The Transmission of Pricing Information of Dually-Listed Stocks

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1 Journal of Business Finance & Accouning, 26(5) & (6), June/July 1999, X The Transmission of Pricing Informaion of Dually-Lised Sks Kee-Hong Bae, Baekin Cha and Yan-Leung Cheung* 1. INTRODUCTION A major heme in modern porfolio heory concerns he meris of inernaional diversificaion in reducing sysemaic porfolio risk. On he one hand, early research by Grubel (1968), Lessard (1973) and Solnik (1974), which repor low or saisically insignifican correlaions of sk reurns across counries, dumens he benefis of inernaional diversificaion. On he oher hand, many researchers have examined he comovemen of world exchange indices (e.g., Grubel and Fadner, 1971; Ripley, 1973; Joy e al., 1976; Hilliard, 1979; and Philippaos e al., 1983). Ineres in his line of sudy has increased markedly since he global Crash of Ocober Exan lieraure has invesigaed wheher or no naional equiy markes are inerrelaed (e.g., Eun and Shim, 1989; Becker e al., 1990; Hamao e al., 1990; and Kh and Kh, 1991) and wheher or no he developed markes exer a srong influence on he emerging markes (e.g., Chan e al., 1992; and Cheung and Mak, 1992). These sudies have generally found a significan degree of inerdependence * The firs auhor is from he Hong Kong Universiy of Science and Technology. The second auhor is from he Korea Insiue of Finance. The hird auhor is from he Ciy Universiy of Hong Kong. An earlier version of his paper was presened a he Thiry- Ninh Inernaional Alanic Economic Conference, March 10^16, 1995, Vienna, Ausria. The auhors are graeful o he paricipans of he Conference and o Ira Horowiz for heir valuable commens. Responsibiliy for any remaining errors ress solely wih he auhors. (Paper received February 1998, revised and acceped November 1988) Address for correspondence: Kee-Hong Bae, Deparmen of Finance, Hong Kong Universiy of Science and Technology, Clear Waer Bay, Hong Kong. ß Blackwell Publishers Ld. 1999, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Sree, Malden, MA 02148, USA. 709

2 710 BAE, CHA AND CHEUNG beween naional sk markes and/or shown ha he US marke has he greaes influence of all on he performance of oher markes. Recenly, wih he increasing inernaionalizaion of capial markes, a rising number of corporaions have lised heir sks on foreign exchanges as well as on heir domesic exchanges. Previous sudies on inernaional lisings have fused on he moives for lising abroad (e.g., Saudagaran, 1988; and Biddle and Saudagaran, 1989), or he share price movemens around he corporaion's firs rading day on a foreign exchange (e.g., Howe and Kelm, 1987; Alexander e al., 1988; and Lee, 1991), or he bid-ask spread relaionship and he reurn volailiy relaionship of he dually-lised sks (e.g., Shum, 1994; Cheung and Shum, 1995; and Cheung e al, 1995). Lef relaively unexplored is he ransfer of pricing informaion beween foreign and domesic sk exchanges hrough he inernaionally-lised securiies. The price of a given sk on one exchange canno remain ou of line wih is price on anoher exchange in which i is raded for any exended period of ime. Traders assure ha he price of a sk on one exchange will necessarily move in coordinaion wih is price on anoher exchange. A non-overlap of rading hours beween wo exchanges in which he same underlying sk is raded provides an ideal seing o invesigae he informaion ransfer as well as marke efficiency. Moreover, he use of duallylised sk reurns allows us o address he issue of informaion flows beween naional sk markes more precisely han using index reurns. While one exchange is closed, he informaion from he oher exchange is available o invesors or vice versa. If he marke is efficien, his informaion should be refleced in opening price of a sk raded, and one would expec conemporaneous spillovers from inraday reurns of one exchange o overnigh reurns of he oher exchange. On he oher hand, if he sric version of he efficien marke hypohesis holds, one should no expec any spillovers from inraday reurns of one exchange o inraday reurns of he oher exchange, i.e., lagged spillover effec. Using he daily opening and closing sk prices of seven Japanese corporaions ha are dually lised on he New York Sk Exchange (NYSE) and he Tokyo Sk Exchange (TSE),

