Migraion, Spillovers, and rade Diversion: he mpac of nernaionalizaion on Domesic Sock Marke Aciviy Ross Levine and Sergio L. Schmukler January 6, 006 Absrac his paper sudies he relaion beween inernaionalizaion (firms cross-lising, issuing deposiary receips, or raising capial in inernaional sock markes) and he rading aciviy of he remaining firms in domesic markes. Using a panel of 3,000 firms from 55 emerging economies during 1989-000, we find ha inernaionalizaion is negaively relaed o he rading aciviy of domesic firms. We idenify wo channels. Firs, he rading of inernaional firms migraes from domesic o inernaional markes and his migraion along wih he reducion in domesic rading of inernaional firms has negaive spillover effecs on domesic firm rading aciviy. Second, here is rade diversion wihin domesic markes as rading aciviy shifs ou of domesic firms and ino inernaional firms. JEL classificaion codes: G15, F36, F0 Keywords: inernaional finance; equiy markes; rading; cross-lising; deposiary receips; ADRs; GDRs Levine: Brown Universiy and he NBER (ross_levine@brown.edu). Schmukler: World Bank (sschmukler@worldbank.org). We hank aiana Didier and Juan Carlos Gozzi for ruly ousanding research assisance. We received very helpful commens from Gordon Alexander, Luca Benzoni, Sijn Claessens, Peer Henry, Fari Moshirian (Edior), Helene Rey, Michael Schill, Frank Warnock, an anonymous referee, and seminar paricipans a Darmouh College, he Economeric Sociey Meeings (Chile), he Universiy of Minnesoa, he World Bank, and he Universiy of Zurich. For help wih he daa, we hank Pamela Doin, Monica Erpen, Dori Flanagan, Marina Hala Angela Marshall, Richard Webser-Smih, and Cheryl Workman. Levine is graeful for generous financial suppor from he BS Gamma Foundaion. Schmukler hanks he World Bank Lain American Regional Sudies Program and Research Suppor Budge for ample financial suppor. he findings, inerpreaions, and conclusions expressed in his paper are enirely hose of he auhors and do no necessarily represen he views of he World Bank.
. nroducion Wha is he impac of firms ha paricipae in inernaional sock markes on he rading aciviy of he remaining firms in he domesic marke? We address his quesion by sudying he effecs of firms becoming inernaional (by paricipaing in inernaional equiy markes hrough issuing deposiary receips, cross-lising, or raising new capial) on he rading aciviy of domesic firms (he firms ha do no inernaionalize). 1 Undersanding he effecs of inernaionalizaion on rading aciviy is imporan because domesic marke rading affecs he growh rae and performance of firms, indusries, and he overall economy. o sudy he effecs of inernaionalizaion, we use rading informaion on over 3,000 firms across 55 emerging marke counries during he years 1989 o 000. We measure rading aciviy using urnover, which equals he value of a firm s ransacions in a marke divided by he firm s marke capializaion. urnover, and similar rade-based indicaors, are frequenly used o proxy for liquidiy since (i) heory and evidence sugges a close associaion beween urnover and bid-ask spreads, (ii) many counries do no have bid-ask spread informaion (especially ime series daa), and (iii) some research finds ha urnover can be a beer proxy for liquidiy han bid-ask spreads due o problems wih measuring spreads. 