The value of information in cross-listing

Until 2004, the London Stock Exchange allowed firms to be traded in the specialized SEAQ-I platform without the firm's involvement. Trading only required an application by one LSE trading member firm. Such an institutional arrangement, which made cross-listings possible without a firms' approval, allows for a direct test of different theories of foreign listing. In particular, we can differentiate between market segmentation and liquidity hypotheses, which rely on a firm trading in a foreign exchange and informational hypotheses, which assume that a firm makes the decision to trade in a foreign exchange. We identify a sample of international firms that are admitted to trading on London's SEAQ-I platform without their involvement. We estimate the valuation effects of this multi-market trading event and compare them to those enjoyed by firms that pursue a standard London Stock Exchange cross-listing. A cross-sectional abnormal returns analysis documents significant evidence in support of information-related hypotheses of cross-listing. An analysis of the firms' home market price volatility corroborates the results.     

Does Cross-Listing Benefit the Shareholders? Evidence from Companies in the GCC Countries?

The goal of this study is to estimate the impact of cross-listing on stock returns, on liquidity, and on risk. A sample of 24 companies from the Gulf Cooperation Council countries which cross-listed their stocks in a foreign market over the period 2000–2010 were chosen for study. An event study estimating abnormal returns related to the cross-listing event as well as parametric and nonparametric tests find that there is (1) a significant abnormal return of about 6 % that lasts until 6 days after the cross-listing day and starts fading away thereafter (2) a significant increase in liquidity during the event period for most firms and (3) on average a decrease in risk. Our results also suggest that cross-listing had a small impact on market risk measured by the average beta but led to a decrease in the total risk measured by standard deviation of returns and a decrease in the potential loss measured by the average value at risk at the 5 % confidence. Additionally, an analysis based on the foreign market of secondary listing suggests that the benefit of cross-listing varies with the market of secondary listing. The positive abnormal return is more obvious for companies that cross-listed in Kuwait, Bahrain, and London. The most obvious increase in liquidity is for firms that cross-listed in London or in Bahrain and the biggest decrease in risk is for companies that cross-listed in London. We conclude overall that cross-listing in London benefits the shareholders the most as it leads to positive significant abnormal returns, an increase in liquidity, and a decrease in risk.     

Why Do Companies List Shares Abroad?: A Survey of the Evidence and Its Managerial Implications

The purpose of this monograph is to survey the academic literature on the economic implications of the corporate decision to list shares on an overseas stock exchange. My focus is on the valuation and liquidity effects of the listing decision, and the impact of listing on the company's global risk exposure and its cost of equity capital. The evidence shows:
(1) share prices reacts favorably to cross-border listings in the first month after listing;
(2) post-listing price performance up to one year is highly variable across companies depending on the home and listing market, its capitalization, capital-raising needs and other company-specific factors;
(3) post-listing trading volume increases on average, and, for many issues, home-market trading volume increases also;
(4) liquidity of trading in shares improves overall, but depends on the increase in total trading volume, the listing location and the scope of foreign ownership restrictions in the home market;
(5) domestic market risk is significantly reduced and is associated with only a small increase in global market risk and foreign exchange risk, which can result in a net reduction in the cost of equity capital of about 126 basis points;
(6) American Depositary Receipts represent an effective vehicle to diversify U.S.-based investment programs globally;
(7) stringent disclosure requirements are the most important impediment to cross-border listings.     

Crises,contagion and cross-listings

We investigate whether cross-listing shares in the form of depositary receipts in overseas markets benefits investors in emerging market countries during periods of local financial crisis from 1994 to 2002. We regress cumulative abnormal returns for three windows surrounding the crisis events on the cross-listing status while controlling for cross-sectional differences in firm age, trading volume, foreign exposure, disclosure quality and corporate governance. Further, we examine cross-listing effects in countries popularly thought to experience contagious effects of these crises. We find that cross-listed firms react significantly less negatively than non-cross-listed firms, particularly in the aftermath of the crisis. The results on contagious cross-listing effects are however mixed. Our findings are consistent with predictions based on theories of market segmentation as well as differential disclosure/governance between developed and emerging markets. We do not find evidence that foreign investors “panic” during a currency crisis.     

Transaction costs, trading volume, and the liquidity premium

In a market with one safe and one risky asset, an investor with a long horizon, constant investment opportunities and constant relative risk aversion trades with small proportional transaction costs. We derive explicit formulas for the optimal investment policy, its implied welfare, liquidity premium, and trading volume. At the first order, the liquidity premium equals the spread, times share turnover, times a universal constant. The results are robust to consumption and finite horizons. We exploit the equivalence of the transaction cost market to another frictionless market, with a shadow risky asset, in which investment opportunities are stochastic. The shadow price is also found explicitly.     

What drives delistings of foreign firms from U.S. Exchanges?

