CROSSLISTED SECURITIES AND LAW OF ONE PRICE Evidence from firms domiciled in BRIC countries and listed in US and European exchanges

Abstract

Companies seek beyond their domestic financial markets, in order to enhance their global presence and expand their shareholder bases. Investors move beyond their national borders to take advantage of international diversification of their portfolios. Hence raising capital from foreign market through crosslisting fulfills the need for both companies and investors. Along with better governance in developed countries especially in the US and Europe, the challenges of the developing countries to raise capital from domestic markets have blown up the growth of depository receipts in the last few decades. The law of one price states that in perfect and efficient capital markets, the same asset or its perfect substitutes should trade at the same price. But the law of one price (LOOP) does not hold true in case of crosslisted stocks as the depository receipts are generally traded at higher price in host market compared to the underlying in the home market. The underlying reason for divergence form LOOP can be found if we examine the linkages and the information processing and sharing mechanism of the two markets involved, home and host. Thus the present study examines the international market integration, price discovery and volatility transmission mechanism for the crosslisted securities. Interestingly, previous studies have examined the above three aspects for a single pair of home and host markets. The present study covers multiple pairs of home and host markets and attempts to reveal the anomalies among them. Also the present study covers all these three aspects, unlike previous studies, to find if there exists any link among the three. The study uses Non-synchronous Information Share (NIS) for the first time in the context of crosslisting. The method helps us to calculate the contribution of the home and host markets in price discovery, after controlling for the effect of non-overlapping trading hours of the home and host markets.