The Effects of Formal and Informal Institutions on theCredit Ratings of Foreign Firms Cross-Listed in the U.S.Market

by Wei-Ying Chen

Institution: University of Manchester
Year: 2017
Keywords: credit ratings; cross-listed firms; U.S. regulatory environment; national culture; embeddedness; mastery
Posted: 02/01/2018
Record ID: 2206926
Full text PDF: http://www.manchester.ac.uk/escholar/uk-ac-man-scw:310812


This study investigates the role of formal andinformal institutions in the credit ratings of foreign firmscross-listed in the U.S. listing market. The U.S. regulatoryenvironment and national culture are employed to capture formal andinformal institutions, respectively. To the extent theseinstitutional influences could affect firms' default risks andagency costs, credit analysts are expected to adjust corporateratings accordingly. First, I find that the credit ratings ofcross-listed firms are significantly lower than those of comparableU.S.-domiciled firms. The evidence reflects that cross-listed firmsdo not face exactly the same regulatory stringencies as U.S.domestic firms, which may reduce the credibility of cross-listedfirms. Credit analysts, therefore, may find the accountinginformation of cross-listed firms less informative or credible toformulate ratings. Thus, they perceive an increase in default risksand agency costs resulted from the information asymmetry betweencross-listed firms and external stakeholders. Next, usingSchwartz's two cultural dimensions (embeddedness and mastery) asproxies for culture, I document robust evidence of higher creditratings of cross-listed firms domiciled in high-embeddedness orstrong-mastery countries. This finding reveals that credit analystsrecognize the cultural power in moderating the negative impactsinduced by the SEC's lax enforcement on cross-listed firms.Specifically, it is consistent with cultural effects that influencemanagers' behaviours and decisions, and then restrain managers frominvesting in high default-risk projects. My study contributes tothe credit rating and culture literature by showing that creditanalysts consider both formal and informal institutional factors infirms' agency costs and default risks. This evidence furtherimplies that cross-listed firms and U.S.-domiciled firms are notregulated on a level playing field in a one-size-fits-all legalenvironment in the eyes of credit analysts. However, culture helpsmoderate the different regulatory enforcements between cross-listedfirms and U.S. firms.Advisors/Committee Members: ZENG, CHENG C, XU, LIANG L, Lee, Edward.