The March of Going Public Abroad: What Motivates Chinese Enterprises?

(1)

The March of Going Public Abroad: What Motivates Chinese Enterprises?

(2)

Abstract

This paper investigates the motivation behind Chinese companies’ overseas listing.

Multivariate probit analysis is used to explore the factors that have a dominant influence in the

decision to go public abroad from 2005 to 2013. Results suggest Chinese firms that have a larger size measured by total assets and a higher growth rate tend to prefer Hong Kong

market to domestic stock exchanges and firms possessing a higher growth potential and

computer and internet related are more driven to U.S. Regarding the choice of overseas

listing location, smaller and lower PPE/Total Assets ratio firms prefer U.S. over Hong Kong.

JEL classification: G10; G15

(3)

1. Introduction

China has been one of the most dynamic and emerging economies in the world during the past decades and maintained a rapid economic growth rate. Accordingly, Chinese companies, as the engine of this tremendous performance, also attract a great deal of attention from overseas investors. Compared to Chinese enterprises’ active participation in financing and investment activities on the international platform, the studies related to their overseas listing behaviors and other characteristics are still not that ample. Many existing studies of Chinese financial market’s integration into global market remain focused on the firms’ capitalization and valuation, stock returns and underpricing and post-IPO performance, whereas the questions such as what motives Chinese enterprises to engage in overseas financing activities and what are the determinants of their decision to list abroad are under-investigated. This paper is trying to shed some light on the motivation of Chinese companies and explore whether the conventional wisdom of the decision to go public overseas, Hong Kong and U.S. specifically, applies for Chinese companies as well. The main hypothesis in this paper is that Chinese firms with larger size, better profitability and higher risk are more prone to go public away from home, especially those companies mainly engaged in high-tech industries. I would also like to compare Chinese firms listing in Hong Kong with those that select U.S. as the listing destination to determine the difference. By answering these questions, I hope to unveil Chinese companies in the international financial environment and provide preliminary evidence for further study. The primary findings are that firm size and growth rate are the best predicators of Chinese companies’ decision to list in overseas financial markets. While U.S. is most attractive for computer and internet technological Chinese firms, Hong Kong gets more attention from larger firms and firms with a higher PPE/ Total Assets ratio.

(4)

data. Few previous studies on listing motivation are conducted targeting China particularly. Secondly, Chinese firms operate in a market with unique Chinese characteristics, and this paper may provide further insight into Chinese companies’ listing features which in turn could help complete the picture of global IPO studies. Thirdly, there are three basic forms of public listed Chinese firms: domestic IPOs, foreign listings and cross-listings (issued both at home and foreign country). Chinese domestic A-share and overseas listed H-shares or N-shares are relatively segmented, thus we will only explore the determinants of overseas listing decision using single listing companies on domestic, Hong Kong or U.S. stock exchanges. None of previous studies makes this distinction. Lastly, this paper broadens the scope of existing literature by examining the preference of Chinese companies between Hong Kong and U.S. stock markets, enriching existing studies on geography of equity listing.

The rest of this paper is structured as follows. Section 2 gives a snapshot on the history of Chinese companies going public abroad, Section 3 presents literature review, and Section 4 describes the data and variables, together with selected methodology and all the hypotheses of Chinese companies to list overseas. Section 5 provides descriptive evidence and analytical results and the final section summarizes, discusses possible further research direction and concludes the paper.

2. Overview of Chinese overseas listing firms

(5)

Figure 1 Chinese IPOs among the U.S. market1

Figure 2 Chinese companies listed in the US in the form of ADRs vs. IPO

China’s domestic financial market is not a well-developed market and has been long considered as weak efficient, highly speculative and full of uncertainty. The market prices of equity have strong intervention by the government and generally do not reflect the firms’

1_{Data source: Ritter’s website at}

(6)

(7)

Figure 3 Timeline of Chinese listing firms in the major markets2

In addition, as the early birds that go public in foreign countries, Chinese state owned enterprises (SOE) have played an important role initially while more and more private owned companies have joined this trend and seek for international investment via foreign listing. Among these, technology companies are leading edge (See Figure 4).

Figure 4 Industry of Chinese overseas listing firms

3. Literature review

2

Data source is from the official website of NASDAQ, HKEx, SHSE and SZSE.

(8)

Most studies about foreign listing focus on underpricing and post-IPO performance. Existing literature typically agrees that cross-listed firms obtain a short-term positive abnormal return and a long-run negative abnormal return (Jayaraman et al., 1993; Miller, 1999; Foerster and Karolyi, 1999; Benos and Weisbach, 2004). Pagano et al. (2002) find overseas listings are traded intentionally at a heavy discount relative to the domestic market prices and they interpret this phenomenon as a scale of economy and availability of information. To be specific for Chinese overseas IPOs, Luo et al (2012) show that Chinese firms listing in the U.S. generally underperform the benchmark and industry peers in the post-IPO period of 3 years.

The decision to go public abroad is one of the most critical but least investigated questions in corporate finance studies. Pagano et al (2002) point out that the decision to list on a foreign exchange is related to the more general issue of why firms go public, and some of the insights could be brought to the study of the decision to list abroad.