3 PRICING INFORMATION OF DUALLY-LISTED STOCKS 711 Lau and Dilz (1994) conclude ha marke imperfecions ha may inhibi informaion ransfer beween TSE and NYSE sk reurns are no readily apparen and ha inernaional lisings do no give rise o arbirage opporuniies. The purpose of his paper is o provide furher empirical evidence concerning his issue. Our sudy exends he Lau and Dilz (1994) work in wo imporan ways. Firs, we use a larger sample of eigheen companies and a more recen sample period, January 4, 1993 o December 31, Lau and Dilz (1994) use only seven companies and an earlier period of January 1, 1988 o December 31, Second and more imporanly, wih he growing concern abou emerging markes, we invesigae sks which are lised on boh an emerging marke and a developed marke. The wo markes we consider in his sudy are he Sk Exchange of Hong Kong (SEHK) and he London Sk Exchange (LSE). As of he end of 1996, he SEHK was he larges emerging marke in Asia in erms of a marke capializaion of US$ 445 billion. The rading value of equiy shares in he SEHK was US$ 181 billion, making i he second larges among he Asian emerging markes, nex o he Taiwan Sk Exchange. 2 Hong Kong is also he mos open marke among all Asian emerging markes and foreign invesors are free o buy and sell all ypes of securiies. A he end of 1993 he LSE was he hird larges in he world in erms of marke capializaion of US$ 1,625 billion, 3 and i was he larges rader of inernaional equiies. 4 We aemp o answer wo ineresing quesions: (1) Does he ransmission of pricing informaion run in one way (from a developed marke o an emerging marke) or in boh direcions? (2) How rapidly are he price movemens in one marke ransmied o he oher marke? Undersanding he mechanism hrough which sk price movemens are ransmied o anoher marke has imporan implicaions no only for pricing of securiies wihin hose markes, bu also for he formulaion of hedging sraegies, and regulaory policies, no o menion for he growing number of inernaional porfolio managers. Evidence shows ha he ransmission of informaion runs in boh direcions and ha mos of he ransmied informaion coninues o be pressed hroughou he following rading day. The remainder of his paper is organized as follows. Secions 2 describes he daa and saisical echniques used in his sudy.

4 712 BAE, CHA AND CHEUNG Secion 3 presens he empirical resuls. The main conclusions and implicaions are summarized in Secion DATA AND METHOD (i) Daa Thiry Hong Kong-based sks were raded on he London Sk Exchange as of he end of Twelve sks are excluded from he presen sample because heir daily price quoaions for he enire sample period are no available. Our analysis uses he daily opening and closing prices for he eigheen sample sks for he rading days of our sample period. The rading hours of he SEHK are from 10:00 a.m. o 3:30 p.m. wih a wo-hour (12:30 o 2:30) lunch break. Trading a he LSE in Hong Kong ime sars wo hours laer a 5:30 p.m. and coninues unil 11:30 p.m. There is, herefore, no overlap in rading hours beween hese wo sk exchanges. As shown in Figure 1, he chronological sequence for any given rading day is: (i) he SEHK opens; (ii) he SEHK closes; (iii) he LSE opens; and (iv) he LSE closes. The opening and closing prices on he SEHK and he LSE (quoed in HK$) are obained from he Hong Kong Economic Times and he Souh China Morning Pos. The opening and closing values of he Hang Seng Index and he Financial Times-Sk Exchange 100 Share Index are obained from he Hong Kong Economic Times. (ii) Mehod The empirical specificaion and approach used in his sudy are in large par he same as hose used by Becker e al. (1990) and Lau and Dilz (1994). Le he day- opening and closing prices be open and close, respecively. Then, he inraday reurn and he overnigh reurn co are calculaed, respecively, as log(close =open and log(open /close 1. All reurn series are adjused for dividend paymen and sk spli. More specifically, we define he overnigh reurn and he inraday reurn for he SEHK and LSE as follows:

