Does Bonding Really Bond? Cross-Listing Location, Corporate Governance and Value of Chinese Firms

Abstract

The present study aims to develop our understanding of the relationship between corporate governance and firm value in the context of Chinese firms cross-listed on major international exchanges. For the purpose, we use a unique dataset, not used hitherto, and examine Chinese firms cross-listed on the NASDAQ, the New York Stock Exchange (NYSE), the Hong Kong Main Board (HKMB), the Hong Kong Growth Enterprise Market (HKGEM), the Singapore Stock Exchange (SGX), and the London Alternative Investment Market (LAIM). We test two major competing hypotheses: boding theory and liability of foreignness using panel data for the period from 2001-2012.The study is grounded in the bonding theory which asserts that stringent corporate governance requirements that underpin overseas stock exchanges help enhance value of cross-listed firms. Contrary to this theory, we find that firms that are listed only on the domestic stock exchanges of Mainland China command significantly higher value than those that are cross-listed on overseas stock exchanges. The results suggest that the liability of foreignness that the cross-listed Chinese firms face when operating in the foreign capital markets may outweigh the envisaged benefits leading to outcomes contrary to those expected as per the bonding theory.We conclude that the general bonding theory cannot adequately explain, in the Chinese context, how cross-listing affects firm valuation and a refined theory is required. We develop such a theory. The refinements proposed capture the liability of foreignness and related multinational enterprise theories so as to improve our understanding of the applications of the bonding theory.