metadata: authors: 0: author: Gozzi, Juan Carlos
1: author: Levine, Ross
2: author: Schmukler, Sergio L.
count: World
docna: 0: docna: Patterns of international capital raisings
docty: Policy Research Working Paper
theme: Micro, Small and Medium Enterprise support,Other financial and private sector development
majtheme: Financial and private sector development
subtopic: Public Sector Economics,Capital Markets and Capital Flows,Securities Markets Policy & Regulation,Capital Flows,International Trade and Trade Rules,Public Finance Decentralization and
            Poverty Reduction
teratopic: Macroeconomics and Economic Growth,Finance and Financial Sector Development,Private Sector Development
abstracts: cdata!: This paper documents several new
            patterns associated with firms issuing securities in foreign
            markets that motivate the need for and help guide future
            research. Besides noting that these international capital
            raisings grew almost four-fold from 1991 to 2005, accounting
            for 35 percent of all capital raised through security
            issuances, the paper has three main findings. First, a large
            and growing fraction of capital raisings, especially debt
            issuances, occurs in international markets, but a very small
            number of firms accounts for the bulk of international
            capital raisings, highlighting the distributional
            implications of financial globalization. Second, changes in
            firm performance following equity and debt issuances in
            international markets are qualitatively similar to those
            following domestic issuances, suggesting that capital
            raisings abroad are not intrinsically different from
            domestic ones. Third, after firms start accessing
            international markets, they significantly increase the
            amount raised in domestic markets, suggesting that
            international and domestic markets are complements.
repnme: repnme: Patterns of international capital raisings
display_title: Patterns of international capital raisings
listing_relative_url: /research/2008/08/9745120/patterns-international-capital-raisings
topicv3: Public Investment Management m1326102 718,Trade m1326924 698,Capital Markets m1326967 332,Securities Markets m1327223 1918,Equity Finance m1327686 334
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Macroeconomics and Economic Growth,Finance and Financial Sector Development,Private Sector Development
no_of_pages: 57
model_extractions: WPS4687 Policy ReseaRch WoRking PaPeR 4687 Patterns of International Capital Raisings _Juan Carlos Gozzi Ross Levine Sergio L. Schmukler_ The World Bank Development Research Group Macroeconomics and Growth Team August 2008
Policy ReseaRch WoRking PaPeR 4687

# **Abstract**

This paper documents several new patterns associated with firms issuing securities in foreign markets that motivate the need for and help guide future research. Besides noting that these international capital raisings grew almost four-fold from 1991 to 2005, accounting for 35 percent of all capital raised through security issuances, the paper has three main findings. First, a large and growing fraction of capital raisings, especially debt issuances, occurs in international markets, but a very small number of firms accounts for the bulk of international capital raisings, highlighting the distributional implications of financial globalization. Second, changes in firm performance following equity and debt issuances in international markets are qualitatively similar to those following domestic issuances, suggesting that capital raisings abroad are not intrinsically different from domestic ones. Third, after firms start accessing international markets, they significantly increase the amount raised in domestic markets, suggesting that international and domestic markets are complements.

This paper—a product of the Growth and the Macroeconomics Team, Development Research Group—is part of a larger effort in the department to understand financial development and financial globalization. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at sschmukler@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Patterns of International Capital Raisings**<sup>*</sup>

Juan Carlos Gozzi,<sup>a</sup> Ross Levine,<sup>a,b</sup> Sergio L. Schmukler<sup>c</sup>

## **JEL classification codes:** G15, F36, F20

**Keywords:** international finance; bonding; segmentation; market timing; corporate finance

a Brown University, b NBER, c World Bank

* We received very helpful comments from Chris Meissner and participants at the ESRC-WEFRP/IMF International Macro-Finance Conference (Washington, DC). We are grateful to Francisco Ceballos, Tomislav Ladika, Mercedes Politi, and Aleksandar Zaklan for excellent research assistance. We thank the World Bank Finance Research Program and Research Support Budget for ample financial support. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and do not necessarily represent the views of the World Bank.

E-mail addresses: <u>juan_carlos_gozzi_valdez@brown.edu, ross_levine@brown.edu, sschmukler@worldbank.org.</u>
# **1. Introduction**

Financial globalization has reshaped international and corporate finance over the last two decades. About 30 percent of all capital raised by firms through issuances of stocks and bonds over the period 1991-2005 occurred in securities markets outside their home countries. Obstfeld and Taylor (2004) show that a historically unprecedented percentage of the world’s financial capital now flows across international borders. Furthermore, the amount raised by firms in foreign markets grew almost four-fold after 1991, approaching one trillion U.S. dollars in 2005.

Yet, basic questions about the internationalization of capital markets remain incompletely answered. Why do firms sell stocks and bonds in foreign markets? What are the effects of firms issuing securities in foreign markets on firm performance? What are the cross-firm distributional effects from international capital raisings? The lack of firm-level information on equity and debt issuances in both foreign and domestic markets limits our understanding of the causes and effects of financial globalization at the macro and micro level.

To help address these questions, we provide the first documentation of several salient firm-level patterns associated with international capital raisings.<sup>1</sup> First, we illustrate the characteristics of firms that raise capital through the issuance of equity and debt abroad and document how these firms differ from both firms that only raise capital domestically and firms that do not issue securities locally or internationally. We analyze numerous firm-level characteristics, including firm size, growth, investment, profitability, capital structure, exports, and corporate valuation. Second, we show what happens to firms after issuing equity or debt abroad and compare these patterns to firms that raise capital domestically. Third, we compare

> 1 In fact, the international finance literature increasingly stresses the desirability of using firm-level evidence to understand the underpinning of financial globalization, which has been studied extensively at the aggregate level. See, for example, Forbes (2006), Kose, Prasad, Rogoff, and Wei (2006), and Henry (2007). Moreover, a separate, though complementary, literature studies firm-level patterns in international trade. For a survey, see Bernard, Jensen, Redding, and Schott (2007).

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how firms use domestic bond and equity markets before and after they internationalize. Rather than testing hypotheses or formulating new theories, we contribute to the literature by documenting new patterns and relating them to existing theories. As a result, our research both advertises the need for and helps guide the direction of future research.

This paper contributes to a rich literature on the internationalization of capital markets. In particular, Henderson, Jegadeesh, and Weisbach (2006) analyze aggregate patterns of capital raising activity around the world and document how internationalization varies across security types and regions. We extend their work by analyzing the extent of internationalization at the firm level. This allows us (1) to compare the characteristics of firms that raise equity or debt internationally with those of firms that only raise equity or debt domestically, (2) to trace the evolution of firm performance following capital raisings both at home and abroad, and (3) to analyze changes in the capital raising activities of firms after they internationalize.

