Legal System and Rule of Law Effects on US Cross-Listing to Bond by Emerging-Market Firms

1. Legal System and Rule of Law Effects on US Cross-Listing to Bond by Emerging-Market Firms Paul M. Vaaler University of Illinois at Urbana-Champaign pvaaler@uiuc.edu Burkhard N. Schrage Singapore Management University bschrage@smu.edu.sg UIUC Law School, Corporate Law and Finance Pro-Seminar Tuesday, September 26, 2006, 4:15pm

2. Corporate Governance, US X-Listing and Performance: One View from (Old) Europe 58% of chairmen who represent companies listed in the US say that they would consider delisting because of Sarbanes-Oxley, although many German chairmen argue that they have concerns over the damage delisting would do to their brand and sales. 70% of the chairmen of companies which are not US listed say Sarbanes-Oxley would dissuade them from seeking a US listing. Russell Reynolds Associates, Executive Search and Evaluation Firm “Good Governance for Good or Ill – Europe’s Chairmen Report 2006” 4

3. Corporate Governance, US X-Listing and Performance: Another View from an Emerging Market, India A growing number of headlines suggest that stringent [SEC] regulations, US accounting guidelines and Sarbanes-Oxley compliance standards place undue burdens on US-listed companies. Accused of inhibiting the free flow of information as well as the entrepreneurial spirit of growing businesses, these listing requirements have caused many to question whether US markets –long considered the gold standard– are losing their luster. Based on our recent experience going public on the [NYSE], we at WNS Global Services, an India-based business process outsourcing provider, believe the answer is no. Neeraj Bhargava, CEO of WNS August 28, 2006 Wall Street Journal “Good Governance Is Good Business” A21 58% of chairmen who represent companies list in the US say that they would consider delisting because of Sarbanes-Oxley, although many German chairmen argue that they have concerns over the damage delisting would do to their brand and sales. 70% of the chairmen of companies which are not US listed say Sarbanes-Oxley would dissuade them from seeking a US listing. Russell Reynolds Associates, Executive Search and Evaluation Firm “Good Governance for Good or Ill – Europe’s Chairmen Report 2006” 4 Bhargava in July 2006 when WNS listed on the NYSE. 12,000 employees in 8 Centers in India and UK; $165 Million Revenues in 2005. IPO Raised $225 Million. Post-IPO Firm Value: About $1 Billion

4. Research Background and Motivation • Fundamental Research Question: Why Do Firms Go Abroad? • International Business Research Assumes Operational Internationalization and Performance Relationship • ButWhat About Financial Legal Internationalization? • Law and Finance Research Fills the IB Theoretical Gap: Bonding Hypothesis: Firms List Abroad to “Bond” With Stronger Corporate Governance Standards Than Obtain at Home; Attract Greater Minority Shareholding; Lowers Cost of Capital Net of Higher Compliance Costs; Legal Presence Matters • But Bonding Models Imply Negative Relationship Between Quality of Firm’s Home Country Corporate Governance Regime and Firm Listing Abroad (in US or UK). Only Indirect Support and Sometimes Contradictory Evidence for Such a Negative Relationship • Anecdotes and Examples of Legal System Differences in Emerging-Market Contexts (Not OECD or LCD Countries) • But Little Focus on Rule of Law (Enforcement, Respect, Self-Adherence) Differences Between Emerging Market Countries at a Point in Time, and Enforcement Differences Within Emerging-Market Countries Over Time (Since the 1990s) • What IB Can Learn from L&F, What L&F Can Learn from IB, and What Both Can Learn from Neeraj Bhargava

5. Research Goals • Integrate Awareness of Both (Relatively Fixed) Legal System and (Relatively Fluid) Rule of Law Effects on X-Listing to Bond Into Unified Framework for Emerging-Market Firms • Contribute to Law and Finance Research By Accounting For Both Effects, and Refining Institutional Domain Limitations of Bonding Research • Contribute to IB Research with First Theoretical Framework Explaining Internationalization Behavior With Less or No Regard For Operational Presence • Empirically Validate Unified Framework • Multiple Estimation Approaches: Univariate and Multivariate; Cross-Sectional and Panel • Multiple Equation Specifications: Accounting for Other X-Listing Motivations; Accounting for Legal System and Rule of Law Factors; and Testing the Robustness of Such Accounts to Reasonable Variation

