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The Effects of Market Segmentation and Illiquidity on Asset Prices: Evidence from Foreign Stocks Listing in the US

by Stephen R. Foerster at the University of Western Ontario and,
G. Andrew Karolyi at the Ohio State University

February 1996

Abstract: We document the effect on share value of a foreign firm listing on the New York, American Stock Exchanges or Nasdaq over-the-counter market. Our sample consists of over 160 firms from 14 countries that listed their shares for the first time in the US as ordinary listings or as American Depositary Receipts (ADRs) from 1976 to 1992. We find that these stocks earned a significant average abnormal return of 0.349% per week during the year before listing, an additional 0.709% during the listing week, but incur a significant average loss of -0.190% per week during the year following listing. The pattern in abnormal returns is shown to be robust to different benchmark models of risk changes and to be significantly related to an increase in the shareholder base and the exchange on which the shares are listed. Cross-sectional regressions provide support for Merton's (1987) investor recognition hypothesis and Amihud and Mendelson's (1986) liquidity hypothesis as partial explanations for the abnormal returns around listing.

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