Price discovery of South African stocks cross-listed on the New York Stock Exchange

Abstract

The number of South African firms that have sought cross-listing in regional and global markets has been increasing. Many firms increase their presence beyond local markets, and one of these avenues is through cross-listing; however, it remains unclear whether the home or host market contributes more to the incorporation of information in cross-listed stocks. This study examined the price discovery process of Johannesburg Stock Exchange (JSE) domiciled stocks with a cross-listing on the New York Stock Exchange (NYSE). The price discovery of crosslisted stocks was tested using Johansen's and Phillips-Ouliaris' cointegration, the vector error correction model and common factor weights. Long-term relationships consistent with the law of one price were found. Contrary to the home bias hypothesis, results indicated that the NYSE dominated price discovery. Fund managers and investors who have included JSE cross-listed stocks in their portfolios should devote more attention to the NYSE as information flows appear to occur mainly from the NYSE to JSE. Further, results suggest that there is co-movement and integration between the USA and South Africa which diminishes diversification benefits for investors.ABOUT THE AUTHOR Kudakwashe J. Chipunza is pursuing a PhD (Development Finance) focusing on financial inclusion and financial vulnerability. His research interests lie in asset pricing in emerging markets, and development finance focused on household welfare, financial inclusion and financial literacy. Professionally, he has worked in nongovernmental organisations undertaking monitoring and evaluation of various projects. Kudzanai R. Tsunga is in the process of completing his PhD (Finance) at the University of KwaZulu-Natal, focusing on the impact of the financial economy on real economic growth in South Africa. His key research interests are on growth and asset pricing in emerging financial markets. He is employed as an investment administrator for an investment reporting firm in Johannesburg. Kerry F. McCullough is a Senior Lecturer (Finance) at the University of KwaZulu-Natal. Her research interests are capital markets, exchange traded funds, and higher education. This study was inspired by Mr Chipunza and Mr Tsunga's preparations for pursuing their doctoral dissertations.