This paper investigates the role domestic firm-level political connections play in determining a firm’s propensity to cross-list securities in equity markets outside their traditional home country. It characterizes the role political connections with domestic governments play by showing that the implicit property rights protections they provide dominate any benefits received through domestic back-channel contracting arrangements resulting from business-government ties. The findings also help reconcile the competing regulatory bonding and reputational bonding theories about where firms choose to finance, since they explain how the relative costs and benefits of cross-listing change depending upon the political status of firms within their domestic environment.
The weaker the domestic institutional environment is, the less likely the average firm is to cross-list. For connected firms, however, the weaker domestic property rights institutions are the more likely they are to cross-list. This relationship may attenuate, however, at the extremes of institutional quality given high correlations between property rights and contracting. The paper employs, in its empirical analysis, a multi-level, cross-sectional dataset containing information spanning 46 countries (of varying institutional quality), in which 12,395 firms belong to a wide range of industries and have different political statuses (among other corporate financing characteristics) that influence their global financing behavior.
Firms choose not only where to manufacture and sell goods, but also where to finance their operations. Desai (2008) contends that there are three important location decisions corporations make in a globalizing world economy; these are for: (1) their “traditional” home(s) for managerial and day-to-day business operations, (2) their legal home(s), and (3) their financial home(s). Firm-level and country-level political economy considerations play important roles in both the ability and the willingness of firms to “de-center” these homes.
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An Empirical Investigation into the Political Economy of the Firm in a Globalizing World Economy