Our research also relates to studies of the international cross-listing of stocks. Several papers analyze the characteristics of firms that list their shares abroad, either through direct cross-listings or depositary receipts (Pagano, Roell, and Zechner, 2002; Lang, Lins, and Miller, 2003; Lang, Raedy, and Yetman, 2003; and Claessens and Schmukler, 2007). In contrast, we focus on capital raisings, not on equity market cross-listings. Moreover, while most studies ignore debt issuances, we analyze both equity and debt markets. Indeed, we find that debt issues in public markets are a much more important source of capital for firms than equity issues, and debt markets are far more internationalized than equity markets.

Three broad categories of findings emerge from our analysis. We first summarize the findings and then relate these patterns to existing theories of international capital raisings.

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First, a large and growing fraction of capital raisings, especially debt issuances, is conducted in international markets, but only a small fraction of firms actually uses international markets, and of this small fraction, a very small sub-sample accounts for the bulk of international capital raisings. In 2005, firms from developing and developed countries raised, respectively, 51 and 39 percent of their total security issuances outside of their home countries. This share is higher for debt than equity issues. Firms raised 35 percent of their debt capital abroad over the period 1991-2005, while raising 10 percent of their equity capital abroad. Furthermore, about 15 percent of the almost 46,000 firms that issued any securities in public markets during our sample period accessed international markets, and only one-tenth of these international firms (less than 700 firms) collected about two-thirds of all the funds raised internationally. Finally, firms raising capital abroad are larger, slower growing, more leveraged, more profitable, and export more than firms that only raise capital domestically.

Second, changes in firm performance following equity and debt issuances in international markets are qualitatively similar to those that follow the issuance of securities in domestic markets. Whether firms issue securities in domestic or international markets, they tend to become large, but experience a decrease in their growth rate and profitability following capital raisings. These patterns suggest that issues in international markets are not intrinsically different from those in domestic markets. Furthermore, the differences between firms that raise capital abroad and those that only issue securities domestically exist many years before firms actually access international markets.

Third, although issues abroad tend to be significantly larger than issues at home, firms (1) continue to issue securities in both international and domestic markets after accessing international markets, and (2) significantly increase the amount of money raised in domestic 3
markets after internationalizing. For firms from developing (developed) countries, the median security issuance of both equity and debt is about 18 (2) times larger in international markets than in domestic markets. Furthermore, firms do not opt out of domestic markets once they internationalize. Indeed, after accessing international markets, firms significantly _increase_ their capital raisings at home, while continuing to use international markets. For example, the typical developed country firm increases the average annual amount raised in domestic markets by 200 percent following internationalization, and also captures a larger fraction of the total domestic market.

Our findings relate to three theories of the causes and effects of international capital raisings. First, the segmentation view argues that firms internationalize to circumvent regulations, poor accounting systems, taxes, and illiquid domestic markets that discourage foreign investors from purchasing their shares (Black, 1974; Solnik, 1974; Stapleton and Subrahmanyam, 1977; Errunza and Losq, 1985; Alexander, Eun, and Janakiramanan, 1987; and Domowitz, Glen, and Madhavan, 1998). Thus, firms internationalize to gain access to less expensive capital (Miller, 1999 and Foerster and Karolyi, 1999). Second, the ‘‘bonding’’ view argues that firms internationalize to bond themselves to a better corporate governance framework that limits the extraction of private benefits by corporate insiders (Stulz, 1999; Coffee, 2002; Reese and Weisbach, 2002; and Doidge, Karolyi, and Stulz, 2004). This makes firms more attractive to potential investors, reducing their cost of capital, and inducing an enduring improvement in firm performance. Third, the market timing view suggests that firms raise capital abroad to exploit temporarily high prices for their securities during ‘‘hot’’ markets (Errunza and Miller, 2000 and Henderson, Jegadeesh and Weisbach, 2006).

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While the patterns we document do not formally reject or confirm existing theories, they suggest that there are large gaps in the ability of these theories to account for noteworthy features of international capital raisings. For instance, the finding that the evolution of firm characteristics following international capital raisings are qualitatively similar to those that follow domestic capital raisings are difficult to reconcile with the bonding view, which argues that capital raisings in international markets are intrinsically different from capital raisings in domestic markets and should therefore have qualitatively different effects on firm performance. Similarly, our finding that firms do not opt out of domestic markets after raising capital abroad, but actually increase their participation in these capital markets both in absolute and relative terms, does not fit the predictions of simple segmentation arguments that international markets offer unambiguously better services and/or less expensive capital than local markets. In terms of market timing, the argument that hot international markets for firms’ securities are driving the decision to raise capital abroad does not fully explain why only a very few firms actually raise capital abroad.<sup>2</sup> Finally, as we discuss in great depth below, corporate finance theory does not yet fully account for why firms issue debt and equity in both foreign and domestic markets.

Furthermore, theories of internationalization need to account for two patterns associated with international capital raisings that are not the focus of existing research. First, debt markets tend to be more internationalized than equity markets. Second, firms that raise capital abroad are different from firms that only raise capital at home _before_ they internationalize; these differences in firm characteristics do not emerge after firms internationalize. In sum, our findings indicate that current theories have substantive limitations in accounting for the firm-level experiences and

> 2 DeAngelo, DeAngelo, and Stulz (2007) make a similar argument when analyzing SEOs in the U.S., arguing that many firms do not issue stocks during an open financing window, which is inconsistent with theories that highlight market timing as the driving force for stock issues.

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highlight directions for developing more precise theories of the internationalization process and its implications.

Our findings relate to research on lowering the barriers to international capita flows. Chari and Henry (2004a,b) find that equity market liberalizations reduce the cost of capital and increase investment, while Patro and Wald (2005) find that firms’ stock returns increase during stock market liberalizations and that a majority of firms have lower mean returns and lower dividend yields after liberalization. Schmukler and Vesperoni (2006) find that stock market integration is associated with a decrease in long-term debt and a shortening of debt maturities for the average firm in seven emerging economies. In this paper, we do not directly study the effects of relaxing regulatory barriers to capital flows. Instead, we analyze the changes in firm performance and capital raising activity associated with security issuances in international capital markets.<sup>3</sup> This paper also identifies patterns relevant for the large corporate finance literature on the motivations of issuing debt and equity. For instance, Pagano, Panetta, and Zingales (1998) analyze Italian IPOs and find capital structure rebalancing and mispricing exploitation as predominant reasons for going public. Loughran and Ritter (1995, 1997) and Baker and Wurgler (2000, 2002), among others, stress that market timing drives security issuances. On the other hand, Kim and Weisbach (2006) and DeAngelo, DeAngelo, and Stulz (2007) find that investment financing is an important motivation for equity issues. We contribute to this literature

> 3 There is also considerable research on the portfolio allocation decisions of international investors. Edison and Warnock (2004) find that U.S. investors tend to purchase shares from larger firms, firms with fewer restrictions on foreign ownership, and firms that are cross-listed on U.S. exchanges. Aggarwal, Klapper, and Wysocki (2004) find that actively managed U.S. mutual funds tend to invest more in firms from countries with better legal environments and in firms that increase transparency. Ferreira and Matos (2007) analyze institutional investors’ equity holdings in 27 countries and find that foreign institutions tend to invest on firms that are globally visible, either through higher foreign sales, analyst coverage, or cross-listings abroad. Didier, Schmukler, and Rigobon (2008) find that U.S. mutual funds hold only a small set of countries and companies when investing abroad. In this paper, we do not analyze the portfolio allocation decisions of U.S. or institutional investors, but rather firms’ decision to issue securities abroad.

