Political Risk and the Issue Costs of Foreign IPOs

Abstract

I compare the issue costs of 463 foreign and 4129 domestic US companies that raise capital in the US between 1990 and 2018. I find evidence that foreign companies bear a greater home country political risk that generates information asymmetries and increases the first-day initial returns. Political risk correlates positively with underpricing, and the result is significant at the 10% level. However, foreign IPOs possess certain characteristics that make raising capital eventually cheaper for them compared to the domestic IPOs: Foreign companies have more assets in place, list more often in NYSE and are already familiar to US investors at the time of listing. In addition to that, foreign companies list after relatively strong US and home market equity performance, and under stable currency conditions. My results support the Selective entry –hypothesis.