Securities trading in multiple markets: the Chinese perspective

This thesis studies the trading of the Chinese American Depositories Receipts (ADRs) and their respective underlying H shares issued in Hong Kong. The primary intention of this work is to investigate the arbitrage opportunity between the Chinese ADRs and their underlying H shares. This intention is motivated by the market observation that hedge funds are often in the top 10 shareholders of these Chinese ADRs. We start our study from the origin place of the Chinese ADRs, China’s stock market. We pay particular attention to the ownership structure of the Chinese listed firms, because part of the Chinese ADRs also listed A shares (exclusively owned by the Chinese citizens) in Shanghai. We also pay attention to the market microstructures and trading costs of the three China-related stock exchanges. We then proceed to empirical study on the Chinese ADRs arbitrage possibility by comparing the return distribution of two securities; we find these two securities are different in their return distributions, and which is due to the inequality in the higher moments, such as skewness, and kurtosis. Based on the law of one price and the weak-form efficient markets, the prices of identical securities that are traded in different markets should be similar, as any deviation in their prices will be arbitraged away. Given the intrinsic property of the ADRs that a convenient transferable mechanism exists between the ADRs and their underlying shares which makes arbitrage easy; the different return distributions of the ADRs and the underlying shares address the question that if arbitrage is costly that the equilibrium price of the security achieved in each market is affected mainly by its local market where the Chinese ADRs/the underlying Hong Kong shares are traded, such as the demand for and the supply of the stock in each market, the different market microstructures and market mechanisms which produce different trading costs in each market, and different noise trading arose from asymmetric information across multi-markets. And because of these trading costs, noise trading risk, and liquidity risk, the arbitrage opportunity between the two markets would not be exploited promptly. This concern then leads to the second intention of this work that how noise trading and trading cost comes into playing the role of determining asset prices, which makes us to empirically investigate the comovement effect, as well as liquidity risk. With regards to these issues, we progress into two strands, firstly, we test the relationship between the price differentials of the Chinese ADRs and the market return of the US and Hong Kong market. This test is to examine the comovement effect which is caused by asynchronous noise trading. We find the US market impact dominant over Hong Kong market impact, though both markets display significant impact on the ADRs’ price differentials. Secondly, we analyze the liquidity effect on the Chinese ADRs and their underlying Hong Kong shares by using two proxies to measure illiquidity cost and liquidity risk. We find significant positive relation between return and trading volume which is used to capture liquidity risk. This finding leads to a deeper study on the relationship between trading volume and return volatility from market microstructure perspective. In order to verify a proper model to describe return volatility, we carry out test to examine the heteroscedasticity condition, and proceed to use two asymmetric GARCH models to capture leverage effect. We find the Chinese ADRs and their underlying Hong Kong shares have different patterns in the leverage effect as modeled by these two asymmetric GARCH models, and this finding from another angle explains why these two securities are unequal in the higher moments of their return distribution. We then test two opposite hypotheses about volume-volatility relation. The Mixture of Distributions Hypothesis suggests a positive relation between contemporaneous volume and volatility, while the Sequential Information Arrival Hypothesis indicates a causality relationship between lead-lag volume and volatility. We find supportive evidence for the Sequential Information Arrival Hypothesis but not for the Mixture of Distributions Hypothesis

