Asymmetry of Information in Emerging Markets: Should a Firm Issue its Securities Locally or Abroad?

We observe different market reactions whether firms based in emerging countries issue equity locally or abroad. This result suggests that the decision on where to issue may convey information regarding the value of the firm. Constructing indexes for market openness and information disclosure, we empirically find that the probability of issuing in international markets decreases by seven percent as the asymmetry of information between domestic and foreign investors decreases. Furthermore, the risk premium on market-to-book value estimated by Fama and French (1992) is correlated with the firm’s decison on where to issue public securities. We use a switching regression model to compute the price reactions to the firm’s issue decision, where the endogenous switching corresponds to the firm’s decision on where to issue. Our results reveal that foreign issues are associated with lower risk premium suggesting that a firm signals high quality when issuing in international markets. Finally, we find that firms that issue both locally and abroad tend to issue earlier internationally and later in domestic markets, supporting the idea that foreign issues are associated with higher fixed costs. ∗Bank of Portugal and Universidade Nova de Lisboa, Av. Almirante Reis, 71, 1150-012 Lisbon. Ph: +351 21 3130938. E-mail: [email protected]. I would like to thank the guidance of Ian Domowitz, Michael Fishman and Robert Korajczyk; and seminar participants at the European Finance Association Berlin 2002, Northwestern University, Penn State University, and Universidad Carlos III, for helpful comments. All errors are mine.