5 : he SEHK reurn for he overnigh period ending on day, HK : he SEHK inraday reurn on day, L co : he LSE reurn for he overnigh period ending on day, L : he LSE inraday reurn on day. The chronological sequence of hese four reurns is also illusraed in Figure 1. Four equaions are considered in our invesigaion of he ransmission of pricing informaion beween he SEHK and he LSE. For he direcion from he LSE o he SEHK, we consider he following wo effecs: HK co PRICING INFORMATION OF DUALLY-LISTED STOCKS 713 (a) he effec of changes in he inraday LSE reurn, L he following day's SEHK overnigh reurn, HK, and (b) he effec of changes in he inraday LSE reurn, L he following day's SEHK inraday reurn, HK. 1,on 1,on Figure 1 The Chronological Sequence of Evens in he London Sk Exchange (LSE) and he Sk Exchange of Hong Kong (SEHK) Noes: L 1 : he LSE inraday reurn on day 1. HK co : he SEHK reurn for he overnigh period ending on day. HK : he SEHK inraday reurn on day. L co : he LSE reurn for he overnigh period ending on day. L : he LSE inraday reurn on day.

6 714 BAE, CHA AND CHEUNG The corresponding regression specificaions are: HK co HK co ˆ a 1 b 1 L 1 e 1; ˆ a 2 b 2 L 1 e 2; where e i ; i ˆ 1; 2, denoes a random error erm wih he usual normaliy properies. If he SEHK reurn responds quickly o changes in he previous inraday reurns on he LSE, he esimae of b 1 in (1) should be posiive and saisically significan. If, however, he ransmission of informaion from he LSE o SEHK curs wih a lag, he esimae of b 2 in (2) should be posiive and saisically significan. Given ha a sric version of he efficien marke hypohesis holds, one should no expec any spillovers of his kind. For he direcion from he LSE o he SEHK, we consider he following wo effecs: (c) he effec of changes in he inraday SEHK reurn, HK on he same day's LSE overnigh reurn, L co, and (d) he effec of changes in he inraday SEHK reurn, HK on he same day's LSE inraday reurn, L The corresponding regression specificaions are: L co L. 1 2,, ˆ a 3 b 3 HK e 3 ; 3 ˆ a 4 b 4 HK e 4 ; 4 As Figure 1 indicaes, here is an overlap in he rading ime for he LSE inraday reurn and SEHK overnigh reurn (equaion (1)), and for he SEHK inraday reurn and LSE overnigh reurn (equaion (3)). In order o circumven he poenial simulaneiy problem in equaions (1) and (3), we apply he four-sep insrumenal variable mehod used by Kh and Kh (1991) and Lau and Dilz (1994). Firs, for each individual corporaion, marke-model regressions are run for wo inraday reurns: L ˆ a 5 b 5 FT L HK and HK, i.e: e 5 ; 5 ˆ a 6 b 6 HSI e 6 ; 6 where FT is he day- inraday reurn on he Financial Times- Sk Exchange 100 Share Index in London, and HSI is he day- inraday reurn on he Hang Seng Index in Hong Kong.

