The Globalization of Indian capital markets has accelerated in the past decade. Increasing numbers of Indian firms have chosen to raise capital by issuing and listing their Depositary Receipts (DRs) on the foreign markets. As of 30th June 2001, seventy-two Indian companies have issued and listed their 84 DR programs on the foreign markets. Many other Indian companies are planning or in process of listing their DR programs in the near future. The overall research question of the present study is: Has the foreign listing of shares of Indian companies in form of their DR programs made a significant impact on the liquidity of the underlying domestic shares of these companies?
Theoretically, listing on the foreign markets should help in reducing the negative impacts of capital market segmentation1 on firms’ shares listed on the domestic markets. However, trading on multiple markets may cause fragmentation of trading volumes as has been pointed out by Amihud and Mendelson (1995). In a recent study Domowitz, Glen and Madhavan (DGM, 1998) assert, “Though corporations view cross-listings as value enhancing, the changes in the liquidity and volatility, and the cost of trading associated with order flow migration following cross listing may adversely affect the quality of the domestic market. Such changes are especially important for emerging markets facing new competition from well-established, highly liquid markets abroad, and are the source of increasing concern among policymakers.”
Therefore the increasing number of DR programs from emerging countries may inhibit the development of their domestic equity markets. It is possible that large and strongest companies from these countries may rely more on the foreign markets and hence, the trading activity on their domestic exchanges will be restricted to only small and illiquid issues. The issue of impact of foreign listing is also intimately related to the managerial decision making process. Managers perceive that foreign listing enhance the liquidity of firms’ stocks in the domestic markets and thereby reduce the cost of trading in the stock (Mittoo, 1992 and Baker, 1992).
The empirical studies done so far have found that the affect of foreign listing on liquidity varies with firm specific, issue specific, market specific and country specific factors. DGM (1998) concluded that the informational linkages between host and a domestic market play a vital role in determining the final impact of the foreign listings. In a recent paper, Karoyli (1998) surveyed the empirical literature on foreign listing and found mixed evidences – while a majority of studies observed an increase in liquidity, a few studies also recorded decrease in liquidity. We present a detailed theoretical framework and a review of existing empirical literature in Section 3 of this study.
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The Impact of International Listings on Liquidity: Evidence from the Indian Stock Market
