Related securities and price discovery: Evidence from NYSE-listed Non-U.S. stocks

In this paper we analyze whether handling related securities improves a market maker's information environment and helps to incorporate new information in stock prices. Our empirical tests are focused on New York Stock Exchange specialists and the U.S. share in price discovery of 64 British and French companies cross-listed on the NYSE. We define related securities as stocks from the same country, the same region, or other foreign stocks. We find strong evidence that a higher prominence of related stocks in the specialist portfolio is associated with a higher U.S. share in price discovery of our sample firms. We interpret our findings as evidence that concentrating market makers in similar stocks reduces information asymmetries and improves the information environment as market makers can extract information relevant to a stock from order flow to related securities. To support our argument, we show that the adverse selection component of the bid–ask spread is negatively related to the prominence of other foreign stocks in the specialist portfolio.     

Price Discovery for Segmented US-Listed Chinese Stocks: Location or Market Quality?

Abstract:  This study extends the cross-listing literature by examining how, and to what extent, the trading of cross-listed China-backed ADRs on the New York Stock Exchange contributes to information flows and price discovery for the corresponding stocks traded in China's A-share market. We find that the cross-listed US prices and Chinese prices are not cointegrated in the long-run and the home market plays a far more important role in both price discovery and volatility spillover than does the US market. The home bias hypothesis still holds for the segmented Chinese A-share market and the location where price discovery actually originates is the essential factor in the process of international information transmission.     

The dynamics of price discovery for cross-listed shares: Evidence from Australia and New Zealand

This paper studies the dynamics of price discovery for markets with bilateral cross-listings. Using a sample of four Australian stocks cross-listed in New Zealand and five New Zealand stocks cross-listed in Australia for the period January 2002 to December 2007, we assess Hasbrouck (1995) information shares and Grammig et al. (2005) conditional information shares over time. We observe that in both cases the home market is dominant in terms of price discovery. However, when studying price discovery over time, we find that the importance of the Australian market (the larger of the two markets) is increasing for both Australian and New Zealand domiciled firms. Finally, using panel regression analysis, we find that the growth in the importance of the Australian market is positively related to the growth in the size of the firm and negatively related to the size of the percentage spread in the Australian market, implying that as firms grow larger and their cost of trading in Australia declines, the Australian market becomes more informative.     

Cross-listing and subsequent delisting in foreign markets

Employing a sample of stocks cross-listed and subsequently delisted from foreign markets, we examine the consequences of delisting to investors in terms of price, risk, and liquidity. We also provide a direct comparison between the firm's performance after a foreign cross-listing and after its subsequent delisting. We find a positive cross-listing and negative delisting effect on stock price, both of which dissipate in the long run. No significant changes in the market risk are found for either event. Foreign cross-listing and delisting are associated with increasing and decreasing long term trading volume respectively. Further analysis reveals that firms delist in response to low host market return and low firm trading volume in the host market. The changes in liquidity and market risk from delisting relate those from cross-listing. Finally, our results show that the bonding hypothesis fails to explain the listing premium and the delisting loss.     

International high-frequency arbitrage for cross-listed stocks

We explore high-frequency arbitrage activities on international cross-listed stocks and develop a methodology to study the effect of information latency in high-frequency trading. We derive statistical arbitrage bounds for a mean-reverting synthetic instrument engineered from cross-listed stock prices, and we propose a new strategy that takes advantage of price deviations outside these bounds. Market frictions such as trade costs, inventory control, and arbitrage risks are considered. The strategy is tested with cross-listed stocks involving three exchanges in Canada and the United States in 2019. The annual net profit with the limit order strategy is around US$6 million, whereas the market order version is not profitable because of the great interconnectedness between exchanges in our data.     

The determinants of price discovery: Evidence from US-Canadian cross-listed shares

We examine the determinants of price discovery for Canadian firms cross-listed on the main US stock exchanges over the period 1996–2011. Sampling at a one-minute frequency, we compute Gonzalo and Granger Component Shares (CS) and employ a system GMM approach to control for persistence in price discovery and endogeneity between CS and its determinants. We find that price discovery is highly persistent and that there is strong evidence of simultaneity between CS and its determinants. We conclude that lower relative spreads and higher relative trading activity increase an exchange’s contribution to price discovery. We also document that it is small trades that drive price discovery, particularly since the introduction of decimalization.     