Röell (1996) surveys the determinants to firms’ decision to go public, and the motivation includes seeking for new finance, enhancing company image and publicity, existing shareholder wishing to harvest, and exploiting mispricing to take the windows of opportunity. Pagano et al (1998) use Italian firms as samples and summarize the inducements of initial public offerings by comparing the ex ante and ex post characteristics of IPOs. They find that the possibility of an IPO increases with a company's size and industry's market-to-book ratio. Companies go public to overcome borrowing constraints and gain greater bargaining power with banks in order to finance their future growth, as well as to gain investor recognition and maintain liquidity. Results also show that IPOs are followed by lower cost of credit and increased turnover in control. Attention is also paid to the timing of a firm’s public placement. Chemmanur and Fulghieri (1999) explores at what stage in its life that a firm should go for an initial public placement of equity than private financing, pointing out going public would benefit companies by reducing free rider problem due to more dispersed share ownership, while Subrahmanyam and Titman (1999) look at this question from a different, macroscopic angle: they demonstrate that by going public, firms can generate positive externalities by increasing the size and informational efficiency of the stock market. The benefit from going public is positively associated with the size and liquidity of public markets.

(9)

determinants, there is also some research directly looking into companies that place their initial placement of equity in foreign countries. Generally existing studies agree that the merits far exceed the flaws involved.

Pagano et al. (2002) provide a broad picture of the foreign listings of companies in Europe and the U.S., pointing out that listing in the U.S. is typically driven by the need to fund growth, especially for those high-tech firms. The paper also summarizes motives for cross-listings including raising funds for investment, liquidation by existing shareholders, broadening shareholders’ base, selling shares for better terms, reducing the barrier for foreign investors to commit to higher disclosure and corporate governance regulations, maintaining liquidity, taking advantage of market mispricing, obtaining foreign expertise, and capitalizing on product market reputation, etc. Pagano et al. (2002) also show that firm size and newly privatization increase the probability of cross-listings in both the U.S. and European markets.

Bonding hypothesis first proposed by Coffee (2002) has been the cornerstone in the study of cross-listing and overseas listing. It argues that companies going public abroad to bond themselves to mature financial markets which have better information efficiency, legal system, and corporate governance. Reese Jr. & Weisbach (2002) test bonding hypothesis that foreign companies from countries with weak protection tend to go in for cross-listing in the U.S. to chase protection of minority shareholders’ interests. Higher legal consideration and listing requirements prompt firms outside U.S. to conform to strict accounting standards to gain investor recognition. Lel & Miller (2008) present evidence that backs bonding hypothesis from an angle of top management turnover and firm performance. Karolyi (2012) shows further evidence in support of bonding hypothesis by reviewing the world of cross-listing after the passage of the U.S. Sarbanes-Oxley (SOX) Act.

(10)

Kim& Weisbach (2008) study the motives for equity offers, including both IPOs and subsequent equity offerings (SEOs). With the finding consistent with the intention to raise capital for investment, high market to book companies display a more conservative pattern in investing raised cash than those low market to book value ones after equity offerings. Caglio et al (2013) examine the decision to go public abroad and distinguish foreign and global IPOs from seasoned cross-listings. The working paper indicates that different timing of overseas offerings are driven by different factors while foreign IPOs are more motivated by reducing informational frictions and obtaining greater proceeds.

Companies could be motivated mainly due to demand for a well-established market and sound market reaction apart from the demand for funding. Claessens et al. (2006) find that a country that has higher-income economies with sounder macro policies, more efficient legal systems, greater openness, and higher growth opportunities experiences more internalization due to more developed local stock markets. Therefore all these advantages make an irresistible appeal to the companies seeking for capital investments at a lower cost. In Karolyi (1998), evidence shows the economic implications of corporate decision to list on overseas stock exchanges are mainly due to favorable reaction of share prices, increase in post-listing trading volume, improved liquidity and reduced market risk by global risk exposure.

Corporate governance is another important consideration for going abroad. However, stringent disclosure requirements and legislation play a more complicated role, which sometimes can also be a major impediment. Stulz (1999) points out foreign listings give rise to a challenge in corporate governance as well. Merits are also noticeable. Doidge, Karolyi, and Stulz (2004, 2009) suggest listing overseas reduces the extent to which controlling shareholders can engage in expropriation and thereby increases a firm’s ability to take advantage of growth opportunities. They conclude that an overseas listing in the U.S. still has particular governance advantages for foreign companies. Also, listing shares abroad makes firms more accessible to investors and public monitoring helps diminish potential agency conflicts and information problems ((Karolyi 2006). Doidge et al (2009)).

(11)

home bias reflection hypothesis respectively, concluding that there is investor home bias in overseas listing, which is restrained by companies’ low familiarity barrier preference.

Sarkissian and Schill (2013) in their working paper observe foreign listing activity from a long-term view and use cross-country evidence to analyze the impact of cross-listing wave on host and home markets and influence from industry level. By using gravity model, they test three categories of hypotheses, including economic synergies, pricing efficiency and bonding, and results are consistent with the economic synergy argument while pricing efficiency hypothesis is partially supported.