3 We measure he counry-level degree of inernaionalizaion by he share of inernaional firms in a counry in a given year. 1 Various publicaions has voiced concerns of markes becoming illiquid as inernaionalizaion has progressed (e.g., Bovespa, 1996; Financial imes, 1998; Lain Finance, 1999, 004; Federaion des Bourses de Valeurs, 000; and he Economis, 000;). heory predics a posiive link beween rading aciviy and boh firm and naional growh (Bencivenga, Smih, and Sarr, 1995 and Levine, 1991). On he empirical side, Amihud and Mendelson (1986) esimae ha a one percenage poin increase in he bid-ask spread is associaed wih 0. of a percenage poin increase in he monhly risk-adjused excess reurn. Levine and Zervos (1998a) find ha a one sandard deviaion increase in domesic marke urnover booss seady-sae real per capia annual economic growh by 0.8 percenage poins, which is large considering ha he average per capia growh rae in heir sample is less han wo percenage poins per year. Also see Beck and Levine (00, 004) and Demirguc-Kun and Maksimovic (1998). 3 From a heoreical perspecive, Soll (1978a) and Amihud and Mendelson (1986) sugges a direc link beween rading coss and rading volume and holding periods, respecively. Empirically, Soll (1978b) and Akins and Dyl (1997) confirm hese predicions. Peersen and Fialkowski (1994) demonsrae he problems wih compuing accurae bid-ask 1
By providing empirical evidence on how inernaionalizaion is relaed o domesic rading aciviy, we shed ligh on differen heories ha yield conflicing predicions on he effecs of inernaionalizaion. Consider firs he migraion and spillovers argumen. According o he migraion view, inernaionalizaion will induce a shif in he rading of inernaional firms ou of he domesic marke and ino major inernaional financial markes. his may occur because major inernaional markes have lower informaion and ransacion coss (Lang, Lins, and Miller, 003, 004; Chowdhry and Nanda, 1991). Spillovers mean ha a drop in he domesic rading of inernaional firms hurs he rading and liquidiy of domesic firms. ndeed, using daa from he Unied Saes, Chordia, Roll, and Subrahmanyam (000) find ha liquidiy is no simply an assespecific aribue; raher, individual asse liquidiy ends o co-move wih aggregae marke liquidiy. Spillovers could occur because of fixed coss associaed wih operaing a marke, running brokerage firms, clearing and seling ransacions, among oher hings. hus, a drop in he domesic rading of inernaional socks could increase he per-rade cos of domesic sock ransacions and reduce he rading and liquidiy of domesic firms. 4 Combined, migraion and spillovers imply ha inernaionalizaion reduces he rading aciviy and liquidiy of domesic firms. Some disagree wih he migraion and spillovers view and insead argue ha inernaionalizaion improves he domesic marke. n conras o he migraion view, Hargis (000) argues ha cross-lising can ransform a segmened equiy marke wih low liquidiy ino an spreads. Consequenly, a large number papers use urnover and volume based proxies of liquidiy (e.g., Haugen and Baker, 1996; Brennan, Chordia, and Subrahmanyam, 1998; Daar, Naik, and Radcliffe, 1998; Rouwenhors, 1999). Levine and Schmukler (006) find ha alernaive measures of liquidiy based on price changes are highly correlaed wih urnover. 4 Spillover-like effecs can also occur if inernaionalizaion induces invesors o shif heir rading ou of domesic markes and ino major inernaional markes. For example, invesors may seek o diversify counry-specific risk. hus, when some firms cross-lis or issue deposiary receips in inernaional markes, invesors may aain counry-specific diversificaion hrough hese liquid inernaional markes and herefore reduce heir rading in domesic markes. nernaional invesors may prefer o rade in major inernaional markes raher han local markes because of lower selemen risks (Velli, 1994), more efficien pricing of risk (Paro, 000), and lower informaion coss (Lang, Lins, and Miller, 003, 004). ndeed, Ahearne, Griever, and Warnock (004) and Edison and Warnock (004) show ha U.S. invesors focus on firms ha have inernaionalized. From anoher perspecive, Sarkissian and Schill (004) show ha marke proximiy and oher familiariy facors play dominan roles in he choice of overseas lising venue.
