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The Effects of Market Segmentation and Illiquidity on Asset Prices: Evidence from Foreign Stocks Listing in the US

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Author Info
Stephen R. Foerster
G. Andrew Karolyi

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Abstract

We document the effect on share value of a foreign firm listing on the New York, American Stock Exchanges or Nasdaq over-the-counter market. Our sample consists of over 160 firms from 14 countries that listed their shares for the first time in the US as ordinary listings or as American Depositary Receipts (ADRs) from 1976 to 1992. We find that these stocks earned a significant average abnormal return of 0.349% per week during the year before listing, an additional 0.709% during the listing week, but incur a significant average loss of -0.190% per week during the year following listing. The pattern in abnormal returns is shown to be robust to different benchmark models of risk changes and to be significantly related to an increase in the shareholder base and the exchange on which the shares are listed. Cross-sectional regressions provide support for Merton's (1987) investor recognition hypothesis and Amihud and Mendelson's (1986) liquidity hypothesis as partial explanations for the abnormal returns around listing

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Paper provided by Ohio State University in its series Research in Financial Economics with number 9606.

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Handle: RePEc:wop:ohsrfe:9606

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  6. Chan, K. C. & Karolyi, G. Andrew & Stulz, ReneM., 1992. "Global financial markets and the risk premium on U.S. equity," Journal of Financial Economics, Elsevier, vol. 32(2), pages 137-167, October. [Downloadable!] (restricted)
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  7. Bekaert, Geert & Harvey, Campbell R, 1995. " Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-44, June. [Downloadable!] (restricted)
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  9. repec:pal:jintbs:v:24:y:1993:i:4:p:763-784 is not listed on IDEAS
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  11. Howe, John S. & Madura, Jeff, 1990. "The impact of international listings on risk : Implications for capital market integration," Journal of Banking & Finance, Elsevier, vol. 14(6), pages 1133-1142, December. [Downloadable!] (restricted)
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  14. Dharan, Bala G & Ikenberry, David L, 1995. " The Long-Run Negative Drift of Post-listing Stock Returns," Journal of Finance, American Finance Association, vol. 50(5), pages 1547-74, December. [Downloadable!] (restricted)
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  19. Jorion, Philippe & Schwartz, Eduardo, 1986. " Integration vs. Segmentation in the Canadian Stock Market," Journal of Finance, American Finance Association, vol. 41(3), pages 603-14, July. [Downloadable!] (restricted)
  20. Booth, Laurence D & Johnston, David J, 1984. " The Ex-Dividend Day Behavior of Canadian Stock Prices: Tax Changes and Clientele Effects," Journal of Finance, American Finance Association, vol. 39(2), pages 457-76, June. [Downloadable!] (restricted)
  21. Harvey, Campbell R, 1991. " The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-57, March. [Downloadable!] (restricted)
  22. Jayaraman, Narayanan & Shastri, Kuldeep & Tandon, Kishore, 1993. "The impact of international cross listings on risk and return : The evidence from American depository receipts," Journal of Banking & Finance, Elsevier, vol. 17(1), pages 91-103, February. [Downloadable!] (restricted)
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  24. Foerster, Stephen R. & Karolyi, G. Andrew, 1998. "Multimarket trading and liquidity: a transaction data analysis of Canada-US interlistings," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(3-4), pages 393-412, December. [Downloadable!] (restricted)
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  33. Kadlec, Gregory B & McConnell, John J, 1994. " The Effect of Market Segmentation and Illiquidity on Asset Prices: Evidence from Exchange Listings," Journal of Finance, American Finance Association, vol. 49(2), pages 611-36, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. M.-W. Hung & C.-F. Lee & L.-C. So, 2003. "Impact of foreign-listed single stock futures on the domestic underlying stock markets," Applied Economics Letters, Taylor and Francis Journals, vol. 10(9), pages 567-574, July. [Downloadable!] (restricted)
  2. Sugato Chakravarty & Asani Sarkar & Lifan Wu, 1998. "Information asymmetry, market segmentation, and the pricing of cross-listed shares: theory and evidence from Chinese A and B shares," Research Paper 9820, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  3. Geert Bekaert & Campbell R. Harvey, 1997. "Foreign Speculators and Emerging Equity Markets," NBER Working Papers 6312, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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