Abstract
Maximising firm value remains a key tenet of corporate managers. Firms with lower illiquidity and volatility attract lower risk premiums, and these are associated with a lower cost of capital and higher firm value. Internationalisation is one avenue purported to provide liquidity and volatility benefits – possibly lowering both liquidity and volatility risk premiums. This study investigated whether South African domiciled stocks experience a surge in liquidity and/or decline in volatility subsequent to internationalisation. The findings show that internationalisation resulted in a surge in liquidity, and this increase was persistent as suggested by the trading volume and Amihud illiquidity measures of stock liquidity; however, the turnover measure indicated that such liquidity gains were temporary. Similarly, volatility declines after internationalisation were temporary. There was inconclusive evidence to show that internationalised stocks had higher liquidity relative to purely domestic shares, and no statistically significant difference between the volatility of internationalised and purely domestic shareholders’ equity was noted. There is only weak evidence to support internationalisation as a route for lowering cost of capital via a reduction in the liquidity risk premium.
Highlights
In recent times, discussions on market and economic integration have become increasingly common, given that investor, corporate and government interactions are rarely limited within a single country
Firms internationalise via dual listing, which is when two companies incorporated in different countries contractually agree to operate their businesses as if they were a single enterprise, while retaining their separate legal identities and existing stock exchange listings (De Jong, Rosenthal & Van Dijk 2009)
CumulaƟve number of stocks on foreign exchanges CumulaƟve number of stocks on OTC markets shows a growing number of South African companies domiciled on the Johannesburg Stock Exchange (JSE), which have internationalised their shareholders’ equity via the OTC markets and foreign stock exchanges for the period 1990–2015
Summary
Discussions on market and economic integration have become increasingly common, given that investor, corporate and government interactions are rarely limited within a single country. Shows a growing number of South African companies domiciled on the Johannesburg Stock Exchange (JSE) (the largest stock exchange in Africa), which have internationalised their shareholders’ equity via the OTC markets and foreign stock exchanges for the period 1990–2015 This cumulative growth in South African firms that are cross listed and cross traded on various foreign markets could suggest that firms may be seeking to derive the various hypothesised benefits that could arise from internationalising stockholder equity. This study differentiates itself from previous works by Leuz and Verrecchia (2000), Bayer and Onder (2005), Fernandes and Ferreira (2008), Berkman and Nguyen (2010) and Dodd (2011) because it assesses the impact of internationalisation on stock volatility and liquidity from a perspective of stocks domiciled on an emerging African market. This article further provides a comprehensive analysis which presents several relevant methodologies to ensure that a complete representation of these impacts is presented
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