inegraed marke wih high rading aciviy and liquidiy. Similarly, Alexander, Eun, and Janakiramanan (1987) and Domowiz, Glen, and Madhavan (1998) hold ha inernaionalizaion may acually simulae domesic rading of inernaional firms due o he increased inegraion of markes. Also, if inernaionalizaion increases ransparency, his could increase he domesic rading of inernaional firms wih posiive spillover effecs for he res of he domesic marke (Hargis and Ramanlal, 1998). Oher skepics of he migraion-spillovers view could quesion he exisence and magniude of spillovers. hus, i is an empirical quesion as o wheher inernaionalizaion induces migraion and spillovers, or wheher inernaionalizaion booss he rading aciviy of domesic firms. Second, consider he domesic rade diversion view, which argues ha inernaionalizaion induces a composiional shif in domesic marke rading. Firms ha inernaionalize may become more aracive o raders in he domesic marke if inernaionalizaion induces improvemens in repuaion, disclosure sandards, analys coverage, and he shareholder base. 5 hus, raders in he domesic marke may shif heir rading ou of domesic firms and ino he domesic rading of inernaional firms. All else equal, his domesic rade diversion implies less rading of domesic firms and greaer rading of inernaional firms in he domesic marke. Some heories, however, conflic wih he rade diversion view and insead argue ha inernaionalizaion may enhance inegraion and hereby boos liquidiy of domesic firms (e.g., Alexander, Eun, and Janakiramanan, 1987; Domowiz, Glen, and Madhavan, 1998; Hargis, 000). his could occur because inegraion increases he liquidiy of all firms in he local markes. Moreover, inegraion may induce a composiional shif in domesic rading oward domesic firms as he rading of inernaional firms migraes abroad. Again, heory provides conflicing predicions 5 See Baker, Nofsinger, and Weaver (00), Pores and Rey (005), and Reese and Weisbach (00). 3
abou he impac of firms ha choose o inernaionalize on domesic firms, which in urn moivaes his paper s empirical inquiry. he paper firs finds ha as more firms become inernaional, he urnover of domesic firms diminishes. Nex, he paper sudies he channels hrough which inernaional firms can affec he urnover of domesic firms. here is evidence of migraion: as he fracion of inernaional firms rises, he rading of inernaional firms shifs from domesic markes o inernaional markes. Furhermore, we find evidence of spillovers: he domesic rading of inernaional shares is srongly, posiively relaed o he urnover of domesic firms. Hence, he daa are consisen wih he migraion and spillovers view: as he urnover of inernaional firms in he domesic marke dries up because of migraion, he urnover of domesic firms diminishes because of spillovers. Furhermore, besides he migraion and spillover channel, we find evidence supporing he domesic rade diversion channel. he daa sugges ha as firms inernaionalize, he domesic marke inensifies is rading of hose inernaional shares, while rading of firms ha do no inernaionalize wanes. his does no overurn he finding ha inernaionalizaion reduces he domesic urnover of inernaional shares. he rade diversion resul is consisen wih, albei no an unambiguous proof of, heories ha emphasize ha when a firm inernaionalizes his enhances is repuaion, ransparency, and shareholder base in ways ha make i more aracive relaive o domesic firms. n sum, domesic rade diversion is anoher mechanism hrough which inernaionalizaion reduces he urnover of firms ha do no inernaionalize. Our work provides several conribuions o wo recen examinaions of he associaion beween he fracion of a counry s socks ha issue American Deposiary Receips (ADRs) and domesic marke urnover (Moel, 001, and Karolyi, 004). Firs, we sudy he channels hrough which inernaionalizaion influences he urnover of domesic socks, evaluaing he imporance of 4
he migraion-spillovers and rade diversion channels. Second, we subsanially expand he sample size. hird, we measure he main explanaory variable more broadly, by moving beyond he deposiary receip marke in New York o include deposiary receips, cross-lisings, and privae placemens in New York and oher financial ceners. Fourh, we incorporae ime-varying daa on he inernaional rading aciviies of inernaional firms. his allows us o esimae more precisely he impac of inernaionalizaion on domesic equiies because we conrol for counry-specific news ha influences global rading of ha counry s shares, while also obaining separae esimaes of inernaional rading on he domesic marke. Fifh, o furher isolae he marginal impac of inernaionalizaion, we conrol for firm-specific characerisics, including firm size, which exising sudies do no. Our paper also conribues o he more esablished lieraure on inernaional firms, since we examine he impac of firms ha inernaionalize on boh (a) he rading of inernaional firms in he domesic marke and (b) he rading of domesic firms. his large lieraure sudies he impac of inernaionalizaion on various characerisics of inernaional firms. 