In comparison, overseas listing studies regarding Chinese firms are not very ample, but quite diversified. Wójcik and Burger (2010) investigate Brazil, Russia, India, and China (BRIC), four countries of origin issuers on American and European markets, exploring the financial patterns of cross-listed firms from intensity, sub-national geography and destination perspectives. They indicate that China as the country with the largest population of foreign-listed firms in the world has great potential for further growth.

Pan and Brooker (2014) examine the evidence of proximity preferences in firms’ decisions to list in particular overseas markets and the influence by government. They conclude that geographic and cultural proximity can drive firms to choose to list in Hong Kong, whereas political influence is difficult to differentiate.

Tobin and Sun (2009) focus on micro-level evidence from China. Firms use international listing as a means to gain benefits from global capital markets. They reveal that innovative Chinese large enterprises can overcome the barrier, grab the opportunities to access international capital, and benefit from improvement in disclosure and transparency, technology transfer, and organizational learning, which in turn will foster a better environment for the development of Chinese domestic market and economic regulatory system.

(12)

effectiveness of bonding hypothesis in terms of executive incentives and analyze the sensitivity of top executive compensation to firm’s performance between Chinese firms cross-listed in Hong Kong and domestic listed companies. Cross-listed firms have stronger incentives associated with sales growth, but less responsive to stock returns and state owned enterprises are more prone to respond to sales growth than private firms.

Yang and Lau (2006) investigate the reason why Hong Kong is a preferred listing location than the U.S. besides geographic proximity and other noticeable explanations. They add two benefits which make Hong Kong a more attracting financial market: better information environment and less financially constraints. The paper shows different stock markets differ from the value brought to companies listed there while this difference determines the foreign listing preference of choice of listing location.

Hung et al (2012) investigate Chinese SOEs with strong political connections and show that politically connected firms are more prone to list in Hong Kong but perform more poorly post-overseas listing than non-politically connected firms, which provides evidence that connected firms’ executives list their firms overseas for private benefits. Sun et al (2013) also investigate the motivation behind the phenomenon that many Chinese SOEs determine to perform share issue privatization (SIP) in an overseas market, especially in SEHK. By testing market order and governance hypothesis, they confirm the arguments that using overseas listing as a policy tool to ensure a positive and healthy development of Chinese domestic market as well as to let SOEs leverage better accounting, governance and legal standards from developed markets as best practice.

Güçbilmez (2014) look into the reason why Chinese technology companies quit ChiNext3 of SZSE as the first choice of going public and turn to U.S. exchanges. The findings are that there exists a separating equilibrium in which larger firms backed by foreign venture capital exhibit a preference to the U.S. while smaller, profitable companies stay with ChiNext. Pan et al (2013) examine Chinese ADRs in details, showing that Chinese ADRs do better in performance and internal control and enjoy more growth opportunities than domestic listed companies ex ante and ex post ADR listings.

3

(13)

4. Data and methodology

In this study, I will examine the motivation of Chinese companies to list abroad in the form of ADRs and IPOs. Based on all preceding theories, the general hypotheses about the motives to go abroad are better legal systems, more reliable accounting standards, more stringent listing requirements, significant demands for capital, shareholder protection, financial leverage, cost of capital, signaling hypothesis, and proximity preference. In this paper I will discuss five motives in China’s context in further details.

Hypothesis 1: Capital demand and growth prospect: Chinese firms undertake

overseas listing to raise capital for investment needs. It takes about an average 5-year time for Chinese companies to list in domestic market (Zhang & King, 2010). The discrepancy between the longtime waiting before IPOs and the urgent demand of capital to satisfy the fast growth makes domestic listing is not an ideal choice for some firms. Moreover, the limited channels for companies to finance stimulate Chinese firms turn to well-developed international financial markets. Additionally, companies may have been drained of their debt capacity to support the growth and additional borrowing might put too much pressure on the firm’s capital structure. Equity offerings are a preferred choice for issuers under this circumstance. Therefore, this paper predicts that Chinese firms who list abroad are more likely to have higher growth rate in sales and higher gearing.

Hypothesis 2: Listing requirement and commitment to disclosure: Chinese

companies are drawn to list in Hong Kong and U.S. due to more stringent listing requirement and disclosure. The signaling theory assumes companies from weakly efficient market and low information environment may choose foreign listing to signal their quality and

performance to attract potential investors, who may provide a higher valuation for the firms. Correspondingly, markets with more public firms can create positive externalities in

(14)

Chinese stock exchange has a higher standard with respect to lock-up period, which may be caused by the highly-speculative nature of Chinese stock market. While predictive time span needed to be listed is among average compared to Hong Kong and U.S., there is more uncertainty for Chinese firms that seek listing in domestic markets. And it’s also more

(15)

Table 1: Listing requirements of different exchanges:

Requirement China Mainland Hong Kong

U.S.