7 PRICING INFORMATION OF DUALLY-LISTED STOCKS 715 The esimaion resuls of hese marke models are repored in Table 1. Second, using he parameer esimaes of a i and b i i ˆ 5; 6, we obain `predicions' (insrumens) of he inraday reurns, i.e: ^L 1 ˆ ^a 5 ^b 5 FT 1 ; 50 ^HK ˆ ^a 6 ^b 6 HSI : 6 0 Third, he insrumens (5 0 ) and (6 0 ) are hen subsiued ino equaions (1) and (3), respecively, o yield: HK co L co ˆ a 1 b 1^L 1 e 7; 1 0 ˆ a 3 b 3 ^HK e 8 : 3 0 Finally, he parameers of he sysem of equaions (1 0 ), (2), (3 0 ) and (4) are esimaed joinly using he Seemingly Unrelaed Regression (SUR) mehod. By using he esimaes of he covariance of residuals across equaions, he SUR mehod improves he efficiency of he parameer esimaes. 3. EMPIRICAL RESULTS Table 2 presens he resuls of he eigheen SUR esimaes of equaions (1 0 ) and (3 0 ): he conemporaneous effec of changes in a sample corporaion's inraday reurn in one exchange on is overnigh reurn in anoher exchange. For he impac of LSE inraday reurns on SEHK overnigh reurns, all of eigheen slope coefficiens are posiive, and seveneen of hem are saisically significan a he five percen level. This resul implies ha he SEHK reurns for he sample corporaions respond promply o he changes in corresponding LSE inraday reurns a he opening of he following rading day. The resuls of he SUR esimaes of equaion (3 0 ), he effecs of he SEHK inraday reurns on he same day's LSE overnigh reurns, reveal ha all of eigheen slope coefficiens are posiive and significan a he five percen level. The LSE reurns also respond rapidly o changes in reurns on he SEHK. If anyhing, he significance level of he impac from he SEHK o he LSE is even sronger when compared o he impac from he LSE o he SEHK. Previous sudies of inernaional sk marke

8 716 BAE, CHA AND CHEUNG Table 1 Resuls of he Marke Model for he London Sk Exchange (LSE) and he Sk Exchange of Hong Kong (SEHK) Sk L ˆ a 5 b 5 FT e 5 HK ˆ a 6 b 6 HSI e 6 ^a 5 ^b 5 ^a 6 ^b 6 Cahay Pacific Airways ** ** (0.18) (2.36) (0.36) (10.01) Cheung Kong Holding ** ** (1.31) (3.10) (0.50) (12.04) China Ligh ** ** ( 0.65) (3.10) (0.01) (13.50) Dairy Farm ** ** (0.72) (2.25) (0.20) (5.76) Henderson Land ** ** (0.54) (2.71) ( 1.01) (10.50) Hong Kong Elecric ** ** ** (2.01) (3.02) (0.26) (13.10) Hong Kong Land ** ** (1.35) (3.20) (0.41) (9.79) Hong Kong Telecom ** ** (0.24) (3.05) ( 0.15) (10.68) HSBC Holdings ** ** (0.01) (3.57) (1.59) (15.10) Huchison Whampoa ** ** ** ( 1.70) (2.42) (2.50) (16.34) Hysan Developmen ** ** (0.01) (3.12) (1.76) (9.98) Jardine Maheson Hold ** ** ( 1.17) (1.50) (2.56) (13.98) Jardine Sraegic-Ord ** ** (0.51) (3.60) (0.92) (9.52) New World Developmen ** ** (0.19) (4.12) (0.86) (10.26) Sun Hung Kai Properies ** ** (1.15) (2.12) ( 0.23) (16.10) Swire Pacific A ** ** (1.01) (3.06) (1.00) (10.83) Wharf Holdings ** ** (0.90) (2.10) ( 0.05) (8.50) World Inernaional ** ** (1.24) (2.30) (1.49) (13.56) Noes: Esimaion resuls of he marke model for Hong Kong sks lised on boh LSE and SEHK are repored for January 4, 1993 o December 31, The marke model is given by: L HK ˆ a 5 b 5 FT e 5 for LSE and ˆ a 6 b 6 HSI e 6 for SEHK: Figures in parenheses are values for he esimaes. (**) and (*) denoe significance a he 5% and 10% levels, respecively.

