How are Stock Prices Affected by the Location of Trade?
We examine pairs of large, Siamese twin' companies whose stocks are traded around the world but have different trading and ownership habitats. Twins pool their cashflows so, with integrated markets, twin stocks should move together. In contrast, the relative prices of twin stocks appear correlated with the markets where they are traded most, i.e., a twin's relative price rises when the market on which it is relatively intensively traded rises. We examine several explanations for this phenomenon: discretionary uses of dividend income by parent companies; differences in parent expenditures; voting rights issues; currency fluctuations; ex-dividend-date timing issues; and tax-induced investor heterogeneity. Only that latter hypothesis can explain some (but not all) of the facts. Other possible explanations include: i) country-specific sentiment shocks affect share price movements of locally-traded stocks in proportion to their local trading/ownership intensity, and ii) investors are rational, but markets are segmented by frictions other than international transactions costs, such as agency problems.
|Date of creation:||May 1998|
|Publication status:||published as Journal of Financial Economics, Vol. 53, no. 2 (August 1999): 189-216.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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NBER Chapters,in: The Internationalization of Equity Markets, pages 345-403
National Bureau of Economic Research, Inc.
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