The Bonding Effect in Cross-Listed Chinese Companies: Is it Real?

A common explanation offered for PRC companies’ listing overseas is that they receive a price premium because listing overseas demonstrates a willingness to submit to the more shareholder-protective regulatory regime of the foreign jurisdiction and stock market. This explanation is commonly known as the bonding hypothesis. There is some empirical support for the proposition that listing overseas does indeed bring a price premium, although issues of causality are difficult to sort out. If it is true that investors view an overseas listing of a Chinese firm as something worth paying a premium for, the question remains, however, as to whether that view is well founded. Investors in overseas markets may find themselves left out in the cold when things go wrong, and indeed the Risk Factors section of PRC firms’ IPO prospectuses routinely caution investors that successfully suing the company or its management will be difficult or impossible. This paper will examine the degree to which Chinese listed companies and their management do in fact, in a practical and realistic way, bind themselves to overseas state and market norms when such companies list abroad. It will argue that the actual binding effect of an overseas listing is small and that investors are mistaken to pay a premium for it. This conclusion, if correct, has at least two important implications beyond China. First, it casts into doubt the semi-strong form of the efficient capital markets hypothesis, because it means that there is publicly available information that does not seem to be adequately incorporated into stock prices. Second, it suggests that the bonding hypothesis needs to be examined on an empirical, country-by-country basis to see whether the bonding is in fact anything more than an illusion