Financial Globalization and the Rise of IPOs Outside the U.S.

René Stulz is Professor Finance at Ohio State University.

In the paper, Financial Globalization and the Rise of IPOs Outside the U.S., which was recently made publicly available on SSRN, my co-authors (Craige Doidge and George Karolyi) and I document dramatic changes in the IPO landscape around the world over the past two decades. U.S. IPOs have become less important and IPOs in other countries have become more important, whether one looks at counts or at proceeds. In fact, U.S. IPO activity has generally not kept pace with the economic importance of the U.S. We show that financial globalization plays a critical role in facilitating the increasing importance of IPOs by non-U.S. Firms.

Financial globalization makes it easier for firms to have global IPOs, which enables them to overcome the adverse effects of weaker institutions in their home country. Greater globalization also affects the monitoring of firms, as holdings by institutional investors grow throughout the world. With greater financial globalization, a country’s local institutions are less important for the domestic IPO rate. In addition, greater financial globalization is associated with an increase in the rate of global IPO activity.

Global IPOs played a critical role in increasing the importance of IPOs by non-U.S. firms. Though firms in countries with weaker institutions are less likely to go public with a domestic IPO, they are more likely to go public with a global IPO. That is, global IPOs enable firms to overcome poor institutions in their country of origin. Perhaps as a result, the laws and institutions of a firm’s country of origin have become significantly less important in affecting the rate and pace of IPO activity in a country. Of course, there are also other important drivers of domestic and global IPO activity, such as domestic and world valuations.

Our paper leaves open some important issues. First, although we find clear evidence that institutions became less important in affecting a country’s IPO activity, it could be that laws and regulations that we do not account for still affect IPO activity. Further work should, therefore, examine the impact of changes in laws that are not captured by our institutional proxy variables. Second, we do not investigate the impact of financial globalization on individual IPOs. A detailed study of how firms going public in financially open countries actually make use of institutions and resources from other countries would help in understanding better the impact of financial globalization on IPO activity. Finally, our focus is resolutely on cross-country variation in IPO activity; though our model shows that the U.S. IPO rate is abnormally low in the 2000s, we do not explain it. More work, like that of Gao, Ritter, and Zhu (2012), should seek to address that abnormally low U.S. IPO rate and explain it.

The full paper is available for download here.

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