9 PRICING INFORMATION OF DUALLY-LISTED STOCKS 717 Table 2 The SUR Esimaes of Conemporaneous Spillover Effecs Sk HK co ˆ a 1 b 1 ^L 1 e 7 L co ˆ a 3 b 3 ^HK ^a 1 ^b 1 ^a 5 ^b 5 e 8 Cahay Pacific Airways ** ** (0.10) (2.89) ( 0.20) (3.86) Cheung Kong Holding ** ** (0.98) (2.89) (1.43) (10.70) China Ligh ** ** (0.67) (3.50) (0.62) (5.50) Dairy Farm ** ** (0.01) (3.40) (0.01) (2.50) Henderson Land ** ** ** (2.58) (2.38) (0.33) (6.70) Hong Kong Elecric ** ** ( 0.10) (2.45) (0.90) (7.32) Hong Kong Land ** ** (0.18) (2.68) (1.01) (5.12) Hong Kong Telecom ** ** (1.31) (2.56) ( 0.86) (7.65) HSBC Holdings ** ** ( 0.05) (3.96) (0.84) (6.72) Huchison Whampoa ** ** (0.81) (2.29) (1.42) (9.12) Hysan Developmen ** ** ** ( 0.12) (2.96) (2.40) (5.68) Jardine Maheson Hold ** ** (1.43) (2.51) ( 0.83) (4.48) Jardine Sraegic-Ord ** (0.12) (1.56) (1.80) (3.96) New World Developmen ** ** (0.96) (2.50) ( 0.85) (6.98) Sun Hung Kai Properies ** ** (0.56) (2.60) (0.01) (5.63) Swire Pacific A ** ** ( 0.78) (2.31) (1.36) (7.79) Wharf Holdings ** ** (0.27) (2.30) (1.35) (5.12) World Inernaional ** ** (0.63) (3.20) ( 1.48) (11.12) Noes: The SUR model is esimaed for January 4, 1993 o December 31, The model is given by: HK co HK L co L ˆ a 1 b 1 ^L 1 e ˆ a 2 b 2 L 1 e ˆ a 3 b 3 ^HK e ˆ a 4 b 4 ^HK e For each firm, SUR esimaes of he parameers of equaions (1'), (2), (3') and (4) are esimaed joinly. Esimaes of (1') and (3'), he conemporaneous effecs of inraday reurn in one exchange on overnigh reurn in he oher exchange, are repored. Figures in parenheses are values for he esimaes. (**) and (*) denoe significance a he 5% and 10% levels, respecively.

10 718 BAE, CHA AND CHEUNG inerrelaionships, mos of hem using index reurns, have found ha he developed markes (noably he US marke) predominanly lead he oher naional markes. The bilaeral ransmission relaionship dumened here using dually-lised sks suggess ha sk reurns on he emerging marke also rapidly affec he corresponding reurns in he developed markes. Table 3 repors he resuls of he SUR esimaes of equaion (2) and (4): he lagged effec of changes in a sample corporaion's inraday reurns in one exchange on he inraday reurns in he oher exchange. For he impac of LSE inraday reurns on SEHK inraday reurns, all eigheen slope coefficiens are posiive, and hireen are significan a he five percen level and wo a he en percen level. These resuls sugges ha mos of he ransmission of pricing informaion is no compleed by he ime of he firs rade of he day. Raher, more informaion remains o be pressed during subsequen rading hours. The resuls of he SUR esimaes of equaion (4), he effecs of changes in SEHK inraday reurns on he same day's LSE inraday reurns, show ha seveneen of he esimaed slope coefficiens are posiive, and as many as eigh of hese are saisically significan a he five percen level. The resuls are herefore a bi weaker in erms of significance level and number of significan slope coefficiens when compared o lagged spillover effec from he LSE o he SEHK. Neverheless, he fac ha more han half of he coefficiens are significan suggess ha he ransmission of pricing informaion is coninuous from he SEHK o he LSE even afer rading hours a he SEHK have ended. This resul is somewha surprising. If he marke is efficien, one would no expec such mean spillovers from inraday reurns in one exchange o inraday reurns in he oher exchange. In an efficien marke, informaion abou he inraday reurn performance in one marke should be refleced in he opening price of he oher marke. Given ha informaion flow is random, subsequen price changes should be uncorrelaed wih lagged reurns. Thus, if he opening sk price had incorporaed all sample firm informaion from he previous rading in he oher marke, he esimaed slope coefficiens would have been generally insignifican. One possible explanaion of his puzzling evidence may be he problem of sale opening prices in compuing inraday reurns. Given ha opening prices are sale, i is cerainly possible ha a

