Price discovery for cross-listed firms with foreign IPOs

We investigate the inter-market return and volatility linkages for an atypical case of firms with foreign IPOs that subsequently cross-listed in their domestic market. In particular, our data set consists of a unique sample of 29 Israeli firms that went public in the US (host market) and then cross-listed in the Israeli market (home market). To estimate the spillover effects, we employ bivariate GARCH models, assuming both constant and dynamic conditional correlation specifications. At the aggregate market level, we find unidirectional mean and volatility spillovers from the US to the Israeli market. For the portfolios of Israeli cross-listed stocks, we report significant spillovers, at both the mean and volatility levels, from the underlying stocks in the Israeli market to their American Depository Receipts (ADRs) but not vice versa. Thus, the home market dominates the host market in the price discovery process in this atypical international cross-listing case, providing new evidence in support of the home bias hypothesis. We also find that external shocks originating from the Middle East peace process have no impact on the conditional correlation between the two markets but external shocks originating from the world and regional markets impact the conditional correlation positively.     

Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements

This article explores the fundamental factors that affect cross-country stock return correlations. Using transactions data from 1988 to 1992, we construct overnight and intraday returns for a portfolio of Japanese stocks using their NYSE-traded American Depository Receipts (ADRs) and a matched-sample portfolio of U. S. stocks. We find that U. S. macroeconomic announcements, shocks to the Yen/Dollar foreign exchange rate and Treasury bill returns, and industry effects have no measurable influence on U.S. and Japanese return correlations. However, large shocks to broad-based market indices (Nikkei Stock Average and Standard and Poor's 500 Stock Index) positively impact both the magnitude and persistence of the return correlations.     

Day and night returns of Chinese ADRs

Are the returns of Chinese American Depositary Receipts (ADR) more affected by the US market or their underlying home market? We separate Chinese ADR daily returns into day and night returns to investigate the different market effects on ADR pricing. We compare “homeless” ADRs to home-based or cross-listed ADRs to see if they are affected differently by market factors. We find the night returns of Chinese ADRs are significantly affected by their home market (either the Hong Kong market or mainland China market) daily returns and the US market night returns. The US day returns appear to be the most significant pricing factor for the day returns of Chinese ADRs. The homeless ADRs are more affected by the US market and less affected by their home market compared to the cross-listed ADRs.     

Multi-market trading and arbitrage

We measure arbitrage opportunities by comparing the intraday prices and quotes of American Depositary Receipts (ADRs) and other types of cross-listed shares in U.S. markets with synchronous prices of their home-market shares on a currency-adjusted basis for a sample of 506 U.S. cross-listed stocks from 35 different countries. Deviations from price parity average an economically small 4.9 basis points, but they are volatile and can reach large extremes. Price parity deviations and their daily changes are positively related to proxies for holding costs that can impede arbitrage, even after controlling for transactions costs and foreign investment restrictions.     

SHORT SELLING AND PRICE DISCOVERY: EVIDENCE FROM AMERICAN DEPOSITARY RECEIPTS

The underlying shares of some American Depositary Receipts (ADRs) can be short sold in their home markets, and others cannot. This institutional feature offers a unique opportunity to investigate the relation between short selling and price discovery. We hypothesize and confirm that ADR short selling on a U.S. exchange is more informative when the ADRs’ underlying shares cannot be short sold in the home market. These and related results suggest that short sellers make a significant contribution to price discovery. Short sellers’ trading activity, representing more than 20% of total ADR share volume, increases the benefits of cross‐listing on U.S. exchanges.     

Barriers to international investing and market segmentation: Evidence from Indian GDR market

In this paper we evaluate market segmentation and its effect on the pricing of cross-listed securities using Indian Global Depositary Receipts (GDRs). When international capital markets are segmented, cross-listed securities may trade at different prices. We test this market segmentation hypothesis using a theoretical and empirical model developed along the lines of Hietala [Hietala, P.T., 1989, Asset pricing in partially segmented markets: Evidence from the Finnish market, Journal of Finance 44, 697–718]) and Foerster and Karolyi [Foerster, S.R., Karolyi, A.G., 1999, The effects of market segmentation and investor recognition on asset prices: Evidence from foreign stocks listing in the United States, Journal of Finance 54, 981–1013; Foerster, S.R., Karolyi, A.G., 1999, The long-run performance of global equity offerings, Working Paper, Ohio State University]. Our model looks at a specific type of market segmentation in India, where capital flow barriers are such that domestic investors are allowed to invest only in domestic securities, while the foreign investors can invest in dollar-denominated Indian GDRs as well as other foreign securities. Tests on these GDRs indicate that foreign investors, who hold these depositary receipts, estimate the expected returns at a lower level than the domestic investors do. This leads to the GDRs being priced at a premium over the exchange rate adjusted prices of the underlying Indian securities. GDR index returns are affected by both domestic and international factors, while the underlying Indian securities are affected only by domestic variables.     

