The purpose of this monograph is to survey the academic literature on the economic implications of the corporate decision to list shares on an overseas stock exchange. My focus is on the valuation and liquidity effects of the listing decision, and the impact of listing on the company’s global risk exposure and its cost of equity capital. The evidence shows: (1) share prices reacts favorably to cross-border listings in the first month after listing; (2) post-listing price performance up to one year is highly variable across companies depending on the home and listing market, its capitalization, capital-raising needs and other company-specific factors; (3) post-listing trading volume increases on average, and, for many issues, home-market trading volume increases also; (4) liquidity of trading in shares improves overall, but depends on the increase in total trading volume, the listing location and the scope of foreign ownership restrictions in the home market; (5) domestic market risk is significantly reduced and is associated with only a small increase in global market risk and foreign exchange risk, which can result in a net reduction in the cost of equity capital of about 126 basis points; (6) American Depositary Receipts represent an effective vehicle to diversify U.S.-based investment programs globally; (7) stringent disclosure requirements are the most important impediment to cross-border listings. I.

Award at the 2005 European Finance Association Meeting, to the retail broker and discount

We study an equilibrium in which agents face surprise liquidity shocks and invest in liquid and illiquid riskless assets. The random holding horizon from liquidity shocks makes the return of the illiquid security risky. The equilibrium premium for such risk depends on the constraint that agents face when borrowing against future income; it is insignificant without borrowing constraint, but can be very high with borrowing constraint. Illiquidity, therefore, can have large effects on asset returns when agents face liquidity shocks and borrowing constraints. This result can help us understand why some securities have high liquidity premia, despite low turnover frequency.

: We consider a model of the stock market with delegated portfolio management. All agents are rational: some trade for hedging reasons, some investors optimally contract with portfolio managers who may have stock-picking abilities, and portfolio managers trade optimally given the incentives provided by this contract. Managers try, but sometimes fail, to discover profitable trading opportunities. Although it is best not to trade in this case, their clients cannot distinguish "actively doing nothing," in this sense, from "simply doing nothing." Because of this problem: (i) some portfolio managers trade even though they have no reason to prefer one asset to another (noise trade). We also show that, (ii), the amount of such noise trade can be large compared to the amount of hedging volume. Perhaps surprisingly, (iii), noise trade may be Pareto-improving. Noise trade may be viewed as a public good. Results (i) and (ii) are compatible with observed high levels of turnover in secur...

In modelling competition among mechanism designers, it is necessary to specify the set of feasible mechanisms. These specifications are often borrowed from the optimal mechanism design literature and exclude mechanisms that are natural in a competitive environment; for example, mechanisms that depend on the mechanisms chosen by competitors. This paper constructs a set of mechanisms that is universal in that any specific model of the feasible set can be embedded in it. An equilibrium for a specific model is robust if and only if it is an equilibrium also for the universal set of mechanisms. A key to the construction is a language for describing mechanisms that is not tied to any preconceived notions of the nature of competition.

Given the cross-sectional and temporal variation in their liquidity, emerging equity markets provide an ideal setting to examine the impact of liquidity on expected returns. Our main liquidity measure is a transformation of the proportion of zero daily firm returns, averaged over the month. We find that it significantly predicts future returns, whereas alternative measures such as turnover do not. Consistent with liquidity being a priced factor, unexpected liquidity shocks are positively correlated with contemporaneous return shocks and negatively correlated with shocks to the dividend yield. We consider a simple asset pricing model with liquidity and the market portfolio as risk factors and transaction costs that are proportional to liquidity. The model differentiates between integrated and segmented countries and time periods. Our results suggest that local market liquidity is an important driver of expected returns in emerging markets, and that the liberalization process has not fully eliminated its impact.

We propose a dynamic equilibrium model of asset prices and trading volume when agents face fixed transactions costs. We show that even small fixed costs can give rise to large “no-trade ” regions for each agent’s optimal trading policy. The inability to trade more frequently reduces the agents ’ asset demand and in equilibrium gives rise to a significant illiquidity discount in asset prices. I.

What are the equilibrium features of a Þnancial market where a sizeable proportion of traders face reputational concerns? This question is central to our understanding of Þnancial markets that are increasingly dominated by institutional investors. We construct a model of delegated portfolio management that captures key features of the US mutual fund industry and embed it in an asset pricing framework. We thus provide a formal model of Þnancial equilibrium with career concerned agents. Fund managers differ in their ability to understand market fundamentals, and in every period investors choose a fund. In equilibrium, the presence of career concerns induces uninformed fund managers to churn, i.e. to engage in trading even when they face a negative expected return. As churning plays the role of noise trading, the asset market displays non-fully informative prices and positive (and high) trading volume. The equilibrium relationship between fund return and net fund ßows displays a skewed shape that is consistent with stylized facts. The robustness of our core results is probed from several angles.

This paper analyzes the intraday interdependence of price movements and order flows for actively traded NYSE stocks and their CBOE-traded options. Stock net-buy volume (buyer-initiated volume minus seller-initiated volume) has strong predictive ability for subsequent stock and option returns, but call or put net-buy volume has little predictive ability. Furthermore, stock returns lead option returns more than they lag even after controlling for net-buy volume. Therefore, our results indicate that order flows in the stock market are informative but order flows in the option market are not, and suggest that informed investors submit trades primarily in the stock market rather than in the option market. There is also some evidence for the non-informational linkage between the two markets. Stock net-buy volume is positively (negatively) related to lagged call (put) returns, suggesting that option dealers dynamically hedge their outstanding short option positions when the option deltas chan...

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