Cross-listing, segmentation and foreign ownership restrictions

Abstract

We examine empirically the impact of international cross-listing on stocks traded on the Mexican Stock Exchange. We focus on the Mexican market because equity issues in Mexico differentiate between foreign and domestic investors, permitting tests of hypotheses about the effects of cross-listing on different shareholder classes. For shares open to foreign ownership, ADR introduction is associated with higher volatility unrelated to volume and lower liquidity, consistent with the hypothesis that cross-listing induces market fragmentation. However, the implicit bid-ask spreads for shares open to foreign ownership decrease although there are no such changes for shares restricted to domestic ownership. This finding is consistent with the hypothesis that cross-listing also creates in greater competition for order flow in some segments of the market. These effects vary with firm characteristics such as market capitalization. Internal capital market segmentation, induced by foreign ownership restrictions is an important factor in these results. Cross-listing is thus more complex than previously believed, with differential impacts on foreign and domestic investors.KeywordsDomestic MarketTrading CostPrice VolatilityForeign OwnershipDomestic InvestorThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.