6 he res of he paper is organized as follows. Secion discusses he daa. Secion discusses he economeric mehodology and presens he resuls. Secion V concludes. 6 Our work also relaes o oher srands of he inernaional finance lieraure. Several papers analyze he impac of marke inegraion. Some papers examine he volume and liquidiy of inernaional firms in local markes afer firms cross-lis or issue deposiary receips, e.g., see Hargis (1998) and Noronha, Sarin, and Saudagaran (1996). Oher researchers sudy he impac of inernaionalizaion on sock prices, he cos of capial, and growh opporuniies, e.g., see Alexander, Eun, and Janakiramanan (1988), Errunza and Miller (000), Foerser and Karolyi (1999) and Miller (1999). A relaed line of research analyzes he effec of inernaionalizaion on asse size, growh, financing consrains, and he financial srucure of firms ha issue deposiary receips or cross-lis, e.g., see Paro and Wald (005) and Schmukler and Vesperoni (006). Finally, Gozzi, Levine and Schmukler (006) examine wheher inernaionalizaion increases he marke value of hese inernaionalizing firms. For more general effecs of inernaionalizaion, see for example, Bekaer, Harvey, and Lundblad (005), Henry (000), Levine and Zervos (1998a,b), and Marin and Rey (000). 5
. Daa o assess he impac of inernaionalizaion on domesic socks, we need he following daa: 1. Firm-level daa on he inernaional equiy aciviies of firms, including a. Daes of capial raisings, cross-lising, and deposiary receip issuance, b. nernaional rading daa,. Firm-level daa on domesic sock ransacions, 3. Firm-level daa on a range of firm aribues, and 4. Counry-specific daa on macroeconomi insiuional, and financial condiions. An imporan conribuion of his paper is ha we use considerably more daa on he inernaional equiy marke aciviies of companies han pas sudies. he daa for idenifying each firm s inernaional aciviies come from wo main sources: he Bank of New York and Euromoney. Besides he Bank of New York s sandard daabase (he Complee Deposiary Receip Direcory) ha conains informaion on curren deposiary receip aciviies, he Bank of New York gave us access o heir hisorical daabases and repors on (i) deposiary receip program iniiaion daes, (ii) erminaion daes (if any), (iii) capial raisings, and (iv) rading aciviies. hese daa form a comprehensive daabase on American and Global deposiary receip programs. he hisorical daa sar in January 1956, bu mos programs begin afer 1980. We augmen he informaion on daing he iniiaion of inernaional equiy marke aciviies wih daa from Euromoney, he London Sock Exchange (LSE), NASDAQ, and he New York Sock Exchange (NYSE). Euromoney provides he daes when firms raise equiy capial in inernaional markes, including cross-lisings and issuance of global deposiary receips. hus, he Euromoney daa subsanively enhance he idenificaion of inernaional firms. he Euromoney daabase covers 8,795 cross-border equiy issuance and cross-lising operaions from 5,665 firms in 86 counries over he period January 1983 - April 001. LSE, NASDAQ, and NYSE provide informaion on lising daes by foreign corporaions. 6
n erms of rading abroad, we focus on rading in ADRs. he daase on ADR value raded also comes from Bank of New York and covers he period 1989-000, providing he value raded in U.S. dollars. Companies ha are no shown o be rading according o Bank of New York are assigned a zero. See he working paper version of his paper, Levine and Schmukler (003), for more discussion on he availabiliy of rading daa from he LSE and he Frankfur Sock Exchange (FSE). Also see Claessens, Klingebiel, and Schmukler (00) for a descripion of some rends on he inernaionalizaion of sock markes as well as heir relaion o counry characerisics. Consisen wih our objecive of using a broad daabase on inernaionalizaion, we classify firms as inernaional if hey (1) issue deposiary receips, () cross-lis, or (3) raise capial hrough privae placemens abroad. he firs wo clearly involve ongoing rading of domesic socks in foreign counries. However, raising capial hrough privae placemens is differen because he new shares are no