The impact of international cross-listing on the cost of capital

The question of international capital market integration or segmentation has become an important issue for international investors and for companies seeking to source their capital internationally. Previous research has suggested that international listing represents one effective way to mitigate the effects of international market segmentation. Segmentation is caused by various types of barriers to international investment as restrictions on portfolio investment, liquidity, and a poor institutional environment. Previous studies have shown that liquidity, the size of the investor base, and market segmentation influence the cost of capital. Hence, an international listing may reduce a firm's cost of capital, if it increases the size of the investor base, leads to an increase in the liquidity of a firm's stock, and reduces international market segmentation. The objective of this study is to examine whether an international listing on the London Stock Exchange, NASDAQ, and the New York Stock Exchange (NYSE) has an impact on the cost of capital of firms. The main focus of this study is to investigate if the decision to raise equity capital with the listing affects liquidity and market integration. The purpose of the thesis is fourfold: (1) to investigate whether foreign firms that list on NYSE or NASDAQ experience more positive wealth effects in the pre-listing period and a stronger decline in expected returns in the post-listing period than London listings; (2) to compare changes in the liquidity of stocks when they become internationally listed on one of the three major global stock exchanges, the London Stock Exchange, the New York Stock Exchange (NYSE), and NASDAQ; (3) to examine the effect of alternative international equity offering methods on liquidity and its subsequent impact on the cost of capital; (4) to investigate the transfer of pricing information for non-US companies that conducted a simultaneous initial public offering on the NYSE and on their domestic stock exchange. We find that foreign firms that list on the New York Stock Exchange or NASDAQ experience positive abnormal returns prior to their US listing, and a decline in expected returns in the post-listing period. On the contrary, foreign firms that list on the London Stock Exchange do not experience any significant changes. This suggests that the benefits associated with a US listing are higher, since foreign firms make themselves more accessible for US investors by complying with the stringent disclosure requirements of the Securities and Exchange Commission (SEC). These benefits may even be higher for emerging market firms which use their ADR listing to raise equity capital. Although emerging market firms may try to time their issues to take advantage of some form of "emerging market sentiment", the evidence is only weak. The finding of substantial positive returns of the ADR price for firms that upgrade their previously OTC-traded ADR programme to a listing are rather an indication of the benefits experienced with a listing. The results show that the liquidity of stocks which list on the London Stock Exchange, the New York Stock Exchange, and NASDAQ increases subsequent to the listing. However, firms listing on NYSE appear to experience the strongest abnormal volume effects. In addition to the persistent long-term impact on liquidity, we also document significant short-term trading volume effects of international listings. Our comparison of international listings and control firms matched by nationality, firm size, and industry confirms our finding that internationally listed firms experience an increase in liquidity. This study also provides evidence that 80 percent of our sample firms, which obtained a "full" ADR listing on NYSE or NASDAQ, experience an increase in their total order flow. Moreover, the US order flow of NYSE-listed firms is higher than in their pre-listing domestic market for 83 percent of our sample firms. The results provide evidence that non-US firms which conduct a public offerings in the US have lower bid-ask spreads than private placements. Our sample consists of 231 international equity offerings from 33 countries world-wide; 86 companies conducted a public offering on NYSE or NASDAQ, and 145 companies raised capital in the private placement market. We find that the decision between a public offering or a private placement under Rule 144 A has an impact on the cost of capital of a firm. Our cost-benefit analysis shows that the benefits of a public offering outweigh the cost advantage of private placements. We provide empirical evidence that the interaction between the domestic and the foreign stock market leads to lower bid-ask spreads for internationally listed firms. The investigation of the determinants of domestic and foreign trading volume indicates that international listing increases the total trading volume. Trading volume on the foreign stock exchange appears to be strongly influenced by the percentage of equity issued in the foreign market. In contrast to previous studies that examine "normal" cross-listings, our results show that in many cases NYSE prices seem to lead domestic prices. This result is particularly pronounced for emerging market shares whose domestic markets often appear to be pure satellites of the NYSE market. Our results also show a higher speed of convergence between ADRs and underlying shares for developed market firms implying that arbitrage is undertaken more quickly. A comparative order flow analysis provides consistent evidence since a great number of firms experience a higher trading activity on the NYSE than on their domestic market. While previous evidence suggests that ADR IPOs are less underpriced than US IPOs, our results do not indicate any differences. Moreover, initial returns of emerging market and developed market IPOs do not seem to differ

The impact of international cross-listings on firm value after the Sarbanes–Oxley Act: Evidence from American depositary receipts

The Sarbanes-Oxley Act is formally named the Public Company Accounting Reform and Investor Protection Act of 2002. The act is arguably one of the most significant reforms to affect the U.S. stock markets since the Securities Exchange Act of 1934. This study compares valuation implications of ADR announcements before and after the introduction of the act. A total of 234 ADR announcements are analyzed over a time frame spanning from 1994 to 2010 by employing event study methodology. Even though several studies attempt to explore the effects of the act on the value of firms issuing American Depository Receipts (ADR), reported results are either negative or positive. The empirical results presented in this study indicate that the impact on ADR issuing firms is not negative. The observed cumulative abnormal returns (CARs) reveal that investors on average positively react to ADR issue announcements during the post Sarbanes-Oxley period. However, empirical results do not lend support for the hypothesis that CARs are significantly different during the two periods analyzed in the study.Cao, M. M. (2012). The impact of international cross-listings on firm value after the Sarbanes–Oxley Act: Evidence from American depositary receipts. Retrieved from http://academicarchive.snhu.eduDoctor of Business Administration (D.B.A.)International BusinessSchool of Busines