An Analysis of Alternate Paths Used by Non-US Firms to List in US Markets: Revisiting the Bonding Hypothesis

Abstract

We compare non-US firms that go public using reverse mergers to those using foreign initial public offerings and capital-raising American Depositary Receipts. We find that foreign reverse merger firms do not bond with minority shareholders. We also find that the repeated accessing of US capital markets, mainly through private investments in public equity, does not signal better performance, higher transparency, or enhanced governance structures. Further, we show that foreign reverse mergers originate from countries with higher strength of minority shareholder protection when compared to foreign initial public offerings and capital-raising American Depositary Receipts. We argue that the decision to enlist in the US capital markets by foreign reverse merged companies is driven by the need to finance operations at an early stage of their lifespan rather than the bonding with their minority shareholders.