Abstract
This paper evaluates the impact of trading locations on equity returns by examining the stock price behaviour of three Anglo-Dutch dual-listed companies which result from mergers where two corporations agree to function as a single operating business, but maintain separate identities. The shares of these stocks are traded not only in their home market but also on several US stock exchanges in the form of American Depository Receipts. Regressing the return differentials on these dual-listed and cross-listed stocks on the relative market index returns and currency changes provides evidence of an apparent violation of the Law of One Price. The regression results show that the return on each part of dual-listed companies is highly correlated with the market on which it is most intensively traded. Similarly, returns on cross-listed stocks have considerably higher co-movement with US market indices and considerably lower co-movement with home-market indices than their home-market counterparts. Market risk premium is not a significant explanatory variable of the location of trade effect.
Highlights
According to the Law of One Price (LOOP) two identical commodities should be priced at parity, because they are perfect substitutes (Lamont & Thaler, 2003)
This paper examines the impact of trading locations on equity prices by testing if the stock returns of dual-listed companies (DLCs) are affected by the relative market indices, the relevant currency changes and the local market risk premium
Besides local market indices and relevant currency changes that are largely examined by many authors, this paper investigates whether equity risk premium (ERP) is a possible factor that drives the price deviation between two parts of a twin
Summary
According to the Law of One Price (LOOP) two identical commodities should be priced at parity, because they are perfect substitutes (Lamont & Thaler, 2003). If international financial markets are perfectly integrated, the same set of risky cash flows has the same value and risk characteristics when its trade is redistributed across markets and investors (Froot & Dabora, 1999). Recent studies have shown that share price of a company is influenced by the market in which its stock is traded, which indicates the LOOP does not hold in actual financial market. Chan, Hameed and Lau (2003) investigate the case of the Jardine Group companies that shifted their listings from Hong Kong to Singapore in 1994. They find that Jardine stocks are more correlated with Singapore market after the delisting, the core business of the group remained in Hong Kong
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