International Cross‐Listing and Order Flow Migration: Evidence from an Emerging Market

Abstract

Policymakers in emerging markets are increasingly concerned about the consequences for the domestic equity market when companies list stock abroad. We show that the effects of cross-listing depend on the quality of intermarket information linkages. We investigate these issues with unique data from the Mexican equity market. The impact of cross-listing is complex-balancing the costs of order f low migration against the benefits of increased intermarket competition. These effects are exacerbated by equity investment barriers that induce segmentation of the domestic equity market. Consequently, the benefits and costs of cross-listing are not evenly spread over all classes of shareholders. THERE HAS BEEN A DRAMATIC INCREASE in the trading of foreign stocks as investors recognize the need for international diversification and as foreign companies seek to broaden their shareholder base and raise capital. As a result, the number of American Depository Receipt~ADR! listings on U.S. exchanges has also risen sharply. Though corporations view cross-listings as value enhancing, the changes in liquidity and volatility, and the cost of trading associated with order f low migration following cross-listing may adversely affect the quality of the domestic equity market. Such changes are especially important for emerging markets facing new competition from wellestablished, highly liquid markets abroad, and are the source of increasing concern among policymakers. There is also considerable academic interest in this topic, especially because the effects of cross-listing may be related to the * Domowitz is from Northwestern University, Glen is with the International Finance Corporation, and Madhavan is at the University of Southern California. Financial support from the World Bank is gratefully acknowledged. Expert research assistance and several helpful suggestions were provided by Mark Coppejans. We thank

Where Is the Market? Evidence from Cross-Listings in the United States

“…So, unlike developed country companies, emerging market companies do not experience increased trading activity in their home market. If anything, their domestic trading is less active after cross-listing in the United States, consistent with the findings of Domowitz, Glen, and Madhavan (1998); Karolyi (2004); and Levine and Schmukler (2006). The imprecision of the estimates may reflect the paucity of observations: we observe only 12 emerging market companies the year before, 13 in the cross-listing year, and 20 in the year after.…”

“…See Hargis (1998) for a study that argues otherwise. Domowitz, Glen, and Madhavan (1998) show that the home market liquidity of Mexican companies decreases upon issuing ADRs, and relate this effect to the poor information linkages between the two markets. This company-level evidence is consistent with the finding of Karolyi (2004) based on aggregate data for 12 Latin American and Asian countries from 1976 to 2000.…”

Liquidity and price volatility of cross-listed French stocks

“…All three measures of volatility -daily volatility, trading hour volatility 11 The spread of each stock is estimated using Roll's (1984) and non-trading hour volatility -increase after crosslisting and all of them are found to be significant at 1%. The results of a t-test support the findings of other studies that volatility increases after crosslisting (see, for example, Jayaraman et al, 1993;Domowitz et al, 1998). Imperfect information flow between the French and German stock markets might explain the increase in volatility after crosslisting.…”

“…In their theoretical model, Domowitz et al (1998), hereafter DGM, show that the impact of cross-listing on market quality, measured by liquidity and volatility, depends on the level of integration between domestic and foreign markets when it is costly to acquire information. They demonstrate that if price information is freely available in the foreign market, cross-listing will result in an increase in the quality of the domestic market because when foreign investors start to trade, the number of traders will increase and spread will decline; furthermore, the incorporation of public information into prices will be fast with crosslisting.…”

The Geography of Equity Listing: Why Do European Companies List Abroad?

“…Domowitz, Glen and Madhavan (1998) show that opening trade on the foreign market may reduce liquidity in both the domestic and the foreign market, if intermarket information linkages are poor, and support this point with evidence concerning Mexican companies issuing American Depository Receipts (ADRs).…”