The Costs, Wealth Effects, and Determinants of International Capital Raising: Evidence from Public Yankee Bonds

Abstract

This paper examines the costs, wealth effects, and determinants of international capital raising for a sample of 260 public debt issues made by non-U.S. firms in the U.S. (Yankee) market. We find that investors demand economically significant premiums on bonds issued by firms that are located in countries that do not protect investors' rights and do not have a prior history of ongoing disclosure. The results provide support for the literature that suggests better legal protections and more detailed information disclosure increases the price investors will pay for financial assets. We also find that the average stock price reaction to Yankee bond offerings is significantly positive and that abnormal returns are largest for first-time Yankee bond issuers. In addition, we show that foreign firms tend to issue in the Yankee market when the relative interest cost is low, indicating that potential differences in borrowing costs influence where firms choose to sell bonds.

How firms use corporate bond markets under financial globalization

“…More recently, other papers have studied other markets. For instance, Miller and Puthenpurackal (2002) analyze the yields of Yankee bonds (bonds issued in the U.S. by non-U.S. firms). Miller and Puthenpurackal (2005) and Petrasek (2010) compare spreads on global bonds (those issued and traded simultaneously in several markets around the world) with those issued in the Eurobond and U.S. markets.…”

Control/ownership structure, creditor rights protection, and the cost of debt financing: International evidence

“…Miller and Puthenpurackal (2002) show that bondholders value the existence of strong laws protecting creditor rights as well as the effective enforcement of these laws. La Porta et al (2006) find that the existence of laws that facilitate private contracting is a stronger determinant of financial markets development than the public regulatory enforcement.…”

“…Few existing studies look at the potential impact of investor protection and overall quality of institutions in the country on the firms' cost of debt financing. Miller and Puthenpurackal (2002) offer the first empirical evidence on the importance of investor protection in the debt market. The authors analyze the cost of debt for a sample of 260 Yankee bonds issued by non-US firms and report that investors charge higher bond costs to firms that are located in countries with poor investors' rights protection and those that ''do not have a prior history of ongoing disclosure."…”

“…Well protected debt claimants would normally require lower interest rates. Miller and Puthenpurackal (2002) examine the impact of legal protection and the information disclosure on the cost of public yankee bonds issued by non-US firms and find that better investor protection and more detailed information disclosure reduce the costs of these bonds. The authors use the creditor rights and the rule of law indices developed by La Porta et al (1998) to proxy for the level of investors' protection.…”

Effects of law on corporate financing practices—international evidence from convertible bond issues

“…LLSV (2000) find firms in countries with better shareholder protection paying higher dividends, and Reese and Weisbach (2002) find that foreign firms cross-list in the U.S. in order to bond themselves to the U.S. legal system. However, this bonding mechanism may be limited to equity cross-listings, as Miller and Puthenpurackal (2002) find that the home country legal system affects the cost of acquiring financing for a sample of Yankee bond issuers. On the supply-side of financing, Esty and Megginson (2003) find that lenders in countries with poor creditor protection tend to spread their risk more than lenders in countries with good quality creditor protection.…”