Between May 1992 and June 2001, 72 Indian firms listed their 85 Depositary Receipt (DR) programmes on the foreign capital markets. Most Indian DR programmes are listed on the European exchanges rather than on the US exchanges. This paper studies firm-level financial data of foreign listed Indian firms to see whether the ‘improved access to external capital markets’ is an important consideration for Indian firms listing on the foreign markets. The results of the study can be interpreted in terms of informational disclosure requirements of the foreign markets (in our case the Global Depositary Receipts– GDR markets) where sample Indian firms have listed their securities. The firms listed on the US exchanges have to necessarily follow US GAAP in casting of their accounts and disclose more. Hence, US listing acts as a signal about the firm's level of transparency and disclosures which, in turn, reduces informational asymmetry between managers and external investors. Thus, listing of emerging markets' firms on the US exchanges improves their access to the external capital markets and hence reduces their investment-to-cash flow sensitivity. Also, till recently, two-way fungibility in the Indian DRs was not allowed. Foreign institutional investors (FIIs), investing in the Indian GDRs, are restricted from owning and trading in Indian shares listed on the Indian stock exchanges. Besides, Indian citizens were prohibited from owning and trading in Indian DRs listed on the foreign markets. These factors impede the free flow of information between the GDR markets and Indian markets. Thus, GDR listings by the Indian firms are rendered ineffective in removing the information asymmetry about the listing firms and in improving Indian firms' access to the external markets. The results of the study have the following implications: The policy makers should adopt a regulatory framework so that firms are encouraged to disclose more and thus become transparent. Managers should prefer listing firms' securities only on stringent and transparent foreign markets with listing requirements. The measures proposed will reduce the informational asymmetry for the Indian firms and hence improve their access to the external capital markets. But if these markets do not improve their transparency and disclosure levels, they will lose out to the US markets. Naturally, firms contemplating fresh listing on foreign markets will list their securities on the more transparent US markets to improve their access to the external capital markets. Corporate decision makers should realize that the listings on the US markets send strong signals about the firms' level of transparency and disclosures to the investing community. This signalling effect is rather less in case of listing on the GDR markets. This could be the reason for US exchanges becoming more successful in attracting foreign listings by the Indian firms compared to the London and the Luxembourg exchanges in recent years.
Accounting Quality and Firm-Level Capital Investment