Foreign IPO capital market choice: Understanding the institutional fit of corporate governance

While product market choices were central to strategy formulation for firms in the past, the integration of financial markets makes the choice of capital markets an equally important strategic decision. We advance a comparative institutional perspective to explain capital market choice by firms making an IPO in a foreign market. Based on a sample of 103 and 99 foreign IPOs in the US and UK respectively during the period 2002-2006, we find that internal governance characteristics (founder CEO, executive incentives, and board independence) and external network characteristics (prestigious underwriters, degree of venture capitalist syndication, and board interlocks) are significant predictors of foreign capital market choice by IPO firms. Our results suggest foreign IPO firms select a host market where its governance characteristics and third party affiliations fit the host market?s institutional environment. The basis for evaluating such fit is the extent to which firm attributes and characteristics meet legitimacy standards in host markets. Thus, differences in internal governance characteristics and external ties are associated with strategic capital market choices such that increased fit results in higher likelihood of choosing one market over another.