We examine time dependency in the factors motivating delistings of foreign firms from major U.S. Exchanges over the period 1962–2006. For firms listing before Sarbanes-Oxley (SOX), we find that governance has no significant effect on delisting but after SOX, it becomes one of the main forces driving delisting. For firms whose delisting decision is most likely attributable to SOX, we find they realize low benefits from listing – they originate from countries with strong home market governance, and from listing onward realize low trading volume, analyst coverage, and make little use of capital raising. Our results suggest that SOX has had a large influence on the benefits seek from a U.S. listing, leading firms from well governed countries and low capital raising needs to delist.     

Order flow, bid-ask spread and trading density in foreign exchange markets

This paper examines the implications of market microstructure for foreign exchange markets. We argue that the usual order flow model needs to be recast in broader terms to incorporate the transaction costs of liquidity and the limitation of price discovery through order flows that involve low trading density currencies. Using a daily data set, we find that order flows are inadequate when it comes to explaining the changes in the low trading density currencies. Alternatively, within the high trading density, both order flows and bid-ask spreads significantly affect the foreign exchange rate returns. Our findings suggest that the order flow model is better at incorporating these microstructure effects except for some currencies with a very high level of trading density.     

Does international cross-listing improve the information environment

We investigate whether cross-listing in the U.S. affects the information environment for non-U.S. stocks. Our findings suggest cross-listing has an asymmetric impact on stock price informativeness around the world, as measured by firm-specific stock return variation. Cross-listing improves price informativeness for developed market firms. For firms in emerging markets, however, cross-listing decreases price informativeness. The added analyst coverage associated with cross-listing likely explains the findings in emerging markets, rather than changes in liquidity, ownership, or accounting quality. Our results indicate that the added analyst coverage fosters the production of marketwide information, rather than firm-specific information.     

A theory of the interday variations in volume, variance, and trading costs in securities markets

In an adverse selection model of a securities market with oneinformed trader and several liquidity traders, we study theimplications of the assumption that the informed trader hasmore information on Monday than on other days. We examine theinterday variations in volume, variance, and adverse selectioncosts, and find that on monday the trading costs and the varianceof price changes are highest, and the volume is lower than onTuesday. These effects are stronger for firms with better publicreporting and for firms with more discretionary liquidity trading.     

市场摩擦对特质风险溢价的影响效应——基于A股主板市场的实证分析

与国外发达市场相比,我国A股主板市场的市场摩擦因素对市场微观结构和资产定价的影响更大。在防范和化解系统性风险的过程中,进一步分析市场摩擦如何作用于特质风险定价效应的问题具有重要的理论和现实意义。本文通过采用多维市场摩擦指标来代理信息不对称、交易成本、买卖限制、卖空限制、风险对冲和外部冲击,检验中国股市特质风险和预期收益率的关系,并判断出市场摩擦因素间的差异性影响机制。回归发现,市场摩擦和特质风险因子(特质波动率和特质偏度)都具有定价效应。各维度市场摩擦因素降低了股票流动性,进而增强了特质波动率的负向定价效应,部分解释了“特质波动率之谜”,但市场摩擦对特质偏度因子溢价的影响较为微弱。同时,基于特质波动率和特质偏度因子的投资策略能够产生超越CAPM、三因子和五因子模型的绝对收益,并印证了市场摩擦对特质风险因子绝对收益的影响作用。     

Credit and liquidity components of corporate CDS spreads

This paper investigates the role of credit and liquidity factors in explaining corporate CDS price changes during normal and crisis periods. We find that liquidity risk is more important than firm-specific credit risk regardless of market conditions. Moreover, in the period prior to the recent “Great Recession” credit risk plays no role in explaining CDS price changes. The dominance of liquidity effects casts serious doubts on the relevance of CDS price changes as an indicator of default risk dynamics. Our results show how multiple liquidity factors including firm specific and aggregate liquidity proxies as well as an asymmetric information measure are critical determinants of CDS price variations. In particular, the impact of informed traders on the CDS price increases when markets are characterised by higher uncertainty, which supports concerns of insider trading during the crisis.     

Domestic liquidity and cross-listing in the United States

This study examines changes in domestic liquidity after cross-listing in the United States. Our liquidity measures are based on intraday data from domestic markets for a large sample of firms that cross-list in the United States and for a matched sample of firms that do not cross-list. We find that unadjusted liquidity significantly improves after cross-listing. However, after controlling for contemporaneous changes in liquidity for a matched sample of firms that do not cross-list, there is no evidence of improvements in domestic liquidity due to cross-listing. Our results offer no support for the bonding hypothesis, or for the hypothesis that cross-listing improves domestic liquidity because of increased intermarket competition and additional order flow.     