11 PRICING INFORMATION OF DUALLY-LISTED STOCKS 719 Table 3 The SUR Esimaes of Lagged Spillover Effecs Sk HK co ˆ a 2 b 2 ^L 1 e 2 L co ˆ a 4 b 4 ^HK ^a 2 ^b 2 ^a 4 ^b 4 e 4 Cahay Pacific Airways ** (0.80) (5.88) (0.01) (1.21) Cheung Kong Holding ** (1.60) (1.12) (0.78) (4.24) China Ligh (1.43) (1.60) (1.10) (0.96) Dairy Farm ** ** ( 0.98) (9.78) (2.75) ( 1.31) Henderson Land ** ** (2.50) (3.68) (0.85) (1.59) Hong Kong Elecric ** (0.85) (1.80) (0.79) (3.92) Hong Kong Land ** ** ** (2.28) (6.12) (0.19) (5.67) Hong Kong Telecom ** ** ** (2.50) (5.10) ( 0.50) (2.29) HSBC Holdings ** (0.01) (5.60) ( 0.59) (1.41) Huchison Whampoa ** ** ** (3.02) (4.51) ( 1.57) (4.56) Hysan Developmen ** (2.75) (5.37) ( 0.58) (1.22) Jardine Maheson Hold * ** (1.70) (1.96) (1.20) (3.44) Jardine Sraegic-Ord ** ** ** (2.84) (8.67) (0.03) (2.30) New World Developmen ** ** * (3.56) (5.02) (0.50) (2.00) Sun Hung Kai Properies ** * * (2.06) (2.00) (1.21) (2.10) Swire Pacific A ** ** * (2.60) (3.64) (0.28) (2.00) Wharf Holdings ** (1.36) (6.70) (1.36) (0.86) World Inernaional ** ** ** ** (4.62) (5.81) ( 2.56) (2.75) Noes: The SUR model is esimaed for January 4, 1993 o December 31, The model is given by: HK co HK L co L ˆ a 1 b 1 ^L 1 e ˆ a 2 b 2 L 1 e ˆ a 3 b 3 ^HK e ˆ a 4 b 4 ^HK e For each firm, SUR esimaes of he parameers of equaions (1'), (2), (3') and (4) are esimaed joinly. Esimaes of (2) and (4), he lagged effecs of inraday reurn in one exchange on inraday reurn in he oher exchange, are repored. Figures in parenheses are values for he esimaes. (**) and (*) denoe significance a he 5% and 10% levels, respecively.

12 720 BAE, CHA AND CHEUNG lagged spillover effec could have obained since informaion would have been incorporaed ino subsequen rade prices following he opening. To minimize he effec of sale prices, one can rea rade prices ha obain afer he official opening as he opening prices in compuing inraday reurns. Due o he problem of daa availabiliy, however, we leave his exercise for fuure sudy. Overall, he resuls of equaions (1 0 ) and (3 0 ) indicae ha ransmission of pricing informaion does indeed run from Hong Kong o London as well as from London o Hong Kong. This finding is consisen wih he finding in Lau and Dilz (1994) ha ransmission of pricing informaion runs in boh direcions beween New York and Tokyo. The resuls of equaions (2) and (4), however, sugges a differen paern in he ransfer of pricing informaion beween London and Hong Kong as compared o ha beween New York and Tokyo. Lau and Dilz (1994) find six of he seven esimaed slope coefficiens for he effec of he NYSE inraday reurns on he TSE inraday reurns o be insignifican, whereas all seven coefficiens are significan when he TSE o NYSE relaionship is considered. This finding led hem o argue ha he ransmission of informaion is immediae when running from New York o Tokyo, and boh immediae and hroughou he rading day when running from Tokyo o New York. Our resuls in Tables 2 and 3 sugges ha informaion ransfer curs boh immediaely and hroughou he rading day in boh direcions beween he LSE and he SEHK. Furher insighs are obained by comparing he resuls of London o Hong Kong wih hose of Hong Kong o London. Firs, he esimaed slope coefficiens are generally larger in spillover from London o Hong Kong han from Hong Kong o London, implying ha he informaion flow from he LSE o he SEHK has a more significan effec han in he oher direcion. The esimaes of conemporaneous impac from Hong Kong o London, for example, are abou half as much as he corresponding figures in Table 2. Second, comparing parameer esimaes in Table 2 and 3 shows ha in boh markes overnigh reurns are highly responsive o he previous inraday reurn in he oher marke. Inraday reurns in boh markes are, however, relaively less responsive o he previous inraday reurn in he oher marke, alhough he effecs are saisically significan.