Pricing of American Depositary Receipts under Market Segmentation

This article examines the pricing of American Depositary Receipts (ADRs) in a three-factor pricing model. A seemingly unrelated regression model is utilized to test the nonlinear parameter restriction implied by the model. It is found that, although ADRs are traded in the U.S. securities market, their returns are significantly affected by their respective home market factors rather than by U.S. market movements. While U.S. investors are exposed to incremental risk from foreign equity market, they do not command a risk premium. The findings suggest that (1) markets are segmented and ADR listing does not integrate world capital market and (2) ADRs behave more like a foreign security and ADR is an effective tool of global risk diversification for U.S. investors.     

Trading location and equity returns: Evidence from US trading of British cross-listed firms

Our study examines market sentiment and the importance of trading location in British American Depository Receipts (ADRs) traded in the US. Perfect integration between UK markets and UK ADRs is ruled out given that UK ADRs exhibit an intraday, U-shaped volatility curve. Both a variance decomposition analysis and an EGARCH model show that UK ADR returns are driven more by US market returns than US-traded UK ETF returns. These results indicate the existence of US market sentiment for UK ADRs and that trading location influences pricing behavior.     

Informed traders of cross-listed shares trade more in the domestic market around earnings releases

This paper examines informed trading and price discovery for Canadian shares cross-listed on the Toronto Stock Exchange and the main U.S. exchanges. The domestic Canadian market can absorb higher demand for liquidity but offers no trading cost advantage. During earnings non-announcement periods, the intra-market probability of informed trading (PI) is similar on both national markets, and both national markets contribute to price discovery. The magnitude and elapsed time over which trading volumes are increased when earnings are announced are higher in the domestic Canadian market. Around earnings announcements, PI decreases only on the U.S. market and the Canadian market contributes more to price discovery. To infer the fundamental values of the underlying cross-listed firms, market participants should monitor both markets, and intensify their monitoring of the Canadian market during earnings announcement periods.     

Contagion Effects from the 1994 Mexican Peso Crisis: Evidence from Chilean Stocks

The contagion, or informational spillover, effects of the 1994 peso crisis from the Mexican market to the Chilean market, and to the Chilean American Depository Receipts (ADRs) trading in the U.S., are examined. Significant excess returns are observed for Chilean stocks for the event dates of the Mexican Peso crisis, providing evidence of contagion effects. Significant excess returns on these Chilean ADRs are also observed for each of the five event dates associated with the Peso crisis, suggesting that the contagion effects spilled over to the ADRs. A multiple regression model shows that the spillover contagion effects were very efficiently transmitted from the Mexican market to the Chilean market to the Chilean ADRs. Multifactor regressions show that the most significant influence on the pricing of Chilean ADRs is the raw Chilean Index, rather than the Chilean Index expressed in U.S. dollars.     

Market Segmentation Effects in Corporate Credit Rating Changes: The Case of Emerging Markets

We examine stock market reactions to corporate credit rating changes in 26 emerging market countries included in the Morgan Stanley Capital International (MSCI) Emerging Market Index. We hypothesize and test the notion that emerging market firms in the American Depository Receipts (ADRs) markets are more likely to purchase ratings from the Big Two (Moody’s and S&P), and that they react more strongly to the announcements of corporate rating changes by Moody’s or S&P than to those of raters in local markets. We compare the effect of credit rating changes of the Big Two in two emerging stock markets: local markets (local currencies) and ADR markets (U.S. dollars). We find significant price reactions in the ADR markets, and insignificant reactions in local markets, and conclude that there is capital market segmentation in ADR markets for credit rating changes of emerging market firms. We find evidence that investors react more strongly in the ADR markets than local markets because they require higher costs of capital for firms cross-listed both in the ADR markets and local markets due to greater expected bankruptcy costs and foreign exchange risks of those firms. We also report that stock markets react significantly, not only to rating downgrades, but also to upgrades in the ADR markets.

Price Interactions in a Sequential Global Market: Evidence from the Cross-listed Stocks

In this paper, we investigate the pattern of dynamic interactions among the prices of those stocks that are cross-listed on the three major stock markets of the world, i.e. New York, London and Tokyo. Major findings are: first, regardless of the nationality of stocks, innovations in the 'home' market returns are always fed into the returns in the 'overseas' markets, with the former causing the latter in the Granger sense. However, innovations in the New York market returns of foreign stocks are fed back into their respective home markets, contributing to the price discovery there. Second, the 'succeeding' overseas market, which operates immediately after the home market, plays a dual-role: it conducts the home market innovations to the next-opening overseas market, as well as adds its own innovations. Third, the exchange rate changes substantially influence the overseas market returns, but not the home market returns. The exchange rates appear to play a role in the transmission mechanism mainly via the inter-market price parity.     

An Investigation on Information Transmission Between Stocks of Far Eastern Countries and Their American Depositary Receipts

Domestic stocks and their American depositary receipts (ADRs) are essentially twin securities listed in the home country and United States, respectively. Accounting for exchange rates and market friction, their prices should move in tandem if international markets are efficient. In reality, however, their returns are close but sometimes differ dramatically. This study hypothesizes that changes in trading volume and macro events can lead investors between two equity markets to generate heterogeneous expectations or interpretations, causing returns on one security to deviate from those on the other. The results show that changes in past domestic volume do affect current ADR returns, implying that volume contains additional information not in prices. It is also found that important macro events, especially bad news, trigger significant differences in returns between domestic shares and their ADRs. These results support our argument that heterogeneous expectations prolong price information transmission between two equity markets.     

