Following the introduction of the euro, the Financial Times noted: “One side-effect of the launch of the single currency is that it has deprived European investors of a rich source of currency diversity. Thus the explosion of a euro-denominated bond market has paradoxically led to a surge in European demand for dollar-denominated products. As a result, there has also been a marked rise in the number of US companies visiting the international bond markets in their domestic currency” (Financial Times, September 10, 1999).
Theoretical academic literature has also long accepted that international investors care about the international diversification of their portfolios and that firms catering to this desire of diversification fetch better financing conditions. However, the empirical test has been difficult since the literature has mainly focused on international firms listing in the US and thus it has been difficult to distinguish the benefits of portfolio diversification from those of bonding to a better system of governance. Indeed, listing in the US provides access to better governance such as superior US shareholder protection and more governance-savvy institutional investors as well as more diversified institutional investors.
In this paper, we consider an ideal case to investigate diversification separately from governance. We focus on the corporate debt market and, in particular, on the international bond issuances by US firms. Indeed, catering to international investors exposes US firms to investors who, on the one hand, are less sensitive to US shocks, but, on the other hand, are less effective monitors than more proximate US investors. Lower exposure to US macroeconomic shocks is related to better benefits of diversification, while higher distance between lenders and borrowers reduces the ability of effective monitoring.
International bond offering by US firms has been massive over the last decade. Figure 1 shows that the net corporate debt that US non-financial firms raised internationally has increased from $1.8bn (6% of total changes in US corporate debt) in 1994 to $173.3bn (54% of total changes in US corporate debt) in 2007, with a total outstanding amount raised going up from $48bn to $730.6bn. The growth is even more evident for financial firms. During the same time, the fraction of international bondownership in US corporations has also grown, from 7.8% in 1994 to 24% in 2007. In contrast, in 2007, US firms raised only $17.6bn of equity in the markets outside of the US. Despite their size, international bond issuances by US firms have been scarcely noticed in the literature.
