The Relationship Among U.S. Securities Laws, Cross-Listing Premia, and Trading Volumes

Abstract

This paper studies the relationship among the U.S. securities laws, the premia that non-U.S. firms obtain by subjecting themselves to U.S. laws, overall U.S. share prices, and a cross-listed firm’s U.S. trading volume. I report three main sets of findings. First, for exchange-traded (NYSE and NASDAQ) cross-listed firms, pair premia and pair returns (premia and returns not explained by valuation and returns for similar non-cross-listed firms from the same home country) are strongly correlated with U.S. stock indices. There is a visually apparent “bubble” in pair premia for these firms, which peaks in early 2000, at the same time as U.S. stock indices. In contrast, pair premia and pair returns for cross-listed firms traded OTC or on PORTAL are not correlated with U.S. indices. The correlation between pair returns and U.S. indices only exists for firms with an above-median ratio of U.S.-based to total trading volume, and is triggered by cross-listing; there is no significant correlation before listing. Second, pair premia for level-23 firms, relative to premia for level-14 firms (“relative pair premia”), exist only in firms with above-median ratio of U.S. to total trading volume. Firms with below-median ratio of U.S. trading have no relative pair premia, regardless of listing level. Third, there are important time variations in relative pair premia. Relative pair premia decline significantly for all firms during the first 6 years after listing, and disappear after year six. The decay is most pronounced for firms with below-median ratio of U.S. trading volume.

These results, taken together, weaken the law-based explanation for cross-listing premia (bonding to U.S. securities regime) and strengthen the non-law-based explanations (liquidity and visibility). They also suggest a behavioral explanation: U.S. investors treat high trading volume, exchange traded firms partly like U.S. firms, but treat OTC firm, Portal firms and low-trading-volume exchange-traded firms like other foreign firms.