necessarily raded abroad. hus, he issuing of deposiary receips and cross-lising may involve he wo poenial channels discussed in he nroducion: migraion/spillovers and rade diversion. Raising capial abroad in he absence of cross-lising, however, will only poenially involve rade diversion in he domesic marke since simply raising capial abroad canno induce migraion. As noed below, we confirm his paper s findings wih various sub-samples. he firm-level domesic sock marke rading and capializaion daa are from he Sandard & Poor s Emerging Markes Daa Base (EMDB). n cross-checking wih counry sources, we found some inconsisencies in he daa for Argenina and correced i using daa from he Buenos Aires Sock Exchange. Alhough he EMBD is he mos comprehensive daabase on equiy ransacions, he EMDB focuses on emerging markes and does no include 100 percen of local firms (i.e., while varying by counry, he EMDB ypically covers abou 70 percen of marke capializaion). 7
We also use balance shee daa on each firm o conrol for firm-specific characerisics ha may influence liquidiy. hus, we conrol for indusry effecs, firm size, and firm sales in assessing he impac of inernaionalizaion on he liquidiy of firms in he domesic marke. For simpliciy, in he resuls discussed below, we presen he resuls conrolling for firm size, bu he resuls are robus o conrolling for he oher firm-specific effecs. We obain hese daa from he Worldscope daabase (homson Financial Company). he firm-level daa on domesic sock marke rading, he firm-level balance shee informaion, and inernaional equiy aciviies are all mached a he firm level over he period 1989-000. Appendix able 1 liss he 55 counries in he sudy and he number of domesic and inernaional firms per counry, as well as summary saisics of some of he variables used in he analysis. Some counries do no have any inernaional firms. We keep hese in he sample as a conrol group, bu emphasize ha his paper s resuls hold when we exclude counries wih zero or only one inernaional firm. We have over 16,000 firm-year observaions. Appendix able provides addiional informaion on daa sources. For robusness, we conrol for ime-varying counry-specific informaion and counry dummy variables. Daa are from he World Bank s World Developmen ndicaors. Daa on he efficiency of each counry s legal sysem are obained from he nernaional Counry Risk Guide (Poliical Risk Services). nformaion on official resricions on inernaional capial flows is from he nernaional Moneary Fund s Annual Repor on Exchange Arrangemens and Exchange Resricions. We also conrol for economic growh, inflaion, real ineres raes, erms of rade changes, ime rend, and alernaive measures of capial accoun openness ha we describe below. 8
. Mehodology and Resuls his secion examines he impac of firms ha inernaionalize (firms ha issue deposiary receips, cross-lis, or raise equiy capial abroad) on domesic firms (firms ha do no inernaionalize). o do his, we firs examine wheher inernaionalizaion is direcly relaed o he urnover of domesic firms. Second, we examine wheher inernaionalizaion affecs domesic urnover hrough he migraion and spillovers channel. hird, we es wheher inernaionalizaion induces rade diversion, i.e., does inernaionalizaion diver he composiion of rading in he local sock marke ou of domesic firms and ino inernaional firms? A. Direc Effec on urnover 1. Mehod o examine wheher inernaionalizaion is direcly relaed o he urnover of domesic equiies, we esimae he following regression using ordinary leas squares wih sandard errors adjused for clusering a he firm level. D γ 1 S + γ c, + θ ' M + λ1 F + δ1 nc + δ τ + ε =. (1) D j c,, is he logarihm of one plus he urnover raio of domesic firm j in counry c in year, where he urnover raio equals he oal value of rades of firm j s sock during year divided by firm j s marke capializaion. 7 For breviy in he ex, we refer o D j c,, as he urnover of domesic firms. he superscrip D designaes ha i is a domesic firm during he enire sample period, i.e., i never inernaionalizes. We define he dependen variable in his way because we wan o examine he effecs of inernaionalizaion on he firms ha rely on he domesic marke hroughou he sample period. By focusing on hose firms ha never access inernaional capial markes, we es 7 We use his ransformaion because he oal value of rades is someimes zero. An alernaive measure of rading aciviy is he number of shares raded in one year divided by he number of shares ousanding. his measure absracs from price changes. Bu, i is impossible o aggregae usefully across differen socks o obain counry-level liquidiy measures, which we need in order o assess spillovers. 9