NYSE NASDAQ

Operating history 3 years 3 years 3 years (Amex 2 years) 2 years

Income, revenue and profits

Aggregate profits of over RMB30 million

for the last three years

Main Board: a trading record of no less than three financial

years and meet one of the following three financial criteria:

(i) Profit test: aggregate profit at least HK$50 million, profits at

least HK$20 million in most recent year, and aggregate profits

at least HK$30 million recorded in the two years before that;

the market cap of at least HK$200 million at the time of listing

(ii) Market cap/revenue test: market cap of at least HK$4

billion at the time of listing and revenue of at least HK$500

million for the most recent audited financial year

(iii) Market cap/revenue/cash flow test: market cap of at

NYSE: Revenues US$75million

most recent fiscal year.

NYSE Amex Pre-tax income

(most recent year or two of last

three years) US$750,000.

Global Select Market Revenue >=

US$110 million (previous fiscal

year)

Global Market Revenues (most

recent year or two of last three

(16)

U.S.

NYSE NASDAQ

Income, revenue and profits(continued)

least HK$2 billion at the time of listing and revenue of at least

HK$500 million for the most recent audited financial year and

positive cash flow from operating activities of at least HK$100

million in aggregate for the three preceding financial years.

Market capitalization

Share capital no less than US$7.5

million (RMB50 million) before listing

US$25 million (HK$200 million)

NYSE Revenues (most recent

fiscal year) US$75 million

Amex Pre-tax Income (most

recent year or two of last three

years) US$750,000

NASDAQ Global Market Revenues

(most recent year or two of last

three years) US$75 million

NASDAQ Capital Market Net

Income US$750,000

Equity market listing fees

0.03% of total par value listed and not

exceeding RMB30,000; B share: 0.1%

of total issued share capital, not more

than equivalent of US$5,000

From HK$150,000 to HK$650,000 depending on the monetary

value of equity securities to be listed

NYSE: From min US$0.0019 per

share to max US$0.0048 per

share.

Amex: Minimum US$40,000;

Maximum US$65,000

Global Market: From min

US$125,000 to max

US$225,000;

NASDAQ Capital Market min

(17)

U.S.

NYSE NASDAQ

Lock-up period

(1) The stock issued before the IPO

shall not be transferred within one year

from the listing;

(2) When applying for IPO, its

controlling shareholders and de facto

controller shall make an undertaking

that within 36 months of listing of the

issuer's stocks, they shall not transfer

and repurchase stocks issued before

the IPO

N/A

6 months (as per underwriter's

request)

6 months (as per underwriter's

request)

Accounting standard PRC GAAP HKFRS/IFRS

US GAAP/IFRS acceptable for

FPI

US GAAP/IFRS for issuer

permitted by the commission

Time line of going public 6-24 months 6-12 months 12-24 months 12-24 months

(18)

Hypothesis 3: Broader shareholder base: Chinese firms go public on foreign

exchanges to gain a more diversified institutional investor base. Firms listing on NYSE have an increased visibility (Stulz 1999). Firms may choose overseas listing to reduce firm risk. Therefore it can be predicted that firms that go public overseas are more likely to have a higher risk ratio.

Hypothesis 4: Expertise of overseas market: Pagano et al (2002) point out firms going

public overseas have access to exceptional knowledge from well-developed markets. U.S. exchanges are an everlasting attraction to high-tech firms since U.S. owns the leading and most dynamic tech companies in the world, and the cluster in turn encourages the industry’s rapid growth. Accordingly, this reason may drive companies to list on foreign exchanges to leverage the windows of opportunity to excel in the industry. It can be predicted that high-tech Chinese firms are more likely to go public abroad.

Hypothesis 5: Proximity preference: Chinese firms could be drawn to go public in

Hong Kong due to home bias reflection. Hong Kong shares similar culture background with China mainland, and meantime Hong Kong financial market is more active and efficient than Chinese domestic financial market. With a lower familiarity barrier, better financial environment, more stringent listing requirements, and possible political connection, it can be preferred that Chinese enterprises with a larger size and better profitability are more likely to choose Hong Kong as a preferred listing destination compared to the U.S.

After analyzing above hypotheses, it may help shed some light on the features of Chinese overseas-listed companies. What kind of companies is more likely to go abroad and what kind of markets they prefer could be better understood.

To analyze the motives to list abroad, I am going to use multivariate probit analysis to examine how the likelihood of overseas listing is affected by various firm characteristics. All variables are measured in year -1, where year 0 is the issue year. For companies listed in the U.S. market, total Chinese companies as a whole, companies listed in the form of ADRs and normal IPOs will be examined separately.

