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Market liberalizations at the firm level: Spillovers fromADRs and implications for local markets

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  • Fernandes, Nuno

Abstract

This paper studies the cross-sectional properties of market liberalizations by decomposing the channels through which financial market liberalization affects firms from segmented markets. Using data on 27emerging markets and 1000 firms, we show that the first ADR issuance in a country produces a positive spillover effect across other firms in the local market, and can thus be interpreted as a market liberalization event. The first ADR leads to a strong revaluation effect, a decrease in expected returns and average volatility; in addition, exposure to international factors increases. Overall, the cross-section of gains across firms is consistent with improved risk sharing after the cross-listing, in that firms whose returns are highly correlated with those of the issuing firm benefit the most. We also examine the dynamics of the integration process. The positive spillover effect is not limited to the first ADR introduction. Each additional cross-listing further integrates the market, although as expected, early cross-listings have stronger impact than later ones. The results also suggest that despite the negative impact on liquidity, the net effect of cross-listings on home market firms is positive, as the improved risk-sharing effect dominates the trade-diversion effect.

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  • Fernandes, Nuno, 2009. "Market liberalizations at the firm level: Spillovers fromADRs and implications for local markets," Journal of International Money and Finance, Elsevier, vol. 28(2), pages 293-321, March.
  • Handle: RePEc:eee:jimfin:v:28:y:2009:i:2:p:293-321
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    2. Hales, Alma D. & Mollick, André V., 2014. "The impact of ADR activity on stock market liquidity: Evidence from Latin America," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(3), pages 417-427.
    3. Craig Doidge & G. Andrew Karolyi & René M. Stulz, 2020. "Is Financial Globalization in Reverse After the 2008 Global Financial Crisis? Evidence from Corporate Valuations," NBER Working Papers 27022, National Bureau of Economic Research, Inc.
    4. Hillier, David & Loncan, Tiago, 2019. "Political uncertainty and Stock returns: Evidence from the Brazilian Political Crisis," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 1-12.
    5. Eichler, Stefan, 2011. "Exchange rate expectations and the pricing of Chinese cross-listed stocks," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 443-455, February.

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