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by tracing the evolution of firm characteristics, including firm capital structure, investment, and profitability, after firms issue debt and equity securities in domestic and international markets. These time-series patterns for a broad array of firms from around the world provide new evidence regarding the motivation for security issuances. As shown above, we also find that firms issue debt and equity securities in both domestic and foreign markets following internationalization, suggesting that future research needs to account for these corporate financing patterns.

To analyze the firm-level patterns associated with international capital raisings, we construct a new database. The dataset includes 168,514 equity and debt issues in domestic and international capital markets, conducted by 45,969 firms from 116 countries, and covers the period 1991-2005. We match these data with comprehensive information on firm balance sheets and income statements for 23,366 firms.

The remainder of the paper is organized as follows. Section 2 describes the data. Section 3 documents the extent of internationalization of securities markets and analyzes the characteristics of those firms that raise capital abroad. Section 4 analyzes the evolution of firm characteristics and performance following capital raisings in international markets and compares these patterns to firms that only raise capital in domestic securities markets. Section 5 examines the international and domestic capital raising activity of firms that have accessed international markets. We conclude in Section 6.

# **2. Data**

To document patterns of international capital raisings and analyze the characteristics and performance of firms that raise capital through security issues in international capital markets, 7
we assemble a comprehensive dataset on firms’ security issuances in capital markets around the world and match this information with balance sheet and income statement data.

Our data on firms’ capital raising activity come from Security Data Corporation’s (SDC) New Issues Database, which provides transaction-level information on new issues of common and preferred equity and bonds with an original maturity of more than one year, starting in the 1970s. Given that SDC does not collect data on debt issues with a maturity of less than one year, our dataset does not include commercial paper issues with such short-term maturities. Moreover, since we focus on security issues, we do not consider bank lending.

The SDC database is divided into twelve regional sub-databases covering different markets: Asian Pacific Domestic (Hong Kong, Indonesia, Malaysia, Philippines, Singapore, Taiwan, and Thailand,); Australian/New Zealand Domestic (Australia, New Zealand, and Papua New Guinea); Canadian Domestic (Canada); Continental European Domestic (Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovakia, Spain, Sweden, and Switzerland); Indian and Subcontinent (Bangladesh, India, Pakistan, and Sri Lanka); International (Eurobonds and other cross-border issues); Japanese Domestic (Japan); Korean Domestic (South Korea); Latin American Domestic (Argentina, Bolivia, Brazil, Colombia, Costa Rica, Ecuador, Guatemala, Mexico, Panama, Peru, Uruguay, and Venezuela); United States (United States); United Kingdom Domestic (United Kingdom); and Rest of the World (countries not included in other SDC regional sub-databases, such as China). The academic version of SDC to which we have access does not include the Canadian and Korean Domestic sub-databases. Therefore, we exclude all Canadian and South Korean firms from our analysis. While data for 8
public issues in the U.S. start in the 1970s, coverage of other markets starts later, with most regional databases starting in 1991. Therefore, we restrict our sample to the period 1991-2005.

SDC collects data on security issuances mostly from filings with local regulatory agencies and stock exchanges. These data are augmented with data from other sources such as offering circulars, prospectus, surveys of investment banks, brokers, and other financial advisors, news sources, trade publications, and wires. Although SDC constitutes the most comprehensive databases on security issuances around the world, SDC’s coverage may be less comprehensive for those regions for which it relies mostly on informal sources, instead of collecting data from filings with regulatory agencies and stock exchanges.

Since our analysis focuses on corporate capital raising activity, we exclude all public sector bond issuances, comprising debt issued by national, local, and regional governments, government agencies, regional agencies, and multilateral organizations. We also exclude security issuances by investment funds, investment companies, and real estate investment trusts (REITs), as well as mortgage-backed securities and other asset-backed securities. Moreover, since we focus on capital raising activity in public markets we exclude all private placements.<sup>4</sup> After these exclusions, we are left with a database covering 168,514 security issuances by 45,969 firms from 116 economies over the period 1991-2005. See Appendix Table 1 for a list of the economies included in our dataset and their regional and income level classification. Appendix Table 2 presents data on the number of observations and firms covered by region and income level.

> 4 Note that excluding private placements may affect the observed regional patterns of capital raising activity, as some regions may have more active private markets than others. This may be particularly relevant for debt markets, as private bond markets in some regions are as active, or even more active, than public bond markets.

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To classify security issuances as domestic or international, we consider the main exchange where the issues are listed and compare it to the issuing firm’s nationality.<sup>5</sup> For offerings that take place in more than one market, we consider issues in each market as separate issues. In the case of subsidiaries, one could consider the nationality of the firm’s parent company instead of its own nationality for classifying issues as foreign or domestic. That is, for instance, an equity issue by a British subsidiary of a U.S. firm in the London Stock Exchange would be classified as international, instead of domestic as in our classification. Which approach provides a better criterion for classifying security issues depends on the degree of integration of financing decisions between firms and their subsidiaries, among other factors. If financial decisions are highly integrated, considering firms’ parent nationality may provide a more accurate classification of security issuances. On the other hand, if financing decisions are relatively decentralized, considering subsidiaries’ own nationality may be a better criterion. All the results reported in the paper are obtained classifying issues as foreign or domestic based on issuers’ nationality. In unreported robustness tests, we classified issues by subsidiaries based on their parents’ nationality and obtained results similar to those reported throughout the paper.

To analyze the characteristics and performance of firms that raise capital through security issues in international capital markets, and compare them to firms that raise capital in domestic markets and to firms that do not raise capital, we match the data on security issuances from SDC with firm-level accounting and income statement data from Worldscope.<sup>6</sup> After eliminating firms

> 5 SDC classifies Eurobonds as being listed on the Luxembourg exchange, although these securities are issued all over Europe and trade mostly over the counter. This implies that Eurobond issues by firms from Luxembourg are classified as domestic issues, even though they may trade in other European countries. However, the number of firms from Luxembourg carrying out bond issuances at home according to SDC is relatively low. We re-did all our analyses excluding these firms and obtained results similar to those reported below.

