Prior research posits that firms from less developed countries reduce adverse selection concerns by bonding themselves to exchanges in more developed countries. The bonding hypothesis conceptually identifies legal and reputational channels. There is debate surrounding the effectiveness of the two channels, which are often conflated. This paper empirically isolates the legal channel by examining a positive shock to public enforcement and legal bonding—the 2013 Sino-U.S. agreement on enforcement cooperation—which resolved a three-year credibility crisis for U.S.-listed Chinese firms. I hypothesize and provide two sets of evidence that the agreement yields effective legal bonding and reduces adverse selection. First, high- and low-value U.S.-listed Chinese firms’ valuations become significantly more dispersed post-cooperation. Second, the average information asymmetry component of the bid-ask spread, book-to-market ratio, and zero return days fall while share turnover rises post-cooperation. Analyses show that in spite of U.S.-listed Chinese firms’ individual reputation-differentiating efforts, adverse selection lessens only after cross-border enforcement becomes more credible. I also show that the agreement has higher impact on firms with more positive pre-agreement reputation events. The combined results suggest complementarity between legal and reputational bonding.
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|Commitee:||Ryan, Stephen, Dou, Yiwei, John, Kose|
|School:||New York University|
|School Location:||United States -- New York|
|Source:||DAI-A 81/2(E), Dissertation Abstracts International|
|Keywords:||Cross-border enforcement, Cross-listing, PCAOB, SEC enforcement, US-listed Chinese firms|
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