13 PRICING INFORMATION OF DUALLY-LISTED STOCKS CONCLUSION This paper invesigaes he ransfer of pricing informaion using he daily opening and closing prices of eigheen Hong Kong firms ha are dually lised in he Sk Exchange of Hong Kong (SEHK) and he London Sk Exchange (LSE). The use of dually-lised sk reurns allows us o address he issue of informaion flows beween naional sk markes more precisely han using index reurns. Our findings are: (1) SEHK overnigh reurns respond significanly o changes in LSE inraday reurns, bu he ransmission press is no compleed a he opening of he SEHK; (2) LSE overnigh reurns respond significanly o changes in SEHK inraday reurns, bu he ransmission press is no compleed a he opening of he LSE, eiher; (3) he impac is sronger moving from he LSE o he SEHK. This evidence indicaes ha informaion ransfer curs boh immediaely and coninuously hroughou he rading day in boh direcions. The lagged spillover effec of inraday reurns in one exchange on inraday reurns in he oher exchange is puzzling. Alhough i does no appear ha raders could profi from he lagged price reacions, he evidence dumened in his sudy is no consisen wih wha one would expec from efficien markes. One plausible explanaion behind his unexpeced discovery is ha opening prices in compuing inraday reurns may be sale. Proof of his hypohesis awais fuure sudy when he needed ransacion daa are available. NOTES 1. Shum (1994) also sudies he same issue using welve companies and a period June 6, 1989 o June 5, Companies incorporaed overseas and which conduc heir principal aciviies overseas are excluded. Source: The Sk Exchange Fac Book 1996, The Sk Exchange of Hong Kong. 3. Cheung e al. (1994) repor ha he rading volume of he sks ha are lised or quoed on he LSE accouns for a leas 17% of he oal combined rading volume (of hese sks) on boh he LSE and he SEHK, and ha he rading volume on he LSE accouns for 11% of he oal urnover of he SEHK (including all sks) and he LSE combined. 4. Over 60% of cross-border rading in he world and 94% of ha in Europe passes hrough he LSE. Source: The G. T. Guide o World Equiy Markes 1993, published by Euromoney Publicaions PLC and G.T. Managemen PLC.