> 6 We exclude U.S. firms from this analysis, given that Worldscope’s coverage of U.S. firms is very limited. Also, note that the U.S. is one of the main markets where foreign firms raise capital. Moreover, as reported below, U.S. firms tend to raise significantly less capital in international markets than firms from other countries. Therefore, excluding U.S. firms is not likely to affect our conclusions on the characteristics and performance of firms that raise

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with missing data, outliers, and firms with less than three annual observations for our variables of interest, we are left with a sample of 23,366 firms from 58 economies covering the period 1991-2005, totaling 201,543 firm-year observations.<sup>7,8</sup> Of these firms, 14,228 issued securities in public markets over the sample period according to SDC, while the remaining 9,138 did not raise capital in public capital markets over this period.<sup>9</sup> Throughout the paper we group issues into equity and debt. Equity issues include initial public offerings (IPOs) and seasoned equity offerings (SEOs). Debt issues include convertible and non-convertible debt issues and preferred shares issues. Preferred shares have features of both equity and debt securities and therefore could be classified in either of the two categories. Given that these issues represent a relatively low percentage of capital raisings, the criterion used to classify them does not affect the observed patterns of capital raising activity. All the results reported in the paper classify preferred shares issues as debt issues. As a robustness test, we classified preferred shares issues as equity issues and obtained results similar to those reported throughout the paper.

# **3. Which Firms Raise Capital Abroad?**

This section analyzes the extent of internationalization of capital raising activity around the world and the characteristics of those firms that issue securities in international capital markets.

In particular, we address three questions. First, what is the role of international capital markets

> capital in international markets. As a robustness test, we included the small sample of U.S. firms with firm-level data available from Worldscope and obtained results similar to those reported below.

> 7 Appendix Table 3 shows the number of observations and firms classified by their capital raising activity by region and income level.

> 8 Firms from Japan and the U.K. represent about 22 and 12 percent of the observations in our dataset of firm-level characteristics, respectively. This reflects mostly Worldscope’s data coverage. We re-did all our analyses excluding firms from both countries and reached the same conclusions reported below.

> 9 The number of firms with capital raising activity in our merged dataset is lower than the number of firms included in the SDC dataset because the merged dataset excludes U.S. firms and because several firms that raise capital through security issuances according to SDC do not have accounting data available from Worldscope.

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relative to domestic markets in providing firm financing and has this changed over time? Second, what fraction of domestic firms raises capital in international markets? Third, what are the characteristics of firms that raise capital abroad, compared to firms that only raise capital domestically and to firms that are listed in their domestic stock markets but do not raise capital by issuing securities over our sample period?

# **3.1 Patterns of Global Capital Raising Activity**<sup>**10**</sup>

As a first step towards analyzing the extent of internationalization of capital markets, Figure 1 shows the evolution of the aggregate amount of capital raised by firms from developed and developing economies through security issues in public markets over the period 1991-2005, differentiating between issues at home and abroad.

Figure 1 shows that the aggregate amount of capital raised in public markets by firms from developed and developing economies increased significantly over our sample period. The total amount raised by firms from developed economies increased from 825.5 billion U.S. dollars at 2005 prices in 1991 to more than two trillion U.S. dollars in 2005. The amount of capital raised in public capital markets by firms from developing economies over this period showed significant volatility, with large decreases associated with the 1994-1995 Mexican crisis, the 1997-1998 East Asian and Russian crises, and the 2001 Argentine crisis.<sup>11</sup> Despite these setbacks, the total amount raised in capital markets by firms from developing economies increased more than three-fold over the sample period, from 40.9 billion U.S. dollars at 2005 prices in 1991 to 137.6 billion U.S. dollars in 2005.

> 10 Henderson, Jeegadesh, and Weisbach (2004) also analyze the aggregate patterns of global capital raising activity and present descriptive evidence similar to that discussed in this section.

> 11 See, among many others, Sachs, Tornell, and Velasco (1996), Chang and Velasco (1998), and Ortiz (2002) for accounts of the causes and lessons learned from these crises.

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Figure 1 also shows that security issuances abroad grew faster than issuances in domestic markets over the period 1991-2005. This pattern was particularly marked in the case of developing economies, where the aggregate ratio of the amount of capital raised abroad to total capital raised increased from 25.3 percent in 1991 to 50.8 percent in 2005. In the case of developed economies, the aggregate share of capital raised abroad increased from 25.3 in 1991 to 39.4 percent in 2005. For both groups of countries, issuances in international capital markets represent a significant share of the total amount raised by firms in public markets.

Figure 2 indicates that debt markets are more internationalized than equity markets, and that developing country firms are more intensive users of international markets than firms from developed economies. Figure 2 presents data on the aggregate share of capital raised abroad for developing and developed economies for selected years, differentiating between equity and debt issues. The top panel of Figure 2 shows that equity issues by developing country firms are far more internationalized than those of firms from developed economies. Also, the degree of internationalization of equity issues for developing economies has increased over our sample period. The amount raised through equity issues outside firms’ home country represented 15 percent of the total amount raised through equity issues by developing country firms in 1995, and this ratio increased to 59.4 percent in 2005. In the case of developed economies, the share of equity issues abroad has remained relatively stable over this period, standing at 9 percent in 1995 and 8.6 percent in 2005.

The bottom panel of Figure 2 shows that debt issues are highly internationalized in both developed and developing economies. For both groups of countries the amount raised through corporate debt offerings abroad represented almost half of the total amount raised through 13
corporate debt issues in 2005, reaching 46.1 percent in the case of developed economies and 43.5 percent for developing economies.

Table 1 further stresses the importance of international securities markets for capital raisings and the comparatively high degree of internationalization of debt markets relative to equity markets, while also showing that debt markets are a much larger source of corporate finance than equity markets around the world. Table 1 provides information on the aggregate amounts raised through security issuances in domestic and international markets over the period 1991-2005 for different regions, differentiating between equity and debt issues. Three main features of the aggregate patterns of capital raisings are visible from the data.

First, debt issues in public markets are a more important source of capital for firms than equity issues at the aggregate level during our sample period. Firms raised 19.8 trillion U.S. dollars at 2005 prices between 1991 and 2005 through debt issues in public markets, which represents 80 percent of the total amount raised through security issues over this period.<sup>12</sup> Second, consistent with the patterns shown in Figure 1, international markets account for a large share of capital raising activity, both for developing and developed economies. Firms from developed economies raised about 7 trillion U.S. dollars at 2005 prices in international capital markets over our sample period, which represents 29.7 percent of the total amount they raised in public markets. In case of developing country firms, capital raised outside their home countries between 1991 and 2005 totaled 459.5 billion U.S. dollars at 2005 prices, representing 37.9 percent of the total amount raised through security issuances during this period.

> 12 The value of debt issues is not directly comparable to that of equity issues, since equity issues have no maturity, while debt issues must be repaid. Part of the proceeds from debt issues are typically used to repay maturing debt and therefore only a fraction of debt issues can be considered new capital. Henderson, Jegadeesh, and Weisbach (2006) try to adjust the data on debt issues to take this fact into account and conclude that even with these adjustments debt issues constitute a larger source of new capital than equity issues at the aggregate level.