The general model to be tested is as follow:

(19)

Overseas is a binary variable, which will be coded as 1 if a firm goes public abroad while zero if it’s listing in Chinese domestic market. By analyzing the coefficients, I attempt to determine the factors that could explain the tendency to go public abroad most effectively. A further description of independent variables will be shown below. To test hypothesis 1, sales growth rate prior IPO year is used as a measure of companies’ growth opportunities. Gearing is calculated as total interest bearing liabilities divided by total equity, which reflects the sufficiency of a firm’s capital. Thus in this paper gearing is used as a proxy to test firms’ capital demand and financial risk. To test hypothesis 2, logarithm of total assets prior IPO year are used as a proxy of firm size while Return on Assets (ROA) is employed as a measure of company’s profitability. Property, plant and equipment (PPE) over total assets is employed as a risk measure to test hypothesis 3. The higher PPE/Total assets ratio, the lower the firms’ risk is. To examine the industry impact regarding hypothesis 4, industry dummy is included. Standard Industrial Classification (SIC) three-digit code is used to determine which industries are included as high-tech industry. According to the classification of high-tech industries by Organization for Economic Co-operation and Development (OECD), computer and data processing services (SIC: 737), computer and office equipment (SIC: 357), biotechnology and pharmaceuticals (SIC: 283), medical precision & optical instruments (SIC: 384&385), aircraft and spacecraft (SIC: 372&376) and telecommunications (SIC: 481,482.483, 484&489) industries are used as proxies of high tech industry in this paper.

(20)

The detailed description of independent variables is as below.

Variables Descriptions

Gearing



Measured as interest bearing liabilities

divided by total equity

Growth



Measured as the growth rate for the

firm’s revenue prior to its IPO

Firm size Logarithm of Total Assets(in thousand USD)



Measured as the logarithm of firm’s total assets for the last fiscal year prior to its IPO

ROA Return on Assets

PPE/Total Assets Risk Ratio



Measured as the firm’s total property, plant and equipment divided by total assets for the fiscal year prior to its IPO

Industry Dummy variables with categories as below:



Computer& data processing services



Computer and office equipment



Biotechnology and pharmaceuticals



Medical precision & optical instruments



Aircraft and spacecraft



Telecommunications

(21)

domestic IPOs over the period 2005–2013.There are no overlaps among these three groups. Any firm who has issued an ADR or a foreign IPO is excluded from the domestic listing sample. Accounting data of the companies are obtained from ORBIS as well. Company profiles are gathered from the official websites of the stock exchanges. I cross-check the information from ORBIS and Datastream, and after excluding the firms with missing accounting information, I arrive at the final sample of 54 U.S. listings (21 ADRs, 33 foreign IPOs), 53 Hong Kong listings and 918 domestic IPOs. Descriptive statistics and empirical regression results are analyzed in next section in details.

5. Results

(22)

another risk measure ratio, PPE/Total Assets Ratio, domestic listed companies have a slightly lower PPE/Total assets ratio of 26.49% than that of companies listing overseas (29.03%). The lower PPE/Total Assets ratio, the higher risk a firm faces. This is inconsistent with the

assumption that overseas listing companies face higher risk. It needs to be verified with further tests. In regard to the last independent variable, ROA, which reveals a firm’s ability to earn profits, is higher in domestic listed companies (17.09%) than that of overseas listed companies (14.07%). Again it contradicts with the hypothesis that foreign listing enterprises have a better performance. I will look into it in details in further test with the regression model.

Table 2: Mean and Standard Deviation (USD in thousands)

Independent Variables Mean Median Standard Deviation. All Companies in the sample

Total Assets 354,631.70 71,981.63 1,649,185

Growth 0.3116 0.2600 0.3751

Gearing 77.5230 45.9100 101.7831

PPE/Total Assets 0.2676 0.2400 0.1743

ROA 16.7745 15.2300 9.7338

Domestic listed Companies

Total Assets 223,407.50 70698.63 1,236,438

Growth 0.2882 0.2500 0.3470

Gearing 73.4565 46.1600 93.1487

PPE/Total Assets 0.2649 0.2400 0.1680

ROA 17.0874 15.5100 8.8871

Overseas listed Companies

Total Assets 1,489,845 136,692.6 3,418,287

Growth 0.5137 0.4150 0.5223

Gearing 112.7022 44.2850 154.1034

PPE/TOTAL Assets 0.2903 0.2350 0.2211

ROA 14.0673 11.9700 14.9977

(23)

Table 3: Correlation of Independent Variables Independent

Variables

Total

Assets Gearing Growth ROA

PPE/Total Assets Total Assets 1 0.2563 -0.0186 -0.1911 0.0240 Gearing 0.2563 1 -0.0232 -0.0900 0.0573 Growth -0.0186 -0.0232 1 -0.0274 -0.0310 ROA -0.1911 -0.0900 -0.0274 1 -0.1896 PPE/Total Assets 0.0240 0.0573 -0.0310 -0.1896 1

To estimate the probability of Chinese firms’ overseas listing, multivariate probit

regression is applied. Results are shown in Table 4. Only the coefficients of log (total assets), sales growth rate are positive and significant at 1% level, and the industry dummy, computer and data process dummy to be specific, is positive and significant at 10% level, while the coefficients of other independent variables are insignificant. According to the results, it will increase the possibility of overseas listing by 64.27% if a firm’s sales growth rate increases by 1% and the possibility is 30.01% for firms with larger total assets. The Likelihood Ratio statistic is 87.7924 with a p-value of 0.0000, which indicates the model is generally significant. The pseudo R square is only 0.1289, though. Generally, firm size and growth rate are

(24)

Table 4: Multivariate probit regression of probability of overseas listing (Overseas VS. Domestic listings)

Variable Coefficient Std. Error z-Statistic Prob.