Transmission of shocks from cross-listed markets to the return and volatility of domestic stocks

This paper examines the transmission of information from German and the U.S. markets to domestic markets using daily price and volume data of 264 stocks from 26 countries that are traded in their home country and cross-listed outside their home market as depository receipts (DRs); in the German market as Global Depository Receipts (GDRs) and in the U.S. as American Depository Receipts (ADRs). We identify days with significant news arrivals in a market through minimum thresholds for both significant absolute price change and trading volume. DR returns and volatilities are affected by the shocks in the markets where they are cross-listed controlling for domestic shocks. Contemporaneous and/or lagged shocks to the cross-listed markets are transmitted to domestic stock returns and volatilities. South American DRs are affected mostly by U.S. shocks, while Eastern European DRs show greater reaction to the German shocks.     

Go long or short in pyramids? News from the Egyptian stock market

Similar to other emerging economies, the Egyptian stock market has recently experienced a remarkable run-up but also a major downturn. This paper analyzes the stock market from two angles. First, it compares the performance of the major stock price index with its underlying fundamentals. Second, it explores the relationship between the Egyptian and other stock markets. The paper finds that (i) there is some evidence against a stable relationship between the Egyptian index and its fundamental value; and (ii) short-term correlations and long-term cointegrating relations provide conflicting signals on the value of Egyptian stocks as a means of diversification.     

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.     

Is there price discovery in equity options?

We use tick-by-tick quote data for 39 liquid US stocks and options on them, and we focus on events when the two markets disagree about the stock price in the sense that the option-implied stock price obtained from the put-call parity relation is inconsistent with the actual stock price. Option market quotes adjust to eliminate the disagreement, while the stock market quotes behave normally, as if there were no disagreement. The disagreement events are typically precipitated by stock price movements and display signed option volume in the direction that tends to eliminate the disagreements. These results show that option price quotes do not contain economically significant information about future stock prices beyond what is already reflected in current stock prices, i.e., no economically significant price discovery occurs in the option market. We also find no option market price discovery using a much larger sample of disagreement events based on a weaker definition of a disagreement, which verifies that the findings for the primary sample are not due to unusual or unrepresentative market behavior during the put-call parity violations.     

Price discovery of cross-listed firms

This paper examines the contribution of cross-listing to price discovery for a unique and comprehensive sample of firms listed abroad. Using an extended measure of the common factor weight, we find that foreign market contribution to price discovery is more important for multiple-listed firms compared to cross-listed ones. Our results also show that US exchanges are more conductive to price discovery than do foreign European markets. On a univariate regression, we find new evidence that order driven markets and those which are more integrated with the world contribute significantly to price discovery of stocks listed abroad. On a multivariate regression, information asymmetry measures seem to have the most important effect on foreign market contribution to price determination.     

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.     

The Effectiveness of Price Limits and Stock Characteristics: Evidence from the Shanghai and Shenzhen Stock Exchanges

We examine the effectiveness of price limits on Chinese A shares and investigate the characteristics of those stocks that hit their price limits more frequently. We find that the effect of price limits is asymmetric for the A shares in upward and downward price movements and different for bullish and bearish sample periods. During a bullish period price limits effectively reduce stock volatility for downward price movements, but not for upward price movements; while during a bearish period price limits effectively reduce stock volatility for upward price movements, but not for downward price movements. Second, price limits delay efficient price discovery for upward price movements, but not for downward price movements. However, we do not find evidence to suggest that price limits harmfully interfere with the stock trading processes in the Chinese A share markets. Finally, we find that actively traded stocks hit their price limits more often and tend to hit the lower limit more frequently when overall market conditions are bearish. Stocks with high book-to-market values of equity hit their upper price limits more frequently, while stocks with a high ratio of tradable shares tend to hit their price limits less frequently.JEL Classification: G10, G14, G15     

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.     