how heir urnover changes as oher firms inernaionalize. n all regressions, we conrol for counry and ime effecs ( n c and τ respecively), bu do no repor hese in he ables o save space. S is he share of inernaional firms in counry c a ime. hus, S is he number of inernaional firms from counry c a ime divided by he oal number of firms lised in he domesic marke for counry c a ime. n compuing S, a firm is considered an inernaional firm from he year i issues a deposiary receip, cross-liss, or raises equiy capial abroad. f, however, he firm erminaes is deposiary receip lising or de-liss from an inernaional exchange, hen he numeraor of S falls by one. 8, is he aggregae urnover raio of counry c s inernaional firms in inernaional equiy c markes a ime. hus,, equals he aggregae value raded of all of counry c s inernaional c firms in inernaional markes divided by he marke capializaion of hose inernaional firms. We include he variable, o conrol for rading of counry c s equiies on inernaional c exchanges. nformaion abou a counry s poliical and economic condiions may induce rading of ha counry s socks in boh inernaional and domesic markes. his effec would be capured by a posiive coefficien on,. o absrac from ime-varying counry-specific facors influencing c rading, we include he rading of counry c s socks in inernaional markes in regression (1). M is a marix of macroeconomic and counry-specific conrol variables. We include gross domesic produc (GDP) per capia since he level of economic developmen may influence financial marke developmen (Levine, 005). We also include an index of he law and order radiion of he economy since he operaion of legal sysems may influence equiy marke developmen and cross-lising decisions (Beck, Demirguc-Kun, and Levine, 003; Pagano, Randl, 8 Since firms can lis abroad wihou lising in he domesic markes, his raio could, in heory, be larger han one. 10
Roell, Zechner, 001). Furhermore, we conrol for he openness of he capial accoun o inernaional capial flows (using daa from he nernaional Moneary Fund) since inernaional financial inegraion may influence he liquidiy of domesic equiy markes. We incorporae he macroeconomic and counry-specific conrol variables because we wan o assess he independen impac of inernaionalizaion on domesic urnover. F includes firm-specific characerisics in counry c during year. We conrol for company level rais o assess he independen impac of inernaionalizaion on he rading of firms in he domesic marke. n he ables, we include he logarihm of he oal asses in U.S. dollars. n robusness checks discussed below, we conrol for many oher firm characerisics.. Resuls on he direc effec Conrary o a variey of heoreical models discussed in he nroducion, he able 1 resuls indicae ha inernaionalizaion is negaively associaed wih he urnover of domesic firms. n paricular, he coefficien on he share of inernaional firms in counry c a ime, γ 1, is negaive and significan a he one-percen level across all of he specificaions ha conrol for differen combinaions of regressors. n erms of he oher regressors, we find a srong link beween he rading of inernaional firms in inernaional markes and he urnover of domesic socks. Pu differenly, rading of counry c s inernaional socks on inernaional exchanges (, ) is robusly c relaed wih he urnover of domesic socks. Also, rich counries and counries wih a srong law and order radiion end o have domesic firms wih greaer urnover. Finally, we see ha he variable oal asses eners wih a negaive coefficien. he reason for he negaive coefficien is ha oal asses is closely linked wih marke capializaion, which is he denominaor of he dependen variable. As we will see below however, when we compare he rading of socks wihin a counry, he equiies of bigger companies rade more han hose of smaller companies. n sum, as he share of 11