14 722 BAE, CHA AND CHEUNG 5. A lis of hiry dually-lised sks are available upon reques from he auhors. REFERENCES Alexander, G.J., C.S. Eun and S. Janakiramanan (1988), `Inernaional Lisings and Sk Reurns: Some Empirical Evidence', Journal of Financial and Quaniaive Analysis, Vol. 23, No. 2, pp. 839^55. Becker, K., J. Finnery and M. Gupa (1990), `The Ineremporal Relaion Beween he U.S. and Japanese Sk Markes', Journal of Finance, Vol. 45, No. 4, pp. 1297^306. Biddle, G. and S. Saudagaran (1989), `The Effecs of Financial Disclosure Levels on Firms' Choices Among Alernaive Foreign Sk Exchange Lisings, Journal of Inernaional Financial Managemen and Accouning, Vol. 1, No. 1, pp. 55^87. Chan, K.C., B.E. Cup and M.S. Pan (1992), `An Empirical Analysis of Sk Prices in Major Asian Markes and he Unied Saes', The Financial Review, Vol. 27, pp. 289^307. Cheung, Y.L. and C.K. Shum (1995), `Inernaional Sk Exchange Lising and he Reducion of Poliical Risk', Managerial and Decision Economics, Vol. 16, pp. 537^46. and S.C. Mak (1992), `The Inernaional Transmission of Sk Marke Flucuaion Beween he Developed Markes and he Asian-Pacific Markes', Applied Financial Economics, Vol. 2, pp. 43^7., C.K. Shum and Y.K. Ho (1995), `Informaion Conens of he Bid-Ask Spread of Hong Kong Sks Lised on he London Sk Exchange', Working Paper (Deparmen of Economics and Finance, Ciy Universiy of Hong Kong)., Y.K. Ho, P. Pope and P. Draper (1994), `Inraday Sk Reurn Volailiy: The Hong Kong Evidence', Pacific-Basin Finance Journal, Vol. 2, No. 2, pp. 261^67. Eun, C.S. and S. Shim (1989), `Inernaional Transmission of Sk Marke Movemens', Journal of Financial and Quaniaive Analysis, Vol. 24, No. 2, pp. 241^56. Grubel, H. (1968), `Inernaionally Diversified Porfolio: Welfare Gains and Capial Flows', American Economics Review, Vol. 58, No. 5, pp. 1299^314. and K. Fadner (1971), `The Inerdependence of Inernaional Equiy Markes', Journal of Finance, Vol. 26, No. 1, pp. 89^94. Hamao, Y., R. Masulis and V. Ng (1990), `Correlaions in Price Changes and Volailiy Across Inernaional Sk Markes', Review of Financial Sudies, Vol. 3, No. 2, pp. 281^308. Hillard, J. (1979), `The Relaionship Beween Equiy Indices on World Exchanges, Journal of Finance, Vol. 34, No. 1, pp. 103^14. Howe, J. and K. Kelm (1987), `The Sk Price Impac of Overseas Lisings', Financial Managemen, Vol. 16, pp. 51^56. Joy, O., D. Panon, F. Reilly and A. Sanley (1976), `Comovemens of Major Inernaional Equiy Markes', The Financial Review, Vol. 11, pp. 1^20. Kh, P.D. and T.W. Kh, (1991), `Evoluion in Dynamic Linkages Across Naional Sk Indexes', Journal of Inernaional Money and Finance, Vol. 10, pp. 231^51.

15 PRICING INFORMATION OF DUALLY-LISTED STOCKS 723 Lau, S.T.and J.D. Dilz (1994), `Sk Reurns and he Transfer of Informaion Beween he New York and Tokyo Sk Exchanges', Journal of Inernaional Money and Finance, Vol. 13, No. 2, pp. 211^22. Lee, I. (1991), `The Impac of Overseas Lisings on Shareholder Wealh: The Case of he London and Torono Sk Exchanges', Journal of Business Finance & Accouning, Vol. 18, No. 4, pp. 583^92. Lessard, D. (1973), `Inernaional Porfolio Diversificaion: A Mulivariae Analysis for a Group of Lain American Counries', Journal of Finance, Vol. 28, No. 3, pp. 619^33. Philippaos, G., A. Chrisofi and P. Chrisofi (1983), `The Ineremporal Sabiliy of Inernaional Sk Marke Relaionships: Anoher View, `Financial Managemen, Vol. 12, No. 4, pp. 63^9. Ripley, D.M. (1973), `Elemens in he Linkage of Naional Sk Marke Indices', Review of Economics and Saisics, Vol. 55, pp. 356±61. Saudagaran, S.M. (1988), `An Empirical Sudy of Seleced Facors Influencing he Decision o Lis on Foreign Sk Exchanges', Journal of Inernaional Business Sudies, Vol. 19, pp. 101^27. Shum, C.K. (1994), `The Impac of Cross-Trading on Hong Kong Sks in London', M.A. Thesis (Ciy Universiy of Hong Kong). Solnik, B.H. (1974), `Why No Diversify Inernaionally Raher Than Domesically?' Financial Analys Journal, Vol. 30, No. 4, pp. 48^54.

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