Overseas listing location and capital structure

A significant number of Chinese companies are listed overseas. The authors aim to examine whether overseas locations affect their financing decision, specifically their capital structure choice.

Most of the Chinese overseas listed companies are listed in the USA and Hong Kong. As the institutional quality of the USA is better than Hong Kong, the authors, therefore, choose to build the hypotheses from the “law and finance” literature. Specifically, the authors argue that the better institutional environment of the USA can mitigate the information asymmetry problem and the agency problem of financing via equity. Consequently, firms listed in the USA will rely more on equity and have lower leverage ratio. The difference in leverage ratio of US listed and Hong Kong listed companies should be larger when the marginal benefit of better information environment is larger.

Referring to various data sources, the authors construct a comprehensive list of overseas listed companies in the USA and Hong Kong. The authors collect the accounting and stock performance information from Datastream/Worldscope and the equity offering data from Global New Issue database. The empirical findings provide strong support of the hypotheses: the leverage is 15 percent lower for US listed companies than the Hong Kong listed companies; the results are stronger when the firms face more severe information asymmetry problem; the stock price reacts less negatively for seasoned equity offering in the USA than in Hong Kong.

Most of the Chinese companies decided to be listed overseas because they cannot be listed in the Mainland Chinese stock exchanges. One of the most important motivation is to access to external capital to support firm growth. As the main channel of external financing in the overseas markets is equity since debt is still mainly domestically based, one implication of this paper is that Chinese companies can gain better access to external capital in the USA than in Hong Kong and relax their financial constraint.

There are a considerable number of Chinese companies listed in the overseas markets. Many successful and famous companies are among them. However, almost no research has been done based on them. This paper documents some very important phenomenon of this market. The authors wish that more studies will be conducted. In addition, the study also complements the existing studies on how institutional environment affects corporate financial behavior.