Asymmetry of Information in Emerging Markets: Should a Firm Issue its Securities Locally or Abroad?

Abstract

We observe different market reactions regarding whether firms based in emerging countries issue equity locally or abroad. This finding suggests that the decision on where to issue may convey information regarding the value of the firm. Constructing indexes for market openness and information disclosure, we empirically find that the probability of issuing in inter national markets decreases by 7 per cent as the asymmetry of information between domestic and foreign investors decreases. Furthermore, the risk premium on market-to-book value estimated by Fama and French (1992) is correlated with the firm's decision on where to issue public securities. We use a switching-regression model to compute the price reactions to the firm's issue decision, where the endogenous switching corresponds to the firm's decision on where to issue. Our results reveal that foreign issues are associated with lower risk premium suggesting that a firm signals high quality when issuing in international markets. Finally, we find that firms that issue both locally and abroad tend to issue earlier internationally and later in domestic markets, supporting the idea that foreign issues are associated with higher fixed costs.