Log (Total Assets) 0.3001 0.0466 6.4431 0.0000***

Gearing 0.0007 0.0005 1.3109 0.1899

Growth 0.6427 0.1154 5.5675 0.0000***

ROA 0.0033 0.0057 0.5750 0.5653

PPE/Total Assets 0.2621 0.3167 0.8275 0.4079

Biotechnology 0.1283 0.2529 0.5075 0.6118

Computer and data process 0.4196 0.2267 1.8511 0.0642*

Medical, precision & optical

instruments 0.3419 0.5413 0.6316 0.5277

Telecommunication 0.5331 0.3845 1.3865 0.1656

C -5.2340 0.5969 -8.7694 0.000***

McFadden R-squared 0.1289 Mean dependent variance 0.1036

S.D. dependent variance 0.3049 S.E. of regression 0.2825

LR statistic 87.7924 Sum squared residue 80.8696

Prob (LR statistic) 0.0000 Log likelihood -296.720

Note: The table presents the multivariate probit regression of probability of overseas listings

by Chinese firms over the period from 2005 to 2013. All ratios are in percentage. (* represents significance at 10% level, ** represents significance at 5% level, and *** represents

significance at 1% level).

Next the probability of going public in Hong Kong and in the U.S. is examined separately (See Table 5). First variables of companies listing in Hong Kong and domestic listed

companies in the sample are tested. In this regression, if a company list in Hong Kong, it is coded as 1 while if not, as zero. Coefficients of financial indicators are all positive and

statistically significant except for ROA and industry dummies. Log (Total assets) has a positive and significant effect on the decision to go public abroad (significant at 1% level). With PPE/Total Assets ratio significant at 10% level, gearing and growth rate are positively

(25)

relative to its total assets, which indicates lower firm risk, it is more likely to go public in Hong Kong. This rejects hypothesis 3 that companies with higher risk prefer Hong Kong financial market. With regard to industry dummies, there is still no significant sign that companies from certain industry prefer to list in a specific overseas market. The p-value of the likelihood ratio of this regression is approaching zero therefore this model is generally significant statistically and the pseudo R square is 0.3126 for this model.

Table 5: Multivariate probit regression of probability of overseas listing (Hong Kong VS. Domestic and U.S. VS. Domestic)

Variable Coefficient Std. Error z-Statistic Prob. HK listings vs. domestic listings

Log (Total Assets) 0.4738 0.0598 7.9256 0.0000***

Gearing 0.0015 0.0007 2.2829 0.0224** Growth 0.3247 0.1648 1.9702 0.0488** ROA 0.0013 0.0010 0.1355 0.8922 PPE/Total Assets 0.7740 0.4204 1.8411 0.0656* Biotechnology 0.4809 0.3057 1.5730 0.1157 Telecommunication 0.2898 0.6464 0.4483 0.6539 C -7.8718 0.8243 -9.5497 0.0000***

U.S. listings vs. domestic listings

Log (Total Assets) -0.0765 0.0820 -0.9339 0.3504

Gearing -0.0012 0.0009 -1.3916 0.1640

Growth 0.6256 0.1259 4.9697 0.000***

ROA 0.0006 0.0065 0.0909 0.9276

PPE/Total Assets -0.1781 0.4245 -0.4195 0.6748

Biotechnology -0.1498 0.3580 -0.4183 0.6757

Computer and data process 0.5286 0.2264 2.3335 0.0196**

instruments 0.3301 0.5705 0.5786 0.5629

C -0.9301 0.9823 -0.9469 0.3437

(26)

(27)

Table 6: Multivariate probit regression of probability of overseas listing (U.S. by type)

Variable Coefficient Std. Error z-Statistic Prob.

A: ADR listings vs. domestic listings

Log (Total Assets) 0.0157 0.1153 0.1364 0.8915

Gearing 0.0002 0.0010 0.2203 0.8256

Growth 0.5893 0.1481 3.9782 0.0001***

ROA -0.0114 0.0085 -1.3450 0.1786

PPE/ Total Assets -1.2425 0.7307 -1.7005 0.0890*

Computer and data process 0.8569 0.2741 3.1257 0.0018***

C -2.1856 1.3877 -1.5749 0.1153

Pseudo R-squared 0.2014 Mean dependent variance 0.0213

B: Foreign IPO listings vs. domestic listings

Log (Total Assets) -0.0704 0.0981 -0.7177 0.4729

Gearing -0.0026 0.0013 -1.9213 0.0547*

Growth 0.4305 0.1504 2.8632 0.0042***

ROA 0.0121 0.0091 1.3275 0.1844

PPE/ Total Assets 0.3123 0.4780 0.6533 0.5135

Biotechnology -0.1022 0.3635 -0.2812 0.7786

Computer and data process 0.0811 0.3318 0.2445 0.8068

instruments 0.4533 0.5710 0.7938 0.4273

C -1.3315 1.1947 -1.1146 0.2650

Pseudo R-squared 0.0616 Mean dependent variance 0.0358

(28)

with hypothesis 3 that going for overseas listing for risk diversification. The growth rate and the computer and data industry dummy coefficients are both positive and significant at 1% level, further revealing that a firm with a high growth rate and operating in the computer technology sector has more chance to issue an ADR overseas listing. With reference to foreign IPO, apart from growth rate is positive and significant at 1% level, only gearing is significant at 10% level, but negatively related to the odds of IPO listing in the U.S. To put differently, this suggests a firm is less likely to place an initial public offering in the U.S. if it has a more risky financial structure, although the economic influence is very limited since the coefficient is rather modest.

