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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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  • Stephen R. Foerster
  • G. Andrew Karolyi

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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Cited by:
  1. Chakravarty, Sugato & Sarkar, Asani & Wu, Lifan, 1998. "Information asymmetry, market segmentation and the pricing of cross-listed shares: theory and evidence from Chinese A and B shares," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 8(3-4), pages 325-356, December.
  2. 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 & Francis Journals, Taylor & Francis Journals, vol. 10(9), pages 567-574.
  3. Geert Bekaert & Campbell R. Harvey, 1997. "Foreign Speculators and Emerging Equity Markets," NBER Working Papers 6312, National Bureau of Economic Research, Inc.
  4. Miller, Darius P., 1999. "The market reaction to international cross-listings:: evidence from Depositary Receipts," Journal of Financial Economics, Elsevier, Elsevier, vol. 51(1), pages 103-123, January.
  5. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, Elsevier, vol. 3(3), pages 205-258, August.
  6. Faff, Robert W. & Hodgson, Allan & Saudagaran, Shahrokh, 2002. "International cross-listings towards more liquid markets: the impact on domestic firms," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 12(4-5), pages 365-390.
  7. Hung, Mao-wei & Lee, Cheng-few & So, Leh-chyan, 2005. "Hedging with Foreign-listed Single Stock Futures," MPRA Paper 52372, University Library of Munich, Germany.
  8. Hargis, Kent & Ramanlal, Pradipkumar, 1998. "When Does Internationalization Enhance the Development of Domestic Stock Markets?," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 7(3), pages 263-292, July.

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