G. Andrew Karolyi

Why are Foreign Firms Listed in the U.S. Worth More

At the end of 1997, the foreign companies listed in the U.S. have a Tobins q ratio that exceeds by 16.5% the q ratio of firms from the same country that are not listed in the U.S. The valuation difference is statistically significant and largest for exchange-listed firms, where it reaches 37%. The difference persists even after controlling for a number of firm and country characteristics. We propose a theory that explains this valuation difference. We hypothesize that controlling shareholders of firms listed in the U.S. cannot extract as many private benefits from control compared to controlling shareholders of firms not listed in the U.S., but that their firms are better able to take advantage of growth opportunities. Consequently, the cross-listed firms should be those firms where the interests of the controlling shareholder are better aligned with the interests of other shareholders. The growth opportunities of cross-listed firms will be more highly valued than those of firms not listed in the U.S. both because cross-listed firms are better able to take advantage of these opportunities and because a smaller fraction of the cash flow of these firms is expropriated by controlling shareholders. We find that our theory explains the greater valuation of cross-listed firms. In particular, we find expected sales growth is valued more highly for firms listed in the U.S. and that this effect is greater for firms from countries with poorer investor rights.

The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States

Non-U.S. firms cross-listing shares on U.S. exchanges as American Depositary Receipts earn cumulative abnormal returns of 19 percent during the year before listing, and an additional 1.20 percent during the listing week, but incur a loss of 14 percent during the year following listing. We show how these unusual share price changes are robust to changing market risk exposures and are related to an expansion of the shareholder base and to the amount of capital raised at the time of listing. Our tests provide support for the market segmentation hypothesis and Mertons (1987) investor recognition hypothesis. Copyright The American Finance Association 1999.

Good news, bad news and international spillovers of stock return volatility between Japan and the U.S.

Abstract We study the joint dynamics of overnight and daytime return volatility for the Nikkei Stock Average in Tokyo and the Standard and Poors 500 Stock Index in New York over the recent 1988–92 period. We extend the GARCH framework of Engle (1982) and Bollerslev (1986) to allow for asymmetric effects of negative (“bad news”) and positive (“good news”) foreign market returns shocks for volatility. Our evidence demonstrates that the magnitude and persistence of shocks originating in New York or Tokyo that transmit to the other market are significantly understated if this asymmetric effect is ignored. Implications for pricing of securities within those markets, for hedging and other global trading strategies and for regulatory policies within these financial markets are also discussed.

Did the Asian financial crisis scare foreign investors out of Japan

Foreigners became net sellers of Japanese equities during the Asian financial crisis in 1997. In this study, I examine whether this shift in aggregate foreign portfolio investment activity in Japan exacerbated the effect of the crisis on markets, or whether it simply reflected positive feedback trading behavior. The data draws from weekly reports to the Tokyo Stock Exchange of aggregate purchases and sales of Japanese equities by foreigners and local institutional and individual investors. I find evidence of consistent positive-feedback trading before and during the Asian crisis among foreign investors, while Japanese banks, financial institutions, investment trusts and companies were aggressive contrarian investors. There is no evidence that this trading activity by foreigners destabilized the markets during the crisis.

International Real Estate Returns: A Multifactor, Multicountry Approach

We examine the risk and return characteristics of publicly-traded real estate companies from 14 countries over the period 1990 to 2001. Our data are monthly country-level commercial real estate indexes constructed by the European Public Real Estate Association (EPRA). We find substantial variation in mean real estate returns and standard deviations across countries. Using various global and country-level factor models, we find that there is evidence of a strong global market risk component, measured relative to the Morgan Stanley Capital International world index, in most countries. However, even after controlling for the effects of global market risk, an orthogonalized country-specific market risk factor is highly significant, especially for real estate indexes in Asia-Pacific markets. We find that a country-specific value risk factor has some explanatory power in addition to the country-specific market factor, but U.S.- based market, value and size risk factors do not provide any additional explanatory power. These findings imply that the international diversification opportunities with real estate companies are more complex than previously thought.

The impact of the introduction of the Euro on foreign exchange rate risk exposures

Abstract This paper tests whether significant changes in stock return volatility, market risk, and foreign exchange rate risk exposures took place around the launch of the Euro in 1999. The experiment analyzes weekly returns for 3220 nonfinancial firms from 18 European countries, the United States, and Japan. We find that though the Euros launch was associated with an increase in total stock return volatility, significant reductions in market risk exposures arose for nonfinancial firms both in and outside of Europe. We show that the reductions in market risk were concentrated in firms domiciled in the Euro area and in non-Euro firms with a high fraction of foreign sales or assets in Europe. The Euros introduction led to a net absolute decrease in the foreign exchange rate exposure of nonfinancial firms, but these changes are statistically and economically small. We interpret our findings in the context of existing theories of exchange rate risk management.

Chapter 16 Are financial assets priced locally or globally

Abstract We review the international finance literature to assess the extent to which international factors affect financial asset demands and prices. International asset-pricing models with mean-variance investors predict that an assets risk premium depends on its covariance with the world market portfolio and, possibly, with exchange rate changes. The existing empirical evidence shows that a countrys risk premium depends on its covariance with the world market portfolio and that there is some evidence that exchange rate risk affects expected returns. However, the theoretical asset-pricing literature relying on mean-variance optimizing investors fails in explaining the portfolio holdings of investors, equity flows, and the time-varying properties of correlations across countries. The home bias has the effect of increasing local influences on asset prices, while equity flows and cross-country correlations increase global influences on asset prices.

THE ROLE OF AMERICAN DEPOSITARY RECEIPTS IN THE DEVELOPMENT OF EMERGING EQUITY MARKETS

This paper finds that the growth and expansion of U.S. cross-listings by firms from emerging markets around the world facilitated an expansion of cross-border equity flows and overall development of their stock markets during the 1990s. However, these benefits have negative spillover effects; the capitalization and turnover ratios of local-market firms that do not pursue overseas listings decline as U.S. cross-listings in the form of American depositary receipts (ADRs) increase in size and scope. We investigate various possible sources of these negative spillovers and offer new evidence that the growth of ADRs neither facilitates nor hinders local-market development, but represent an outcome of poorly functioning local markets. Policy implications are discussed.

DaimlerChrysler AG, the First Truly Global Share

On November 17, 1998, trading commenced in DaimlerChrysler AG ordinary shares, a single global registered share (GRS) certificate, on stock exchanges around the world. The GRS quotes, trades and settles in U.S. dollars on the New York Stock Exchange and in deutschmarks/euros on the Deutsche Borse through a new global share registrar linking German and U.S. registrars and clearing facilities. This clinical study documents how almost 95 percent of its order flow migrated back to Germany within the first six months of trading and that the share price underperformed market- and sector-specific benchmarks by up to 10 percent. I analyze this event as an interesting test of different hypotheses about multi-market trading, global competition for order flow and liquidity. Overall, I argue that the choice of the share facility, whether a global share or traditional ADR program, cannot explain DaimlerChryslers flowback and poor share price performance.

Indirect Robust Estimation of the Short-Term Interest Rate Process

We introduce Indirect Robust Generalized Method of Moments (IRGMM), a new simulation-based estimation methodology, to model short-term interest rate processes. The primary advantage of IRGMM relative to classical estimators of the continuous-time short-rate diffusion processes is that it corrects both errors due to discretization and the errors due to model misspecification. We apply this new approach to various monthly and weekly Eurocurrency interest rate series.