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Finally, as highlighted by Figure 2, debt markets are more internationalized than equity markets. In the case of developed countries, the total amount raised through equity issues abroad represents 7.8 percent of the total amount raised through equity issues over our sample period. This statistic is over four times higher in the case of debt offerings, reaching 34.7 percent. For developing country firms, the share of equity issues abroad over the 1991-2005 period reached 27.8 percent, compared to 47.3 percent in the case of debt issuances. Moreover, the higher degree of debt market internationalization, compared to equity markets, is a consistent pattern across all regions shown in Table 1.<sup>13, 14</sup>

# **3.2 Firms’ Access to International Markets**

Although the aggregate patterns documented in Section 3.1 show that equity and debt markets are highly internationalized and that the amount of capital raised in international markets has grown significantly over the last 15 years, these observations do not provide information on developments at the firm level. To address this issue, this section provides information about firms’ access to international capital markets.

The results presented in Table 2 show that the proportion of firms that raise capital abroad is relatively low, suggesting that internationalization is restricted to a small set of firms. Table 2 provides information on the total number of firms that issued securities in domestic and international markets over the period 1991-2005 for different regions, differentiating between

> 13 Out of 99 economies for which we have data on bond issuances, only in nine (mostly Latin American countries) the internationalization of equity markets is higher than the internationalization of debt markets.

> 14 One could argue that we may observe a higher share of international debt issues in the aggregate data not due to underlying differences between equity and debt issuances, but rather because those firms that tend to access international markets are also more likely to issue debt securities, both at home and abroad. However, when analyzing only those firms that raise capital outside their home countries we find that the share of capital raised abroad is on average higher for debt than for equity issues. This suggests that debt issuances abroad may be less costly or more beneficial for firms than equity issues in international markets.

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equity and debt issues. Out of a total of 45,969 firms raising capital in public markets between 1991 and 2005, only 6,661 (14.5 percent) issued securities outside their home market.

Differentiating by type of security issuance, Table 2 shows that a small percentage of those firms that issue equity tend to do so in international markets. Only 5.2 percent of the firms from developed economies that raised capital through equity issues did so through offerings outside their home markets. In the case of developing countries, this statistic reaches 6.3 percent. This suggests that only a relatively small set of firms may be able to meet the requirements to access equity markets outside their home country. This is consistent with the results from Claessens and Schmukler (2007), who show that the firms that cross-list and raise equity capital abroad represent a relatively low share of the total number of firms listed in local stock exchanges in most countries. Moreover, the percentage of firms raising equity abroad is lower than the share of equity capital raised in international markets reported in Table 1, suggesting that equity issues in these markets are larger than those in domestic markets.

The percentage of firms raising capital abroad through debt issues is much higher than for equity issues. In the case of developed economies, the percentage of firms that issued debt securities abroad over our sample period stands at 36.3 percent, which is similar to the share of capital raised through debt issues in international markets for these countries presented in Table 1 (34.7). In contrast, in the case of developing countries, the share of firms issuing debt abroad (26.6 percent) is much lower than the share of debt capital raised abroad shown in Table 1 (47.3), suggesting again that bond issues abroad tend to be larger than domestic bond issues.

Although Table 2 shows that the share of firms that raise capital abroad is relatively low, it does not provide information on how capital raising activity in international markets is distributed among those firms that issue securities abroad. To address this issue, Figure 3 shows 16
the distribution of the total amount raised abroad between 1991 and 2005 among those firms that access international capital markets at some point during this period for developed and developing economies.

Figure 3 shows that capital raising activity in international markets is highly concentrated. For developed economies, the top 10 (20) percent of firms in terms of capital raising activity abroad accounted for 69.4 (82.7) percent of the total capital raised abroad by developed country firms over our sample period. A similar pattern is visible in the case of developing economies, with the top 10 (20) percent of firms accounting for 53.9 (69.5) of the total amount raised abroad by developing country firms over the 1991-2005 period.

In sum, the data presented in Table 2 and Figure 3 indicate that (1) few firms access international markets, and (2) of those few firms that raise capital abroad, a very small fraction accounts for most of the cross-border capital raising activity. These results suggest that a better understanding of the characteristics of those firms that issue securities in international capital markets and how they may differ from firms that only raise capital at home may provide useful insights regarding the internationalization process. We now turn to this question.

# **3.3 Characteristics of Firms That Raise Capital Abroad vs. Those That Do Not**

This section analyzes the characteristics of firms that raise capital through security issues in international capital markets, comparing them to firms that only raise capital in domestic markets and to firms that are listed in their domestic stock markets but do not raise capital over our sample period. We analyze a broad set of firm-level characteristics, including measures of size, growth, investment, profitability, capital structure, international sales, and valuation.

Table 3 presents the medians of several firm-level variables for different groups of firms classified according to their capital raising activity. Similar patterns are visible for most firm 17
characteristics if we compare means across the different groups of firms instead of medians. Appendix Table 4 presents the definition of the different variables used in the analysis.

Two patterns emerge. First, firms that raise capital abroad are very different from those that are listed in local stock markets but do not issue securities in either domestic or foreign markets over the 1991-2005 period.<sup>15</sup> For all of the accounting variables presented in Table 3, the differences in medians among firms that raise capital abroad and non-capital raising firms are significant at the 1 percent level. In particular, firms that raise capital abroad tend to be larger, grow at a faster pace, and have higher capital expenditures and R&D investments, both in absolute terms and as a percentage of sales. In terms of profitability, firms that issue securities in international markets tend to have lower returns on assets, but higher returns on equity. Firms that raise capital abroad also differ from non-capital raising firms in terms of their capital structure. They have higher levels of indebtedness and their debt tends to have longer maturity (a lower ratio of short-term debt to total debt). Also, firms that raise capital abroad tend to conduct a higher percentage of their business activities (sales) abroad and have higher valuations (as measured by Tobin’s q).

Second, Table 3 indicates that there are significant differences between firms that raise capital at home and abroad. Firms that raise capital abroad are significantly larger than firms that only raise capital at home, with the difference in median assets between both sets of firms reaching 1.4 billion U.S. dollars. Firms that raise capital abroad also tend to grow slower than firms that only raise capital in domestic markets. In terms of their investment, firms that raise capital in international markets show higher capital expenditures and R&D investments, both in absolute terms and as a percentage of sales. Firms that raise capital abroad also show higher

> 15 Similar differences are visible between firms that only raise capital at home and firms that do not raise capital during our sample period. In unreported robustness tests, we found that all the differences between these two groups of firms observable in Table 3 are significant at the one percent level.

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levels of indebtedness and exhibit longer debt maturities. In terms of valuation, firms that raise capital outside their home countries have lower Tobin’s q than firms that only raise capital at home. Finally, firms that raise capital abroad conduct a larger percentage of their business outside their home country, as measured by the ratio of foreign sales to total sales.<sup>16</sup>

# **4. What Happens to Firms after Raising Capital Abroad?**

This section analyzes the evolution of the characteristics and performance of firms that raise capital through debt and equity issuances. First, we compare the characteristics of firms that raise capital abroad relative to firms that only raise capital in domestic markets, making these comparisons before and after firms first access international markets. Second, we provide a detailed dynamic analysis. We trace the performance of firms over time after capital raisings, differentiating between equity and debt issues and capital raisings at home and abroad. These analyses allow us to better understand how raising capital abroad affects firms and whether these effects differ from those of domestic capital raisings.

