Three essays in international corporate finance and banking

Abstract

The second chapter explores the importance of home sovereigns to banks. It tests how the market values international diversification of banks in good times and in bad times. Particularly, it looks at the market reaction when a bank's home sovereign debt rating changes and when foreign sovereigns' debt ratings change before and during the European sovereign debt crisis. The analysis shows that international diversification strategies like geographic diversification, income diversification, U.S. cross-listing and lending relationships are beneficial to banks in the most adverse situations in the crisis period. At the same time these strategies sometimes harm banks' stock market returns.

The third chapter assesses the importance of industry peers for a firm's own financial policy decision making strategy. I find that, similar to U.S. firms, foreign firms do follow their peers when they make financial policy decisions. Specifically, a 11(15) percentage point increase in peer firms' average book(market) leverage leads to about 5 percentage points increase in a firm's own leverage. Additionally, I show that firms are more likely to follow their peers when investor protection laws including information disclosure and minority shareholder protection are weak, when creditor rights laws are strong, and when equity markets are more developed, suggesting that peers matter the most when firms have the greatest need to learn and to demonstrate their quality.

The first chapter looks at how corporate investment levels and decision factors change subsequent to a U.S. cross-listing. Foreign firms list their stocks on the U.S. market for various reasons, among which are increased valuation, better access to capital at a lower cost, legal and reputational bonding with investors, improved liquidity, better price informativeness, etc. I focus on a recent theory, which suggests that firms cross-list in the U.S., so that they can obtain more precise information from the market and thus make better investment decisions. I find that after a non-exchange U.S. cross-listing, firms decrease their investment levels significantly. I also show that the sensitivity of investment to stock price changes after a U.S. cross-listing only when a firm's price informativeness is considered. I conclude that cross-listing, voluntary or involuntary, and the level of firm specific information reflected in a firm's stock price are both important factors considered by managers when they make investment decisions.

This dissertation covers three distinct topics in international corporate finance and banking. In each of the three chapters I ask questions, which cannot be answered from a single country's perspective. Each country has distinct legal and institutional characteristics which to some extent determine the decisions of the firms and banks domiciled in it. In the three chapters of my thesis I study the importance of a firm's or a bank's origin by exploring financial decisions in multiple heterogeneous countries.