Liability of foreignness in capital markets: Institutional distance and the cost of debt

• Published in: Journal of corporate finance (Amsterdam, Netherlands) Vol. 57; pp. 142 - 160
• Main Authors: Gu, Yiwen (Jenny), Filatotchev, Igor, Greg Bell, R., Rasheed, Abdul A.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.08.2019
• Subjects: Foreign bonds; Institutional distance; Liability of foreignness; Liability of foreignness; Institutional distance; Foreign bonds
• ISSN: 0929-1199; 1872-6313
• DOI: 10.1016/j.jcorpfin.2017.10.014

We extend the domain of liability of foreignness (LOF) research to capital markets and evaluate whether firms incur LOF when attempting to raise debt capital abroad. We rely upon multiple conceptualizations of institutional distance to capture the extent to which distance may contribute to LOF in capital markets. Based on a sample of 361 firms from 45 countries over a 24year time period, we find that institutional distances lead to increased cost of debt. More importantly, we find that frequency of foreign bond issuance helps to mitigate the LOF. We conclude with a discussion of our results and their implications for future research on understanding how firms address LOF when sourcing debt abroad. •Extended research on liability of foreignness (LOF) from product market to capital market•Institutional distance contributes to LOF in the foreign bond market.•Frequency of foreign bond issuance helps to mitigate the LOF.