These analyses also allow us to enhance the findings in Table 3, which show that there are significant differences between firms that raise capital abroad and firms that only raise capital at home. By tracing firms through time, we are able to test whether firms differ before they raise capital abroad or whether the cross-firm differences we observe in Table 3 materialize after internationalization.

# **4.1 Changes in Firm-Level Variables after Raising Capital Abroad**

Tables 4 and 5 present regressions of the firm-level characteristics analyzed in Table 3 on dummies that identify firms’ activity in international capital markets for SEOs and debt issues,

> 16 Similar results are obtained if we use the ratio of foreign assets to total assets as a measure of international activity.

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respectively. These regressions include both those firms that conduct the specific type of capital raising under analysis in each case and a control group. In the case of SEOs abroad, the control group includes those firms that conducted SEOs in their home markets. Similarly, in the case of debt issues abroad, the control group includes those firms that issued debt securities at home.<sup>17</sup> These regressions include country and year dummies and two dummy variables that identify firm’s capital raising activity in international markets. The first one is a dummy variable that captures the period after capital raisings abroad, which equals one on the year of the capital raising abroad and in all subsequent years. This dummy variable equals zero for the comparison group and before firms raise capital in international markets. This variable captures differences between firms that raise capital abroad and the control group after capital raisings outside firms’ home country. The second dummy variable included in these regressions captures the period before issuing securities abroad. It equals one before firms raise capital in international markets and zero afterwards. It is zero for those firms in the control group. This dummy captures differences among firms that raise capital abroad and firms in the control group that existed before accessing international markets.

The results in Tables 4 and 5 indicate that most of the differences between firms that raise capital abroad and those that issue securities domestically exist <u>before</u> these firms access international securities markets. In particular, both firms that conduct SEOs and debt issuances abroad are larger and have higher capital expenditures and R&D investments (both in absolute terms and as a percentage of sales) than firms that only raise capital at home before actually going abroad. Also, these international firms have higher profitability and conduct a larger share

> 17 Similar results are obtained if we use as a control group firms that conducted any type of capital raising at home or if we use as control group both firms that raised capital at home and firms that were listed in their domestic stock markets but did not raise capital over our sample period.

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of their business outside their home country than firms that only raise capital in local markets before accessing international markets.

The results in Tables 4 and 5 also show that capital raisings in international markets are related to significant changes in firm-level characteristics. For example, firms that conduct SEOs abroad tend to have higher growth and higher Tobin’s q before (but not after) going abroad than firms that only conduct SEOs at home. Firms that issue debt in international markets tend to have higher growth, a higher share of short-term debt, and higher Tobin’s q before (but not after) going abroad than firms that issue debt in local markets. That is, while firms that raise capital abroad tend to grow faster, have greater capital expenditures as a percentage of sales, and have higher profitability and valuations than domestic firms before going abroad, these differences become smaller (or even disappear) following capital raisings in international securities markets.

Moreover, we find no support for the view that the decision to raise capital abroad in the future induces a firm to change before it actually internationalizes and that this behavior drives the patterns we observe. For instance, the perspective of issuing securities abroad may allow firms to raise more capital domestically and expand. Therefore, the finding that international firms are larger than domestic firms before going abroad could be explained by the decision to internationalize, and not be a pre-existing difference across firms. To address this concern, in unreported robustness tests we estimated the regressions in Tables 4 and 5 using different dummies for each year before and after capital raisings in international markets. These robustness tests indicate that the observed differences between firms that raise capital abroad and at home generally existed three or more years before these firms actually issued securities in international markets, suggesting that the results in Tables 4 and 5 are largely capturing preexisting differences across firms.

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# **4.2 Time Patterns of Firm-Level Variables Following Capital Raising Activity**

An important and yet incompletely answered question regarding the process of internationalization is why firms decide to issue securities in international capital markets instead of raising capital in their domestic markets. In particular, do capital raisings abroad have different effects than domestic capital raisings? In this section, we present some descriptive evidence in this regard, by comparing the evolution of firm characteristics following capital raisings at home and abroad. Note, however, that we do not attempt to deal formally with identifying the exogenous effects of international capital raisings on firm performance. Therefore, the patterns presented in this section are a first step towards addressing this question.

Tables 6 and 7 analyze the time-series patterns of firm-level variables following SEOs and debts issuances, respectively. Specifically, these tables present regressions of firm characteristics on a series of dummy variables that trace out annual patterns after capital raisings. The variable “SEO at home year dummy,” for instance, equals one on the year that a firm conducts a SEO in its domestic market, and zero otherwise. Similarly the “More than three years after SEO at home dummy” equals one more than three years after a firm conducts a SEO at home, and zero afterwards. We construct corresponding dummy variables for the years following each type of capital raising. The sample in these regressions includes only the firms that conduct the specific capital raising under analysis in each case. These regressions include year dummies and firm-level fixed effects. By using firm-level fixed effects, we compare each firm to itself before raising capital.

The regression results in Tables 6 and 7 indicate that the time-series patterns of firm-level variables are broadly similar for issues at home and abroad. In the case of SEOs, Table 6 shows that firms expand following both SEOs at home and abroad. Also, firms tend to experience a long-term decrease in growth and profitability following SEOs. Loughran and Ritter (1997) also 22
find evidence of a decrease in profitability following domestic SEOs by U.S. firms. They interpret this evidence as consistent with market timing arguments that emphasize that firms raise capital after periods of high performance, which may make their securities more attractive to investors. The observed decrease in profitability could also be the result of earnings management, as insiders may have incentives to window-dress company accounts before raising capital (Teoh, Welch, and Wong, 1998 and Rangan, 1998).<sup>18</sup> In terms of investment, although the absolute size of capital expenditures and R&D investments increases, when scaling expenditures by sales and assets the results show that investment does not increase permanently (and even tends to decrease) following SEOs both at home and abroad. The results also indicate that firm valuation, as measured by Tobin’s q, decreases permanently following SEOs.

In the case of debt issuances, Table 7 shows that the time patterns of firm-level variables are broadly similar for issues at home and abroad. Firms tend to expand following debt issues and experience a long-term decrease in profitability and growth. Debt issues, both at home and abroad, are associated with temporary increases in investments. Also, debt issues are associated with increases in indebtedness levels, improvements in debt maturity profiles, and decreases in Tobin’s q. As mentioned above, the finding that the changes in firm performance that follow equity and debt issuances in international markets are broadly similar to those that follow equity and debt issuances at home suggests that issues in international markets are not intrinsically different from issues in the domestic market.

Furthermore, the patterns presented in Tables 6 and 7 are not affected by other capital raisings coinciding with the timing of the specific issuances analyzed in the tables. For instance,

> 18 Inflated expectations by investors and earnings management that leads investors to overestimate the earnings potential of issuing firms are not the only possible reason for poor post-issue operating performance. Jensen and Meckling (1976) argue that the interests of managers and other stockholders become less closely aligned as managers’ stakes decline and ownership becomes more disperse. These increased agency problems may result in worse post-issue performance.