inernaional firms in an economy rises i.e., as he fracion of firms in an economy ha issue deposiary receips, cross-lis, or raise capial abroad rises he urnover of remaining firms falls. he adverse impac of inernaionalizaion on he urnover of domesic firms is economically relevan. For insance, consider he las regression coefficien based on he regression wih all of he regressors included (-.6). his esimae implies ha a one-sandard deviaion increase in he share of inernaional firms (0.05) will cause he urnover of domesic firms (measured as he log of one plus urnover) o fall by -0.13. his is subsanial given ha he mean of his variable is 0.51, so ha a one-sandard deviaion increase in inernaionalizaion reduces domesic firm urnover by 5 percen of he sample mean. 9 Some cauion, however, is needed in inerpreing hese iniial resuls. Some may argue ha he resuls simply reflec he possibiliy ha firms ha inernaionalize are good firms and firms ha do no inernaionalize are comparaively poor. While poenially rue, his would no negae he value of he able 1 resuls. Firs, some heories discussed in he nroducion sugges ha inernaionalizaion booss domesic urnover by making markes more inegraed. We find no evidence for his. Second, we confirm he able 1 resuls when conrolling for many firm-specific rais (as discussed below). hus, even when conrolling for firm qualiy, we ge he same resul. hird, he argumen ha bad firms remain domesic does no necessarily predic ha rading in hose firms will diminish as good firms become inernaional, which is wha we find in able 1. Fourh, we obain he same resuls even when we resric he sample o firms ha rade for he enire sample period. hus, uncompeiive firms ha become inacive and drop ou of he sample do no drive he resuls. Fifh, as we show below, he resuls indicae ha he urnover of inernaional firms in he domesic marke falls wih inernaionalizaion, which is inconsisen wih a simple 9 Of course, his ype of experimen is only for illusraive purposes. A one sandard deviaion change is no a marginal change and we do no specify wha drives he change in inernaionalizaion. 1
sory ha inernaional firm urnover hrives while domesic firm urnover falls. An addiional weakness wih he resuls hus far is ha we do no provide informaion on he mechanisms linking inernaionalizaion o domesic firm urnover. Alhough regression (1) provides informaion on he direc impac of inernaionalizaion on he urnover of domesic firms, i does no provide informaion on he channels hrough which inernaionalizaion affecs he urnover of domesic firms. We urn o his now. B. urnover and he Migraion and Spillovers Channel he migraion and spillovers view predics a wo-sage channel hrough which inernaionalizaion may influence he urnover of domesic socks. Firs, inernaionalizaion may reduce he domesic rading of inernaional firms as he rading of inernaional firms migraes o more liquid, lower cos inernaional markes. Second, migraion and he reducion in rading of inernaional firms in domesic markes may hur he urnover of domesic firms because of spillovers. aken ogeher, migraion and spillovers provide an explanaion of how inernaionalizaion migh reduce he urnover of domesic firms. As discussed in he nroducion, heoreical debae exiss on each of hese wo mechanisms ha define he migraion and spillovers channel. We assess empirically each of hese channels. 1. he migraion par of he migraion-spillovers channel o examine he migraion componen of he migraion and spillovers channel we use hree differen regression specificaions. Consider firs he simple specificaion ha assesses he impac of inernaionalizaion on he domesic urnover of inernaional firms. = γ 1 S + γ + θ ' M + λ1 F + δ1 nc + δ τ + ε. () 13
j c,, is he logarihm of one plus he urnover raio of inernaional firm j in counry c in year. he superscrip designaes ha i is an inernaional firm, which is a firm ha has eiher issued a deposiary receip, cross-lised, or raised equiy capial abroad a some poin in he sample. For breviy in he ex, we refer o j c,, as he domesic urnover of inernaional firms. n hese firs analyses, we simply spli he sample beween firms ha never inernaionalize and firms ha become inernaional a some poin in he sample. Below, we will assess he impac of an individual firm s decision o inernaionalize on is rading aciviy wihin he domesic marke. j, c, is he aggregae urnover raio of counry c s inernaional firms in inernaional equiy markes a ime, excluding he rading of company j. he oher variables are he same as hose in equaion (1). able provides srong evidence ha inernaionalizaion exers a negaive impac on he domesic urnover of inernaional firms. he coefficien on S always eners significanly and negaively. As in able 1, we conrol for he inernaional rading of inernaional firms ( j, c, ). We do his o conrol for oher facors influencing he rading of ha counry s equiies. j, c, eners posiively, which indicaes a posiive link beween he rading of a counry s socks abroad and he rading of hose inernaional firms in he local marke. n sum, afer conrolling for many facors, we find ha as a counry s firms inernaionalize his negaively influences he domesic urnover of inernaional firms. he resuls sugges an economically large impac. A one-sandard deviaion increase in inernaionalizaion reduces he domesic urnover of inernaional firms (measured as he log of one plus urnover) by abou 0.1 (.4*0.05). his ranslaes ino a reducion of he domesic urnover of inernaional firms of 9 percen of he sample mean. 14