(29)

Table 7: Multivariate probit regression of probability of overseas listing (HK VS. U.S.) Variable Coefficient Std. Error z-Statistic Prob.

Log (Total Assets) -0.6854 0.1461 -4.6907 0.0000***

Gearing 0.0007 0.0019 0.3830 0.7017 Growth 0.6164 0.3987 1.5462 0.1221 ROA 0.0048 0.0116 0.4108 0.6812 PPE/Total Assets -2.0442 0.8973 -2.2780 0.0227** Biotechnology -1.5898 0.6959 -2.2846 0.0223** Telecommunication 1.1092 1.0080 1.1005 0.2711 C 8.4932 1.7757 4.7830 0.0000***

6. Conclusion and limitations

In this paper, the motivation behind Chinese enterprises going public abroad is investigated. Multivariate regression analysis is conducted to determine the impact of company and industry factors on the odds of a firm’s choice of listing overseas. The first finding is that among companies listing in Chinese domestic stock market, Hong Kong and U.S. stock markets, the larger a firm’s size is, and the higher growth potential a firm has, the more likely a firm chooses to go public away from home. These results are in accordance with hypothesis 1 and hypothesis 2 proposed. However, ROA in hypothesis 2 does not show a significant sign according to the regressions and hypothesis 3, risk diversification assumption is not well supported by the results as well. Moreover, hypothesis 4 regarding industry dummies does not show any significant evidence of industry aggregation in the first

(30)

companies. Only growth rate shows a positive and significant sign in predicting companies listing in the U.S. financial market. Additionally, the computer and data process industry dummy illustrates a significant p-value and implies that computer and internet-related high tech firms are more likely to go public in the U.S., which is not difficult to picture since U.S. has the strongest computer science competence and the best cutting-edge tech firms. The fourth finding is associated with different ways that firms could choose to list in the U.S. A

fast-growing and computer related Chinese firm is more likely to make the decision to list in the U.S. by means of issuing ADRs. Lastly, I explore the inclination of a firm to list in Hong Kong or the U.S market. The data prove that in comparison to companies listing on Hong Kong exchange, Chinese companies listing on the U.S. stock exchanges are smaller in terms of firm size and have a lower PPE/Total Assets ratio, which means it is possible that intangible assets such as capitalized Research and Development expenditures have a considerable proportion in total assets in these U.S. listed companies.

(31)

IPO pricing and post-IPO performance are coming forth whilst little authoritative research with reference to Chinese firms’ motivation of going public abroad comes into view.

(32)

References

Allen, F., Qian, J., Qian, M., 2005. Law, finance, and economic growth in China. Journal of

Financial Economics 77, 57–116.

Baker, H.K., Nofsinger, J. R., Weaver ,D.G, 2002. International cross-listing and visibility. Journal of Financial and Quantitive Analysis. 37(3), 495-521.

Benos, E., Weisbach, M.S., 2004. Private benefits and cross-listings in the United States.

Emerging Markets Review 5, 217–240.

Brau, J.C., Fawcett, S.E, 2006. Initial public offerings: an analysis of theory and practice.

Journal of Finance 61(1), 399–436.

Caglio, C., Hanley, K.W., Marietta-Westberg, J. 2013. Going public abroad. Unpublished

working paper. Divisions of Research & Statistics and Monetary Affairs, Federal Reserve

Board, U.S.

Chen, X., Chen, X., Gu, B., 1997. Empirical study of Chinese stock market efficiency.

Accounting Research 9, 13–17.

Claessens, S., Klingebiel, D., Schmukler, S.L., 2006. Stock market development and

internationalization: do economic fundamentals spur both similarly? Journal of Empirical

Finance 13, 316–350.

Chemmanur, Thomas J., and Paolo Fulghieri, 1999. A theory of the going-public decision.

Review of Financial Studies 12(2), 249-279.

Coffee, John, 2002. Racing towards the top? The impact of cross-listings and stock market competition on international corporate governance. Columbia Law Review 102(7),

(33)

Doidge, C., Karolyi, G.A., Stulz, R., 2004. Why are foreign firms listed in the U.S. worth more?

Journal of Financial Economics 71, 205–238.

Doidge, C., Karolyi, G.A., Lins, K.V., Miller, D.P., Stulz, R., 2009. Private benefits of control, ownership, and the cross-listing decision. Journal of Finance 64(1), 425-466.

Doidge, C.,Karolyi, G.A., Stulz, R.,2009. Has New York become less competitive than London

in global markets? Evaluating foreign listing choices over time. Journal of Financial

Economics 91, 253–277.