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if following capital raisings abroad firms also issue securities at home, then the observed patterns of firm performance may be partially reflecting the effects of these subsequent domestic capital raisings. To address this concern, we re-estimated all the regressions from Tables 6 and 7 including only capital raisings that took place without other concurrent security issuances. Specifically, we considered only those capital raisings in which firms did not carry out other security issuances in a five-year window around the capital raising under analysis. The results obtained using this reduced sample of capital raisings are qualitatively similar to those reported in Tables 6 and 7: Firms tend to expand and experience a decrease in growth and profitability following capital raisings. Moreover, the time-series patterns of firm-level variables are broadly similar for issues at home and abroad.

# **5. The Capital Raising Activity of Firms That Raise Capital Abroad**

This section addresses three broad questions about internationalization: Are issues in international markets different from domestic issues in terms of their size? How do firms that raise capital abroad distribute their capital raising activity among domestic and international markets? After firms raise capital abroad, does their use of domestic capital markets change and if so, how?

# **5.1 Size Differences between Issues at Home and Abroad**

Although the aggregate evidence presented in Tables 1 and 2 suggests that issues in international markets are larger than domestic issues, we now provide more direct evidence in this regard by analyzing the distribution of the amount raised per issue for issues at home and abroad and comparing median issue sizes across markets. Figure 4 shows the cumulative 24
distribution of the amount raised per issue by firms from developed and developing economies, differentiating between issues at home and abroad.

Figure 4 illustrates that issues at home tend to be smaller than issues abroad. In the case of developed country firms, for instance, while 63 percent of issues at home during our sample period raised 100 million U.S. dollars at 2005 prices or less, only 39.6 percent of issues abroad were below this size threshold. In the case of firms from developing economies, more than 91 percent of issues at home during our sample period raised 100 million U.S. dollars at 2005 prices or less. In the case of issues abroad, only 49.5 percent of issues by developing country firms were below this size threshold. To analyze the size differences among issues abroad and at home in more detail, Table 8 compares the median proceeds of issues in domestic and international markets for firms from developed and developing economies, differentiating between equity and debt issues. Similar results are obtained when analyzing differences across means instead of medians.

Table 8 shows that when analyzing all issues, issues abroad tend to be significantly larger than issues at home, consistent with the results displayed in Figure 4. In the case of developed economies, the median proceeds from equity issues at home over the 1991-2005 period were 26.9 million U.S. dollars at 2005 prices, compared to 54.3 million for equity issues abroad. In the case of debt, the median amount raised per debt issue at home was 85.1 million U.S. dollars at 2005 prices, while the same statistic reached 138 million in the case of debt issues abroad. In both cases, the differences among issues at home and abroad are statistically significant at the 1 percent level, according to the Mann-Whitney U-test.

Even larger differences between issues at home and abroad are visible in the case of developing economies. The median amount raised per equity issue abroad by developing country 25
firms over our sample period was more than 16 times higher than the median amount raised per equity issue at home (62 and 3.8 million U.S. dollars at 2005 prices, respectively).<sup>19</sup> Similar differences across markets are visible in the case of debt issues by developing country firms. In both cases, the differences among issues at home and abroad are statistically significant at the 1 percent level.

The bigger size of capital raisings in international markets could be explained by the fact that firms that raise capital abroad are much larger than firms that only raise capital at home, as shown in Table 3. Therefore, the size difference between issues at home and abroad may be just capturing differences in firm size and not any relevant difference among cross-border and domestic issues.

To address this issue, Table 8 shows the median amount raised per issue in domestic and international markets, restricting the sample only to issues by firms that raise capital both at home and abroad at some point during our sample period.<sup>20</sup> The results from Table 8 show that in the case of developed economies, the median amount raised per equity issue at home over the 1991-2005 period by firms that raise capital both at home and abroad was 126.5 million U.S. dollars at 2005 prices, compared to 116.2 million for equity issues abroad, although the difference is not statistically significant. In the case of debt issues, the median amount raised per issue at home by these firms was 105.9 million U.S. dollars at 2005 prices, while the same

> 19 Although part of the size difference between equity issues abroad and at home can be explained by the fact that the latter include a larger share of IPOs (which tend to be smaller than SEOs), there are large differences in issue sizes across markets even if we compare SEOs and IPOs separately. For developing country firms, IPOs at home over our sample period have a median size of 1.8 million U.S. dollars at 2005 prices, compared to 61.5 million for IPOs abroad. In the case of SEOs differences are smaller but still quite large and statistically significant at the one percent level, with the median size of SEOs in domestic securities markets by developing country firms reaching 16.3 million U.S. dollars at 2005 prices, compared to 62.6 million for SEOs in international markets.

> 20 In the results reported in Table 8, issues at home by firms that raise capital both at home and abroad include issues carried out by these firms before their first capital raising abroad. There could be some concerns that these issues may not be directly comparable to issues abroad by these firms, as firms may expand and experience other relevant changes after accessing international markets that might affect the size of their security issues, both at home and abroad. As a robustness test, we restricted the sample of domestic issues by these firms only to issues carried out after their first capital raising in international markets and obtained similar results to those reported in Table 8.

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statistic reached 155.8 million in the case of debt issues abroad, with the difference being statistically significant at the 1 percent level. In the case of developing economies, Table 8 shows that both equity and debt issues abroad are larger than issues at home when analyzing only issues by firms that raise capital both at home and abroad.

In sum, the results indicate that even if we restrict the sample to issues by firms that raise capital both at home and abroad, issues abroad tend to be larger than domestic issues in most cases. This is consistent with the idea that firms tend to raise larger amounts when issuing securities in international markets. The differences are smaller, however, when disaggregating the data and examining firms that issue securities in both markets.<sup>21</sup>

# **5.2 Where Do Firms Raise Capital after Internationalizing?**

This section analyzes how firms divide their capital raisings between domestic and international markets after their first capital raising abroad. Table 9 shows the average across firms of the ratio of capital raised at home to total capital raised in public markets for each year following firms’ first capital raising abroad, differentiating between equity and debt issues.

The Table 9 results indicate that while firms raise most of their capital abroad in the year when they first access international markets, the share of capital raised at home subsequently increases, remaining quite high in the long run. In the case of firms from developed economies, the results show that in the year when they first raise capital abroad, on average firms raise only

> 21 We also conducted other robustness tests to analyze whether issues abroad are larger than issues at home when comparing issues by the same firm. In particular, for each firm that raised capital both at home and abroad at some point during our sample period we computed the average size of issues at home and abroad and then calculated the difference in average sizes across markets for each firm. We also calculated for each firm that raised capital both at home and abroad the difference in proceeds between issues in domestic and international markets conducted in the same year and averaged these differences at the firm level. We then tested whether the median and mean across firms of these two measures of differences in issue size between markets are different from zero and, in most cases (with the exception of equity issues by developed country firms), concluded that issues abroad tend to be larger than domestic issues, consistent with the idea that firms raise larger amounts when issuing securities in international markets.

