that companies can employ to mitigate CMLOF are administrative signals releasing, organizational isomorphism, information intermediaries’ endorsements and industry development space. In the paper, we selected three Chinese companies listed in the United States, namely QIHU, SPRD and RINO, as research objects. We will take advantage of case study research method to test the variables in the theoretical models, and then we will examine the factors which may cause the foreign capital market LOF confronted by companies in this paper. At last we will propose the strategy which may overcome the influence of the LOF.According to the results of case studies, we believe that:if there is a huge institutional distance between company’s home country and host country, the company would face serious CMLOF, at the same time, information cost will affect the companies’ foreign financing. Another source which will lead the foreign company to suffer from CMLOF is unfamiliarity. We conclude that administrative signals releasing can effectively alleviate the CMLOF. It is effective for the foreign company to access to foreign capital markets through organizational isomorphism which will be helpful to obtain legitimacy. The effect of information intermediaries’ endorsements and industry development space in mitigating CMLOF is limited.Finally, we recommend that:when the company is listed in foreign capital market, they should carefully choose the list location and the list method. In the mean while, the company should hire reputation underwriters and accounting firms and they could communicate with investors through road shows.