Limit order books and trade informativeness

In the microstructure literature, information asymmetry is an important determinant of market liquidity. The classic setting is that uninformed dedicated liquidity suppliers charge price concessions when incoming market orders are likely to be informationally motivated. In limit order book (LOB) markets, however, this relationship is less clear, as market participants can switch roles, and freely choose to immediately demand or patiently supply liquidity by submitting either market or limit orders. We study the importance of information asymmetry in LOBs based on a recent sample of 30 German Deutscher Aktienindex (DAX) stocks. We find that Hasbrouck's (1991) measure of trade informativeness Granger causes book liquidity, in particular that required to fill large market orders. Picking-off risk due to public news-induced volatility is more important for top-of-the book liquidity supply. In our multivariate analysis, we control for volatility, trading volume, trading intensity and order imbalance to isolate the effect of trade informativeness on book liquidity.     

Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market

We study the impact of algorithmic trading (AT) in the foreign exchange market using a long time series of high‐frequency data that identify computer‐generated trading activity. We find that AT causes an improvement in two measures of price efficiency: the frequency of triangular arbitrage opportunities and the autocorrelation of high‐frequency returns. We show that the reduction in arbitrage opportunities is associated primarily with computers taking liquidity. This result is consistent with the view that AT improves informational efficiency by speeding up price discovery, but that it may also impose higher adverse selection costs on slower traders. In contrast, the reduction in the autocorrelation of returns owes more to the algorithmic provision of liquidity. We also find evidence consistent with the strategies of algorithmic traders being highly correlated. This correlation, however, does not appear to cause a degradation in market quality, at least not on average.     

A、H股交叉上市能提高流动性吗?

本文选取了先发行H股后发行A股的40只交叉上市股票作为研究样本,在统计检验的基础上,采用事件研究法和面板数据回归方法相结合分析了交叉上市的流动性效应。研究结果发现,H股回归A股市场这一事件公布后的30个交易日里,A、H股交叉上市公司所发行H股的换手率相对于公告前有显著的增大,即A、H股交叉上市能够提高上市公司股票短期内的流动性。本文的研究结果对交叉上市的相关文献做出了重要补充,并且具有重要的政策含义。     

The High-Volume Return Premium

The idea that extreme trading activity contains information about the future evolution of stock prices is investigated. We find that stocks experiencing unusually high (low) trading volume over a day or a week tend to appreciate (depreciate) over the course of the following month. We argue that this high-volume return premium is consistent with the idea that shocks in the trading activity of a stock affect its visibility, and in turn the subsequent demand and price for that stock. Return autocorrelations, firm announcements, market risk, and liquidity do not seem to explain our results.     

Liquidity Changes around Seasoned Equity Issuance: Public Offerings versus Private Placements

I investigate whether firms that issue equity, in public offerings or private placements, have improved on liquidity in the secondary market. Transaction costs, price impacts, and trading activity are examined. Results show that public offering stocks become considerably more liquid in all three dimensions. For private placement stocks, there is some evidence that trading volume increases, but effective spread and temporary price impact decline less than market‐wide changes. Furthermore, I study the behaviors of participants in the newly issued equity market. Analyses indicate that underwriters, analysts, and market makers all contribute to liquidity changes, but in different aspects.     

Why do companies delist voluntarily from the stock market?

We analyse the motives and market valuation of voluntarily delisting from the London Stock Exchange. We show that firms that delist voluntarily are likely to have come to the market to rebalance their leverage rather than to finance their growth opportunities. During their quotation life, their leverage and insider ownership remained very high, they did not raise equity capital, and their profitability, growth opportunities, and trading volume declined substantially. They also generate negative pre-event and announcement date excess returns. These results hold even after controlling for agency, asymmetric information, and liquidity effects, and suggest that firms delist voluntarily when they fail to benefit from listing. Overall, these firms destroyed shareholder value and they should not have come to the market.     

Asset market equilibrium with liquidity risk

This paper derives an equilibrium asset pricing model with endogenous liquidity risk. Liquidity risk is modeled as a stochastic quantity impact on the price from trading, where the size of the impact depends on trade size. Under a strong set of assumptions, we prove that a unique equilibrium liquidity cost process and a unique equilibrium price process exists for our economy. We characterize the market’s state price density, which enables the derivation of the risk-return relation for the stock’s expected return including liquidity risk. We derive a generalized intertemporal CAPM and consumption CAPM for these markets. In contrast to the traditional models without liquidity risk, there is an additional systematic liquidity risk factor which is related to the stock return’s covariation with the market’s stochastic liquidity cost. Traditional transaction costs are a special case of our formulation.     

Liquidity,volume and price efficiency: The impact of order vs. quote driven trading

As equity trading becomes predominantly electronic, is there still value to a traditional, intermediated dealer system? We address this question by comparing the impact of the organization of trading on volume, liquidity, and price efficiency in a quote-driven dealer market and in an order-driven limit order book. Small order price impacts are higher and large order price impacts are lower in a dealer market. Prices are more efficient in the limit order book, except when the level of informed trading is high. Volume is higher in a limit order market, making this system most attractive for trading venues.