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The liability of foreignness in capital markets: Sources and remedies

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Abstract

The accelerating pace of global capital market integration has provided new opportunities for firms to raise capital abroad through global debt issues, cross-listings, and initial public offerings in foreign stock exchanges. However, existing empirical evidence suggests that foreign firms tend to be at a disadvantage compared with domestic firms, and they often suffer from investors’ “home bias”. The objective of this paper is to understand why firms are facing problems when accessing capital in foreign markets, and possible mechanisms that can help to mitigate these problems. It expands the liability of foreignness (LOF) research beyond the product market domain to include liabilities faced by firms attempting to secure resources in foreign capital markets. We identify key differences between product and capital markets related to information environment, time structure of transactions, and linkages between buyers and sellers. We analyze institutional distance, information asymmetry, unfamiliarity, and cultural differences as the main sources of capital market LOF (CMLOF). We suggest possible mechanisms that managers can employ to mitigate CMLOF and overcome investors’ “home bias”: bonding, signaling, organizational isomorphism, and reputational endorsements. We also outline directions for further theoretical and empirical development of the CMLOF research.

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Notes

  1. The majority of our discussion is restricted to equity markets, since a rapid integration of equity markets was the most pronounced globalization phenomenon over the past decade.

  2. For instance, the London Stock Exchange introduced the AIM, and the Borsa Italiana introduced in early 2009 the AIM Italia. The Deutsche Borse contains the Freiverkehr, which is modeled after London's AIM with lower listing requirements. Similarly, Prague, Hong Kong, and Singapore have also subdivided their primary markets in order to compete for small and medium-sized firms attempting to acquire capital resources.

  3. Interestingly, the impact of institutional distance between two countries on investor behavior may often be asymmetrical. That is, a Columbian investor may have more information about the US institutional context than a US investor may have about Columbia. Thus institutional distance may not affect the behavior of the investors in the two countries equally.

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Authors and Affiliations

  1. Graduate School of Management, University of Dallas, Irving, USA

    R Greg Bell

  2. Sir John Cass Business School, City University London, London, UK

    Igor Filatotchev

  3. Vienna University of Economics and Business, Vienna, Austria

    Igor Filatotchev

  4. Department of Management, University of Texas at Arlington, Arlington, USA

    Abdul A Rasheed

Authors
  1. R Greg Bell
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  2. Igor Filatotchev
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  3. Abdul A Rasheed
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Correspondence to Igor Filatotchev.

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Accepted by David Reeb, Area Editor, 11 October 2011. This paper has been with the authors for five revisions.

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Bell, R., Filatotchev, I. & Rasheed, A. The liability of foreignness in capital markets: Sources and remedies. J Int Bus Stud 43, 107–122 (2012). https://doi.org/10.1057/jibs.2011.55

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