The Chinese Stock Dividend Puzzle

In this paper, we examine the announcement effects of dividends with an emphasis on stock dividends in China's capital market. We find that dividend-paying stocks exhibit significantly positive abnormal returns while non-dividend-paying stocks show a negative announcement effect. Further, we document that the cumulative abnormal returns for pure stock dividends and combined dividends are the main drivers of this announcement effect. In contrast, pure cash dividend stocks experience no significant price run-up before announcement. The significant announcement effect of stock dividends is robust to controlling the earnings surprise effect. We offer some discussion of the possible explanations.     

Sell‐Side Analyst Research and Stock Comovement

We document that a stock's price around a recommendation or forecast covaries with prices of other stocks the issuing analyst covers. The effect of shared analyst coverage on stock price comovement extends beyond analyst activity days. A stock's daily returns covary with the returns of other stocks with which it shares analyst coverage. These links between stock price comovement and shared analyst coverage are consistent with the coverage‐specific information we find in earnings forecasts; analysts who cover both stocks in a pair expect future earnings of the stocks to be more highly correlated than do analysts who cover only one stock from the pair. Collectively, our evidence indicates that analyst research produces coverage‐specific spillovers that raise price comovement among stocks that share analyst coverage. The strength of these spillovers is comparable to spillovers from broad industry and market information in analyst research.     

Determining the contributions to price discovery for Chinese cross-listed stocks

We study the price-discovery process for a number of Chinese cross-listed stocks. For the stocks cross-listed on the New York Stock Exchange (NYSE) and the Stock Exchange of Hong Kong (SEHK), we find that the stock prices of these two exchanges are cointegrated and mutually adjusting, and that the SEHK makes more contributions than the NYSE to the price-discovery process. The SEHK contributions are 81.6% and 89.4%, computed from Gonzalo and Granger [Gonzalo, J., Granger, C., 1995. Estimation of common long-memory components in cointegrated systems. Journal of Business and Economics Statistics 13, 27–35] permanent–transitory (PT) and Hasbrouck [Hasbrouck, J., 1995. One security, many markets: Determining the contributions to price discovery. Journal of Finance 50, 1175–1119] information share (IS) models respectively.     

Capital account reform and short- and long-run stock price leadership

This paper studies the effect of capital account liberalization policies on the price discovery of cross-listings in Chinese stocks. We construct a non-linear causality framework that decomposes short- and long-run dimensions of price leadership. Our analysis shows that capital account liberalization has had a profound effect on long-run A- and H-price leadership traits. Specifically, increased inward capital movement from Qualified Foreign Institutional Investors strengthens long-term leadership in the mainland A-market. Similarly, increased capital outflow from the Chinese mainland galvanizes long-term price discovery processes in the Hong Kong H-market. We thus offer strong evidence that capital account liberalization promotes stock market efficiency in the long-run. The present study's empirical account also suggests that such capital flows inhibit short-term lead-lag effects.     

Does eliminating the Form 20-F reconciliation from IFRS to U.S. GAAP have capital market consequences?

This paper investigates the capital market consequences of the SEC's decision to eliminate the reconciliation requirement for cross-listed companies following International Financial Reporting Standards (IFRS). We find no evidence that the elimination has a negative impact on firms' market liquidity or probability of informed trading (PIN). We also find no evidence of a significant impact on cost of equity, analyst forecasts, institutional ownership, stock price efficiency and synchronicity. Moreover, IFRS users do not increase disclosure frequency nor supply the reconciliation voluntarily. Our results do not support the argument that eliminating the reconciliation results in information loss or greater information asymmetry.     

Social media and price discovery: The case of cross-listed firms

In this article, we examine whether social media information affects the price-discovery process for cross-listed companies. Using over 29 million overnight tweets mentioning cross-listed companies, we examine the role of social media for a link between the last periods of trading in the US markets and the first periods in the UK market. Our estimates suggest that the size and content of information flows on social networks support the price-discovery process. The interactions between lagged US stock features and overnight tweets significantly affect stock returns and volatility of cross-listed stocks when the UK market opens. These effects weaken and disappear 1 to 3 hr after the opening of the UK market. We also develop a profitable trading strategy based on overnight social media, and the profits remain economically significant after considering transaction costs.