When does Bonding Bond? The Case of ADRs and GDRs

We show that initial cross-listings are consistent with legal bonding for only a small fraction of Depositary Receipt issues between 1990 and 2000. We argue that subsequent equity issue patterns cannot be consistent with legal bonding for a greater fraction of the sample. However, using a proprietary sample of Rule 144A/Reg S offering circulars, we show that firms from countries with weak legal systems voluntarily disclose enough information to allow homemarket investors and Qualified Institutional Buyers to price existing and new securities reasonably, even though ownership concentrations in these firms are high, accounting and auditing practices are governed by local standards, and legal remedies for potential breaches of Rule 144A/Reg S contracts are unavailable in US or UK courts. We find no evidence that interests of controlling and (new or existing) minority shareholders are misaligned. If anything, our tests show the opposite.