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Abstract
Past evidence show that the impact of cross-listings in foreign markets on the volatility and liquidity of shares in domestic market depends the market transparency (or informational linkage between markets) and the effect of order flow migration from domestic market. Listed companies in Mainland China can issue two different classes of stocks. Before Feb 2001, local A-shares are restricted to domestic investors while foreign B- and H-shares are restricted to foreign investors. Since local A-share market is completely segmented from foreign B-share and H-share markets, this allows us to separate information effect from the order flow migration. Our study uncovers the following findings. First, cross-listings negatively affect stock liquidity as revealed with increased sensitivity of price volatility to volume. Second, only A-shares experience decline in volatility unrelated to volume after cross-listings of foreign shares. Overall, the results suggest that the impacts of cross-listing are not uniformly spread across different classes of investors in the same company.
JEL classification numbers: G15
Keywords: Cross-listing, Volatility, Liquidity, Market segmentation, Chinese Stock Markets.
(ProQuest: ... denotes formulae omitted.)
1 Introduction
The globalization of worldwide capital markets has accelerated dramatically in the past decades. Increasing numbers of companies have their shares cross-listed abroad to broaden their shareholder base and raise capital. Though companies view cross-listings as value enhancing, the change in liquidity and volatility, and the cost of trading associated with order flow migration following cross-listing may adversely affect the quality of the domestic equity market (Domowitz, Glen and Madhavan (1998)). Past empirical evidence show that the impact of cross-listings in foreign markets on the volatility and liquidity of shares in domestic market depends the market transparency (or informational linkages between markets) and the effect of order flow migration from domestic market (Pagano (1989), Chowdhry and Nanda (1991), Hargis and Ramanlal (1998), Domowitz, Glen and Madhavan (1998)).
The Chinese stock market is of particular interest. For listed companies in Mainland China, there are two different classes of stocks traded on the exchanges. Before Feb 2001, local A-shares are restricted to domestic investors while foreign (B- and H-) shares are restricted to foreign investors.2 The restriction imposed in China is therefore unique, as the markets available to domestic and foreign investors are completely segmented from one another. As...