Worldwide reach of short selling regulations

We characterize legality and incidence of short selling in a worldwide, multimarket framework. Home country short selling restrictions curtail home market stock borrowing by 45% and reduce short selling of the country's American Depository Receipts (ADRs) by 68% due to regulatory reach. Also, the 2008 US ban on short selling of financial firms reduced borrowing in foreign locations. These findings are robust to controls for option availability, enforcement, returns, firm size, trading volume, dividends, ADR level, volatility, days-to-cover, and industry sector. Further, we show that investor conduct resulting from adherence to professional standards is a more powerful mechanism of regulatory reach than intergovernment cooperation.     

Evaluating the Forecast Accuracy of Emerging Market Stock Returns

This paper analyzes the forecast performance of emerging market stock returns using standard autoregressive moving average (ARMA) and more elaborated autoregressive conditional heteroskedasticity (ARCH) models. Our results indicate that the ARMA and ARCH specifications generally outperform random walk models. Models that allow for asymmetric shocks to volatility are better for in-sample estimation (threshold autoregressive conditional heteroskedasticity for daily returns and exponential generalized autoregressive conditional heteroskedasticity for longer periods), and ARMA models are better for out-of-sample forecasts. The results are valid using both U. S. dollar and domestic currencies. Overall, the forecast errors of each Latin American market can be explained by the forecasts of other Latin American markets and Asian markets. The forecast errors of each Asian market can be explained by the forecasts of other Asian markets, but not by Latin American markets. Our predictability results are economically significant and may be useful for portfolio managers to enter or leave the market.     

The real earnings management of cross-listing firms

We examine the existence of real and accrual-based earnings management before and after cross-listings on the U.S. market. The results indicate that firms actively manage their earnings around cross-listing events, using both accrual and real earnings management, but real earnings management is dominant. American Depositary Receipts (ADRs) cross-listed at Level 1 and sponsored ADRs show the largest increase in real earnings management from before to after the listing. Firms that have adopted International Financial Reporting Standards (IFRS) display lower increases than firms under domestic GAAP. Finally, our results confirm a significant negative relationship between long-run performance and real earnings management before and after major corporate events.     

Market timing wealth effects of American Depository Receipts: The cases of emerging and developed market issues

We examine the long-term returns of a sample of foreign equities traded on the New York Stock Exchange as American Depository Receipts (ADRs) issued between January 1, 1987 and September 30, 2000. Distinctions are made between those ADRs issued by companies headquartered in emerging and developed markets and those ADRs issued before and after January 1, 1998. The results suggest that, on average, emerging market ADRs issued prior to January 1, 1998 underperform the S&P 500 in long-term holding periods, while those issued after January 1, 1998 outperform the S&P 500. Alternatively, developed market ADRs slightly underperform the S&P 500 in long-term holding periods regardless of date of issue.     

The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States

Non-U.S. firms cross-listing shares on U.S. exchanges as American Depositary Receipts earn cumulative abnormal returns of 19 percent during the year before listing, and an additional 1.20 percent during the listing week, but incur a loss of 14 percent during the year following listing. We show how these unusual share price changes are robust to changing market risk exposures and are related to an expansion of the shareholder base and to the amount of capital raised at the time of listing. Our tests provide support for the market segmentation hypothesis and Merton's (1987) investor recognition hypothesis.     

International equity market integration in a small open economy: Ireland January 1990-December 2000

We examine the relationship between the Irish, German, UK and U.S. equity markets. Our main finding is that the Irish equity market depends heavily on trading activity in the other markets but not vice versa. Significant return and volatility spillover effects occur in the direction of, but not from, the Irish market. We also find that dual listing in the form of American Depositary Receipts (ADRs) has an important role to play in these spillover effects. Our findings obtain throughout the sample, but are strongest for the period after the ERM crises and before the introduction of the euro.     

Capital market consequences of cultural influences on earnings: The case of cross-listed firms in the U.S. stock market

We examine whether market reactions to earnings announcements vary according to differences in the cultural values of firms' countries of origin in the case of cross-listed firms in the U.S. stock market. To deal with time-varying volatility returns, market reactions are determined using the market model adjusted for GARCH. We also apply the Fama-French three factor model to determine market reactions. Using the dynamic panel generalized method of moments estimator, we analyze 5562 firm-year observations from 30 countries over the period 2000–2014. We find that market reactions to the earnings announcements of cross-listed firms are significantly negatively (positively) associated with firms’ home countries characterized by the culturally- based accounting values of conservatism (optimism) and secrecy (transparency). Overall, the results suggest that the informal institutional influences of culture relating to the financial performance of cross-listed firms are priced by the U.S. stock market.