The Ability of Global Stock Exchange Mechanisms to Mitigate Home Bias: Evidence from Euronext

Abstract

T his paper examines the effects on equity home bias of two mechanisms adopted by Euronext when it was formed by the merger of four European countries' stock exchanges in 2002. The two structural mechanisms are the integration of trading platforms across the four predecessor exchanges and the creation of named segments of the integrated exchange on which firms could voluntarily list by precommitting to enhanced disclosure and transparency. Employing a difference-in-differences research design using other European Union companies as a control group, we document that the integration of the Euronext market was associated with a reduction in home bias for firms listed on the named segments of the Euronext exchange, but not for the nonsegment Euronext firms. Our results suggest that the reduction in transaction costs from the integration of the trading platforms did not make the nonsegment Euronext firms more attractive to the specific investors for whom the transaction costs were reduced. On the other hand, the decrease in information costs due to the precommitments to enhanced transparency made the segment firms more attractive to all categories of foreign investors, consistent with the information costs hypothesis.

Accounting Standards Harmonization and Financial Integration

“…Third, a few stock exchanges in European countries joined Euronext in early 2000s, and in 2007 Euronext merged with NYSE. Pownall et al () show that Euronext helped reduce frictions in stock trading and investors' home bias, potentially contributing to financial integration. To control for this concurrent change, we separate adopting countries into two groups based on whether their stock exchanges are a member of Euronext before 2005.…”

“…Given these barriers, prior studies focused on whether regulatory changes such as market liberalization and political or currency union (e.g., Bekaert et al ; Bekaert et al ) contribute to market integration. Indirect barriers, such as information costs, also hinder financial integration and capital flows (e.g., Pownall et al ). Our study provides empirical evidence that adopting a uniform set of higher‐quality accounting standards improves financial integration by reducing information frictions.…”

Equity Issues and Stock Repurchases of Initial Public Offerings

“…Vandemaele () provides evidence on market structure and flotation choice in France, and Pownall et al . () on the integration of the Euronext markets. A comparison of IPOs during the new economy period is offered by Ritter () for IPOs in Europe and the USA, by Goergen et al .…”

Stock exchange consolidation and cross-border investment: An empirical assessment

“…Giofré (2013a) makes a …rst attempt to estimate the role of the Euronext creation on the international portfolio holdings of four European investing countries (Italy, France, Spain, Sweden), in the period 2001-2004. She …nds a signi…cant role of Euronext only for individual investors, while institutional investors and the aggregate economy appear to be non sensitive to the stock exchange consolidation process. Pownall et al (2014) compare changes in foreign and domestic ownership of Euronext-traded …rms with concurrent changes in foreign and domestic ownership of other EU companies, and …nd that the integration of the Euronext market is associated with a reduction in home bias for …rms listed on the named segments of the Euronext exchange. They interpret this evidence as consistent with the information costs hypothesis: the decrease in information costs, due to the pre-commitments to enhanced transparency, made the segment …rms more attractive to all categories of foreign investors.…”