The impact of firms’ going public mode and capital market liability of foreignness on their choice of jurisdiction in the United States

Despite the rapid integration of global capital markets, firms often face capital market liability of foreignness (CMLOF) when raising capital abroad. Given that CMLOF stems from foreign firms' lack of legitimacy in host countries, we examine whether and how foreign and domestic firms’ modes of going public differently affect their adoption of legitimate domestic business practices (i.e., organizational isomorphism) to advance institutional theory that proposes organizational isomorphism as a remedy for the legitimacy deficit of firms. Among the two major modes of going public, reverse mergers (RM) are considered less legitimate than initial public offerings (IPOs). Thus, we argue that foreign firms already suffering from CMLOF require legitimacy even more to assure investors of their viability when using a less legitimate mode (RM), whereas domestic firms seek legitimacy more actively when using a more legitimate mode (IPO) that presents better opportunities to raise substantial capital. Focusing on Delaware incorporation as a legitimate business practice and analyzing IPO and RM deals in the United States from 2007 to 2016, we found empirical support of our arguments. Contributions and limitations are discussed.