6. Overall Research Proposition • Research Proposition: Emerging-Market X-Listing to Bond in US Increases With Decreasing Quality Corporate Governance Regime At Home • Stronger (Weaker) Corporate Governance with Common Law (Civil Law) Legal System • Stronger (Weaker) Corporate Governance with Stronger (Weaker) Rule of Law (Enforcement, Respect, Self-Adherence) • Law “on the Books” and Rule of Law Matter Individually and Interactively Bhargava in August 2005 with Ananda Mukherji of ICIC OneSource, another India-Based BPO Company, with Sunil Mehta, VP of the National Association of Software Services Companies (“NASSCOM”). NASSCOM Certifies BPO Company Service Quality • [O]ur decision to list in the US, and on the NYSE, was driven by the • following: • Credibility: Meeting the financial reporting, corporate governance and disclosure requirements necessary for listing on the NYSE builds confidence among clients, the government and other regulators. Clients prefer reporting in US Generally Accepted Accounting Principles, or GAAP –the same high standards they set for themselves. • Neeraj Bhargava, CEO of WNS • August 28, 2006 • Wall Street Journal • “Good Governance Is Good • Business” A21

7. Integrative Conceptual Framework and Hypotheses • Research Proposition: Emerging-Market X-Listing to Bond in US Increases With Decreasing Quality of Corporate Governance Regime At Home • Stronger (Weaker) Corporate Governance with Common Law (Civil Law) Legal System • Stronger (Weaker) Corporate Governance with Stronger (Weaker) Rule of Law H1: Less X-Listing Among Firms from Common Law Countries Where Rule of Law Is Weak H2: Less X-Listing Among Firms from Common Law Countries Where Rule of Law Is Strong H3: Less X-Listing by Firms from Civil Law Countries as Rule of Law Strengthens H4: Less X-Listing by Firms from Common Law Firms as Rule of Law Strengthens

8. Empirical Methods • [O]ur decision to list in the US, and on the NYSE, was driven by the • following: • Credibility: Meeting the financial reporting, corporate governance and disclosure requirements necessary for listing on the NYSE builds confidence among clients… • Global visibility: The prestige of an NYSE listing not only builds brand recognition among US clients and potential clients, but also among international audiences who recognize the high standards that must be met… • Shareholder value: Companies that list in the US have a valuation nearly one-third than those listed elsewhere… • Liquidity: A US listing allows us to reach a wider pool of investors and to trade in scale… • Even the much-maligned requirements for Sarbanes-Oxley compliance have benefits: Business processes are better defined, vetted by experts and made more efficient. There also could be potential for long-term benefits such as a lower cost of capital, smoother follow-on financing and greater flexibility in M&A activities… • Neeraj Bhargava, CEO of WNS • August 28, 2006 • Wall Street Journal • “Good Governance Is Good • Business” A21 Bhargava’s Publicity Photo for Recent Lecture at Northwestern’s Kellogg School of Management

9. Empirical Methods • Empirical Model • Model Terms • Dependent Variable, USListing: % of Publicly Listed Firms for Country k in Year t X-Listed on US Financial Markets • Independent Variable Controls: Country and Year Dummies, Other X-Listing Controls for Importance of US Market, Home Market Capital Segmentation, Market Liquidity and Economic Growth • Key Independent Variables: Invariant Common Law Dummy, Varying Standardized Rule of Law Measure, Interaction. • Estimation • Pair-Wise Comparison of Scenario Means; Panel FGLS Regression; Scatterplot and Linear Trends • Data, Sampling and Tests • USListing: BoNY, World Bank WDI; Controls and Key Variables: US ITC, WDI, Milken Inst., Reynolds and Flores (2003) (Common Law), Kaufman et al. (2003) (Rule of Law) • 92 USListing Country-Years From 1996-2002 for 24 Emerging-Market Countries and from 400-800 Firms • Regression Tests: H1-H2: β5+ β7<0 (Rule of Law Set at Low and High Levels); H3: 6 < 0; H4: 6 + β7< 0

