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Related securities and price discovery: Evidence from NYSE-listed Non-U.S. stocks
Authors:Piotr Korczak  Kate Phylaktis
Institution:1. School of Economics, Finance and Management, University of Bristol, 8 Woodland Road, Bristol BS8 1TN, United Kingdom;2. Cass Business School, 106 Bunhill Row, London EC1Y 8TZ, United Kingdom
Abstract: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.
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