PDF Ebook Where is the Market? Evidence from Cross-Listings
We investigate the distribution of trading volume across different venues after a company lists abroad. In most cases, after an initial blip, foreign trading declines rapidly to extremely low levels. However, there is considerable cross-sectional variation in the persistence and magnitude of foreign trading. The ratio between foreign and domestic trading volume is higher for smaller, more export and high-tech oriented companies. It is also higher for companies that cross-list on markets with lower trading costs and better insider trading protection. Domestic trading increases around the cross-listing, and afterwards is negatively correlated with past foreign trading activity. This accords with the “flow-back hypothesis” that declining foreign trading is associated with the gravitational pull of the home market.
Several companies list their shares not only on their domestic exchange but also on foreign stock exchanges –– a fact for which a variety of reasons have been offered and explored (see Karolyi, 1998, Pagano, Röell and Zechner 2002, and Sarkissian and Schill 2004, among others). A motive often advanced for this decision is that a foreign listing facilitates trading by foreign investors and therefore tends to attract them into the ranks of the company’s shareholders. If this is true, then cross-listings should be followed by reasonably large and persistent trading activity in the foreign market.
This argument contrasts with the tendency towards agglomeration that according to several models is a quintessential feature of trading activity, owing to the positive externalities present in the trading process (Admati and Pfleiderer, 1988, Chowdry and Nanda, 1991, and Pagano, 1989). This tendency can be counterbalanced only by presence of frictions whether arising from trading costs, from informational barriers or from regulatory obstacles that shelter less active trading venues from the gravitational pull of the larger one. Whether such frictions exist, so that an active foreign market can be sustained after a cross-listing, is an empirical question, and is precisely the question that motivates this study.
Our first contribution is to document the typical pattern of trading activity after a cross-listing. The general pattern of foreign trading volume is qualitatively similar across companies: a blip immediately after the cross-listing, followed by a trend decline, which in most cases rapidly leads to virtual disappearance of foreign trading activity. This phenomenon, known as “flow-back” among practitioners and documented by Karolyi (2003) for the case of DaimlerChrysler AG, appears to be quite universal in our sample, which comprises all the European companies whose shares were cross-listed in the U.S. or in Europe during 1986-1997. This suggests that for most companies the tendency to the agglomeration of trading indeed prevails, so that fostering an active foreign market cannot be the main purpose of a cross-listing, unless the managers who take this decision make systematic mistakes.
However, we also find there is considerable cross-sectional variation in the persistence and magnitude of foreign trading. While for most companies the domestic market re-asserts its dominance within a year and often even faster, for a small but non-negligible group of companies the decline of foreign trading tends to be very slow, and several years after the cross-listing we still observe an active foreign market.
This cross-sectional diversity motivates the second step in our analysis: understanding which company and market characteristics are associated with the different patterns in long-run distribution of trading and in adjustment towards equilibrium. To guide the analysis, we review the possible reasons why foreign investors may wish to trade shares of cross-listed companies. Since trading can arise either from non-informational motives (such as risk diversification) or from the informational advantage relative to other traders, different firm characteristics can affect foreign trading activity depending on which trading motives are most relevant for foreign investors. For instance, companies with a large presence in foreign output markets should be more heavily traded abroad than other companies, since foreign investors should find it easier to collect timely and accurate information about their prospects. The same prediction holds if in the foreign market investors are given better protection against insider trading than those operating in the domestic exchange.
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PDF Ebook Where is the Market? Evidence from Cross-Listings
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