Foerster, S., Karolyi, G.A., 1999. The effects of market segmentation and investor recognition on asset prices: evidence from foreign stocks listing in the United States. Journal of Finance 54, 981–1013.

Francis, B.B, Hasan, I, Sun, X, 2009. Political connections and the process of going public: Evidence from China. Journal of International Money and Finance 28, 696–719.

Gao, S., 2002. China stock market in a global perspective. Research Report, Dow Jones Indexes. Dow Jones & Company, South Brunswick, NJ.

Güçbilmez, U., 2014. Why do some Chinese technology firms avoid ChiNext and go public in

the US? International Review of Financial Analysis. In press.

Hung, M., Wong, T.J., Zhang, T., 2012. Political considerations in the decision of Chinese SOEs to list in Hong Kong. Journal of Accounting and Economics 53, 435–449.

Jay R. Ritter, 1991. The long-run performance of initial public offerings, Journal of Finance 46,

3-27.

Jayaraman, N., Shastri, K., Tandon, K., 1993. The impact of international cross-listings on risk

(34)

91–103.

Karolyi, G.A., 1998. Why do companies list shares abroad? A survey of the evidence and its managerial implications. Financial Markets, Institutions and Instruments 7, 1–60.

Karolyi, G.A., 2006. The world of cross-listings and cross-listings of the world: challenging conventional wisdom. Review of Finance 10, 99–152.

Karolyi, G.A., 2012. Corporate governance, agency problems and international cross-listings: A defense of the bonding hypothesis. Emerging Markets Review 13, 516–547.

Kim, W., Weisbach, M.S., 2008. Motivations for public equity offers: An international perspective. Journal of Financial Economics 87(2), 281-307.

Lel, U., Miller, D.P., 2008. International cross-Listing, firm performance and top management

turnover: A test of the bonding hypothesis. Journal of Finance 63( 4), 1897-1937.

Loughran, T., Vijh, A., 1997. Do long term shareholders benefit from corporate acquisitions?

Journal of Finance 52, 1765–1790.

Luo, Y.L., Fang, F, Esqueda, O.A., 2012. The overseas listing puzzle: post-IPO performance

of Chinese stocks and ADRs in the U.S. market. Journal of Multinational Financial

Management 22,193– 211.

Miller, D.P., 1999. The market reaction to international cross-listings: evidence from depositary receipts. Journal of Financial Economics 51,103–123.

Pan, F., Brooker, D., 2014. Going global? Examining the geography of Chinese firms’

overseas listings on international stock exchanges. Geoforum 52, 1-11.

Pan, L.H., Lin, C.T., Yang, P.C. 2013. Corporate governance, growth opportunities, and the

(35)

221–234.

Pagano, M., Panetta, F., & Zingales, L., 1998. Why do companies go public ? An empirical analysis, Journal of Finance LIIl(1), 27-64.

Pagano, M., Roell, A.A., Zechner, J., 2002. The geography of equity listing: why do European companies list abroad? Journal of Finance 57, 2651–2694.

Reese Jr., W.A., Weisbach, M.S., 2002. Protection of minority shareholder interests,

cross-listings in the United States, and subsequent equity offerings. Journal of Financial

Economics 66, 65–104.

Ritter, J.R., 2012. Initial public offerings: foreign IPOs in the U.S., 1988-2012. Retrieved from

http://bear.warrington.ufl.edu/ritter/IPOs2012Foreign.pdf

Röell, A. A., 1996. The decision to go public-an overview. European Economic Review 40,

1071-1081.

Stulz, R., 1999. Globalization, corporate finance, and the cost of capital. Journal of Applied Corporate Finance 12, 8–25.

Sarkissian, S., Schill, M.J., 2004. The overseas listing decision: new evidence of proximity preference. Review of Financial Studies 17, 769–809.

Sarkissian, S., Schill, M.J., 2013. Cross-listing waves. Unpublished working paper.

Subrahmanyam, A. and S. Titman, 1999. The going-public decision and the development of financial markets, Journal of Finance 54, 1045-1082.

Sun, Q., Tong, W., Wu, Y.J., 2013. Overseas listing as a policy tool: evidence from China’s H-shares. Journal of Banking & Finance 37, 1460–1474.

(36)

globalization: micro-level evidence from China. World Development 37(4), 825–838. Chi, W., Zhang, H., 2010. Are stronger executive incentives associated with cross-listing? Evidence from China, China Economic Review 21,150–160.

Wójcik, D., Burger, C., 2010. Listing BRICs: stock issuers from Brazil, Russia, India, and China in New York, London, and Luxembourg. Economic Geography 86(3), 275–296. Yang, T., Lau, S., 2006. Choice of foreign listing location: experience of Chinese firms.

Pacific-Basin Finance Journal 14, 311 –326.

Zhang, Y., Zhou, Y., 2001. Is Chinese stock market weakly efficient? Journal of Financial Research 24, 34–40.

Zhang, C. X., & King, T.-H. D. (2010). The decision to list abroad: The case of ADRs and