Global valuation of equity: one market correcting another

Abstract

PurposeThe purpose of this article is to assess the pricing of stocks that are traded on both a US stock exchange and a non‐US stock exchange to determine whether interaction exists between the two exchanges.Design/methodology/approachThis article identifies extreme price movements of stocks (winners and losers) in the non‐US stock exchanges that also trade as American depository receipts (ADRs) in the US market, and measure the US market response. Also identifies extreme price movements of stocks (winners and losers) in the US stock exchanges that also trade in the non‐US markets, and measure the non‐US market response.FindingsFinds a significant reversal of winners and losers in the US market, which suggests that the US market attempts to correct the pricing in non‐US markets. Also finds that extreme ADR price movements in the US markets are followed by corrections in the non‐US market.Research limitations/implicationsMarket participants appear to monitor unusual stock price movements that just occurred in other markets, and correct for unusual price movements that cannot be rationalized. Such activity in global markets expedites the process by which price discrepancies are corrected. The evidence also suggests that the cost of equity in one market can be influenced by the actions of investors in another market.Originality/valueThis study of non‐US stocks that are cross‐listed in the US in the form of ADRs allows us to examine the interaction of pricing in a stock's local market with pricing in the US market.