10. Results I: Pairwise Comparison of Means • Preliminary Support for H1 and H3 (No Support or Contradictory Evidence for H2 and H4). 3 of 4 Scenarios Compare Substantially As Predicted.

11. Results II: Panel FGLS Regression -Controls • Results Generally Consistent (3 of 4 Instances) With Expectations at p < 0.10 (†) 0.05 (*) or 0.01 (**) Levels. Column (1) Results Indicate That Controls and Dummies Alone Explain Approximately 86% of the Variation in USListing (Sample Mean = 0.06; Std Dev = 0.05)

12. Results III: Panel FGLS Regression –Key Terms • Results Indicate Support for H1 and H3 at p < 0.10 (†), 0.05 (*) or 0.01 (**) Levels. Legal System Matters (at Low Levels of Rule of Law); Rule of Law Matters (in Less Investor Protective Civil Law Systems) in Explaining Variation in in USListing (Sample Mean = 0.06; Std Dev = 0.05)

13. Results IV: Scatterplot and Linear Trends India observations (x) • Bonding-Related Trends Are Clear for Civil Law Countries. More Advanced Common Law Countries (Hong Kong, Israel) Contradict Bonding Hypothesis: What’s Going On?

14. Key Results and Implications • Contingent Support for Unified Bonding Framework • Emerging Market Firms X-List on US Financial Markets to Bond • But the Bonding Motivation Is Contingent: • On Legal System: Civil Law Countries • On Enforcement: Weak Rule of Law • On Interacting the Two: Common Law and Weak Rule of Law • Bonding to Institutions Versus Specific Laws • Scenario 2A (e.g., Israel, Hong Kong) and “Emerging Market” Good corporate governance is good business. Meeting global best practices, we help to ensure the healthy growth of our company. This helps to make it a better employer for our associates, a better corporate citizen in the companies in which we operate and a better partner for the companies and other organizations with which we interact. Neeraj Bhargava, CEO of WNS August 28, 2006 Wall Street Journal “Good Governance Is Good Business” A21 • Implications for Research, Practice and Policy • For L&F, Refining the Institutional Domain of Bonding • For IB, Expanding the Dimensional Domain of Internationalization • For Foreign Firms, Whether They Will Pay “Higher Rent” with SOX • For Law Versus Finance Professionals, How They “See” Differently • For US Exchanges, How They Market Themselves to Foreign Firms • For US Regulators, How to Enforce “Tougher” Laws and Standards

15. Future Research and Trends to Watch • Future Research • Post 2002 X-Listing Trends • The “Bigger” Picture… • The Means of Bonding Once Listed in US: • Private Law Suits Filed Against Foreign versus Domestic Firms • Resolution • Convergence Over Time Headlines are likely to continue to assert that stringent financial reporting and corporate governance guidelines are diminishing the prestige of US listing and driving companies to international exchanges. And yes, meeting the highest listing standards in the world does come at a price. But the benefits continue to outweigh the challenges and to drive companies toward greater efficiency, stability and long-term growth. Neeraj Bhargava, CEO of WNS August 28, 2006 Wall Street Journal “Good Governance Is Good Business” A21 • Near Term Management, Investor, Policy Trends • SOX-Induced De-Listing and (In)Significance for Emerging-Market Firms • Bonding as Part of a Broader Strategy to Broaden the Investor Base in Emerging-Market Firms • WAM Framework: Western Auditor, ADR Program, Market Capitalization • Major Credit Rating Agency Ratings: Guardians of the Gates of International Capital • International Lawyers as “Counselors” to Emerging-Market Firms