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18 and 8 percent of their equity and debt capital in domestic markets, respectively. However, the share of capital raised at home increases significantly in subsequent years. In the case of equity issues, firms conduct most of their subsequent capital raisings at home, with domestic issues accounting on average for 87 percent of total amount raised through equity issuances more than three years after firms first access international markets. In the case of debt issues, firms that internationalize tend to conduct most of their issuances in international markets, but domestic markets remain significant, accounting on average for 40 percent of the total amount raised by these firms through debt issues more than three years after internationalizing. Similar patterns are visible in the case of developing economies. Firms from developing economies that access international markets tend to raise most of their capital at home in the long run, with average ratio of capital raised at home to total capital raised in public markets reaching 60 (63) percent for equity (debt) issues more than three years after firms first raise capital abroad.

The results from Table 9 indicate that firms that access international capital markets remain active in domestic markets, conducting a significant share of their capital raisings in domestic markets. This suggests that these firms are not just opting out of domestic markets, but rather that they are choosing to use both domestic and international markets. This is consistent with the idea that these markets may provide different services and firms will access one or the other depending on their particular financing needs.

# **5.3 Changes in Capital Raising Activity in Domestic Markets after Raising Capital Abroad**

Having shown that firms continue using domestic capital markets quite actively after they access international markets, we now test whether firms change their use of domestic markets after raising capital abroad. Table 10 compares the average amount raised per year by firms that 28
raise capital abroad before and after these firms first access international markets, differentiating between equity and debt issues.

Table 10 shows that there is an increase in the amount of capital raised in domestic markets per year after a firm first raises capital abroad. In the case of developed economies, the amount raised at home per year through equity issues by these firms averages 7.7 million U.S. dollars at 2005 prices before raising capital abroad and increases to 20.5 million afterwards. A similar pattern is visible for debt issues, with the average amount raised per year by firms that issue securities abroad increasing from 36.8 million U.S. dollars at 2005 prices to 129.8 million following internationalization. In both cases the differences are significant at the 1 percent level.

Similar results are obtained in the case of firms from developing economies. For equity issues, the average amount raised per year by firms that raise capital abroad increases from 3.2 million U.S. dollars at 2005 prices to 5.6 million following internationalization. Similarly, the average amount raised at home per year through debt issuances by these firms increases more than four-fold after firms’ first capital raising abroad, from 1.6 million U.S. dollars at 2005 prices to 6.9 million.

While these results indicate that firms tend to raise more capital in their domestic markets after accessing international markets, this does not necessarily imply that firms increase their relative participation in domestic capital raising activity after they internationalize. In other words, do firms capture a larger share of total domestic market activity following security issuances in international markets?

The results from Table 10 show that firms are indeed capturing a larger percentage of total domestic market capital raising activity following their first capital raising abroad. In the case of developed economies, firms that raise capital abroad raise on average 0.1 percent of the total 29
capital raised in their domestic markets per year before internationalization and this share increases to 0.3 percent afterwards. A similar pattern is visible in the case of developing economies, with the average share of domestic market activity accounted by each firm that raises capital in international markets increasing from 0.3 percent to 0.5 percent following the first capital raising abroad.

The observed increases in the absolute and relative participation of international firms in domestic markets following their first capital raising abroad coincide with an increase in firm size. As discussed above, firms tend to expand following capital raisings in international markets. The results in Table 10 suggest that the corresponding expansion in financing needs is at least partially satisfied by domestic markets. Once we scale the amount raised at home by the firm’s assets, we do not find evidence of a significant change in firms’ capital raisings at home.

# **6. Conclusions**

In this paper, we characterize patterns of equity and debt issuance activities in domestic and international capital markets, and also document the dynamics of firm performance following these distinct corporate financing activities. To do so, we compile a new database on worldwide capital raisings that allows us to compare firms that issue securities abroad with firms that issue securities domestically. We also compare these capital raising firms with corporations that are listed in the local stock markets but do not issue new securities over our sample period. This provides new firm-level information about the patterns of international capital raisings.

Several findings relate to existing theories of international finance and motive future research. First, debt markets dwarf equity markets both in terms of how corporations raise capital and in terms of the internationalization of securities markets. Over the period 1991-2005, 30
corporations raised almost five times more money through bond sales relative to equity issues. Moreover, bonds markets are more internationalized. About 35 percent of all debt issues occur in markets other than the firm’s home market, while the corresponding figure for equity issues is 10 percent. Since most empirical studies of financial globalization ignore debt markets and since major theories, such as market segmentation, bonding, and market timing, focus on the crosslisting of equities and the integration of equity markets, our findings (1) suggest that financial markets are more internationalized than suggested by only considering equity markets and (2) advertise the need for additional work on the internationalization of debt markets.

Second, while firms grow and invest more after raising debt or equity abroad, (1) they do not become more profitable or experience an increase in Tobin’s q, and (2) these changes in firm performance are qualitatively similar to the changes that firms experience when they issue debt or equity domestically. These findings first suggest firms get bigger, but not necessarily “better” following internationalization. Moreover, capital raisings abroad are not intrinsically different from capital raisings at home. While capital raisings abroad are bigger, the changes in firm performance following debt and equity issuance in international markets are broadly similar to those in domestic markets. These findings are difficult to reconcile with arguments that firms access international markets to bond themselves to a better corporate governance system, because internationalization does not spark enduring improvements in corporate performance that differ from the dynamic patterns ignited by domestic issuances. This is consistent with the findings in Gozzi, Levine, and Schmukler (2008).

Third, firms continue to use domestic debt and equity markets after they raise capital abroad and indeed significantly expand their use of domestic securities markets. Thus, after firms internationalize, they issue debt and equity securities in both the domestic and foreign markets, 31
using foreign markets for relatively large issuances. These observations are difficult to reconcile with the view that international markets provide less expensive capital, but there are high fixed costs associated with initially accessing these markets. Furthermore, these patterns complicate the study of corporate finance since firms participate in multiple debt and equity markets simultaneously, which is not the focus of research on the determinants of corporate financing choices. Along these lines, future research may assess differences in the costs of raising capital through different instruments in different markets as Ljungqvist, Jenkinson, and Wilhem (2003) and Torstila (2001, 2003) have done for IPOs around the world.

Finally, very few firms use international markets, and of the few that access international debt or equity markets, a very small number raises most of the capital garnered through the sale of securities in international markets. As emphasized by Levine and Schmukler (2006, 2007), this suggests that financial internationalization could have cross-firm distributional effects that affect the firms that rely solely on local markets. Firms that access international markets both grow relative to other corporations in the local market and raise a higher percentage of the total capital raised in domestic markets. Future research could assess whether these changes affect the ability of smaller firms to obtain financing for growth.

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