The authors simultaneously address three basic issues regarding the corporation: the optimal scope of operation, the optimal financial structure, and the relationship between these two. The starting point is that financial structure serves as a bonding device on the managers' self-interest behavior. The effectiveness of this bonding depends on the distribution of the firm's future cash flow, which in turn depends on the firm's scope. The authors' theory also links the firm's investment decisions to its operation scope. As empirical implications, the theory reconciles the failure of the 1960s U.S. conglomerates with the success of the Japanese keiretsu.

We examine the impact of cross-listing on firm-specific information utilizing the unique features of the Chinese capital markets. By separating the trading activity of domestic Chinese investors from that of foreign non-Chinese investors, we are able to isolate each investor group's relative ability to impound firm-specific information into stock prices. We show that the cross-listed H-shares traded by foreign investors incorporate significantly more firm-specific information than their A-share counterparts traded by domestic Chinese investors. We find a similar pattern between H-shares and A-shares even after a 2007 regulatory change that allowed domestic Chinese investors to trade in the H-share market. This finding suggests that while institutional factors (e.g., stricter listing rules, stronger investor protection) can explain some of the benefits of cross-listing, foreign investors' ability to utilize firm-specific information plays a separate and distinct role in generating cross-listing benefits. The level of information improvement due to foreign investors depends on the quality of the cross-listed firm's corporate governance.

ABSTRACT We simultaneously address three basic issues regarding the corporation: the optimal scope of operation, the optimal financial structure, and the relationship between these two. The starting point is that financial structure serves as a bonding device on the managers' self‐interest behavior. The effectiveness of this bonding depends on the distribution of the firm's future cash flow, which in turn depends on the firm's scope. Our theory also links the firm's investment decisions to its operation scope. As empirical implications, the theory reconciles the failure of the 1960s U.S. conglomerates with the success of the Japanese Keiretsu .

We simultaneously address three basic issues regarding the corporation: the optimal scope of operation, the optimal financial structure, and the relationship between these two. The starting point is that financial structure serves as a bonding device on the managers' self-interest behavior. The effectiveness of this bonding depends on the distribution of the firm's future cash flow, which in turn depends on the firm's scope. Our theory also links the firm's investment decisions to its operation scope. As empirical implications, the theory reconciles the failure of the 1960s U.S. conglomerates with the success of the Japanese Keiretsu.