he second regression we use o examine he migraion componen of he migraion and spillovers channel conrols for he domesic urnover of inernaional firms in addiion o he inernaional urnover of inernaional firms. hus, o assess he independen impac of he share of inernaional firms in a counry on he domesic urnover of individual inernaional firms we now conrol for he aggregae urnover of inernaional firms in boh inernaional and domesic markes. Specifically, we esimae equaion (3). = γ 1 S + γ + β + θ ' M + λ1 F + δ1 nc + δ τ + ε. (3) j c,, is he aggregae domesic urnover raio of inernaional firms, excluding he rading of company j. able 3 shows ha inernaionalizaion lowers he domesic urnover of inernaional firms, i.e., here is a negaive and significan coefficien on S c,. hus, even when conrolling for many facors, he domesic urnover of inernaional firms falls as he share of firms in he economy wih inernaional equiy marke operaions rises. he able 3 resuls provide some preliminary evidence on spillovers. he coefficien on j c,, eners posiively and significanly. hus, aggregae rading of inernaional firms in he local marke posiively influences he rading of individual inernaional firms in he local marke. he hird regression we employ o es for migraion examines he relaive rading of an inernaional firm in inernaional and domesic markes. hus, we examine wheher he fracion of rading of an inernaional firm shifs from domesic o inernaional markes as more firms inernaionalize. So far, we have examined he impac of inernaionalizaion on he level of he domesic rading of inernaional firms. Bu he domesic urnover of inernaional firms can be influenced by several facors, including how aracive an inernaional company is relaive o oher 15
companies. herefore, a more direc mehod for sudying migraion is o analyze he share of he company s urnover in he domesic marke relaive o is oal urnover. hus, we esimae he following regression for inernaional firms. + = γ S + γ + β + θ ' M + λ F + δ n + δ τ + ε 1 1 1 c. (4) he dependen variable in his equaion measures he level of domesic urnover of firm j relaive o firm j s oal urnover, which includes he domesic urnover of firm j and he inernaional urnover of firm j. Since he marke capializaion is he same in he numeraor and denominaor, his measure is equivalen o using he raio of value raded in he domesic marke o oal value raded. mporanly, we conrol for he aggregae urnover of counry c s inernaional firms, excluding firm j. hus, we conrol for he aggregae urnover of firm j s markes when assessing he impac of inernaionalizaion on wheher he rading of firm j shifs abroad. able 4 presens regressions ha are consisen wih migraion. here is a negaive and significan coefficien on S c,. his indicaes ha inernaionalizaion (an increase in he share of inernaional firms in he domesic marke) reduces he proporion of rading of inernaional firms in domesic markes. Economically, he effec is no inconsequenial. According o he coefficien esimaes, a one sandard deviaion increase in inernaionalizaion (0.05) reduces he proporion of rading of inernaional firms in domesic markes (measured as he log of one plus he proporion of rading) by abou eigh percen of he sample mean (([-0.998*0.05]/0.65)*100). As above, we conrol for many facors, including he urnover of counry c s socks ( j, c, ) in inernaional markes and also he domesic urnover of counry c s inernaional firms ( ). able 4 also provides evidence consisen wih he exisence of spillovers. has a posiive and significan coefficien, which holds while conrolling for he urnover of counry c s 16
inernaional socks in inernaional markes ( j, c, ). hus, aggregae urnover influences he urnover of individual socks.. he spillover par of he migraion and spillovers channel Nex, we furher examine spillovers. Does aggregae rading in a marke influence he urnover of individual domesic socks? f here is migraion if inernaionalizaion induces a shif in he rading of inernaional firms from domesic o inernaional markes and if here are spillovers, hen his represens a wo-par channel hrough which inernaionalizaion affecs he rading aciviy of domesic firms. Besides he evidence discussed above on wheher aggregae urnover influences he rading of inernaional firms in he local marke, we esimae an exension of equaion (1) ha focuses on he urnover of domesic firms. D = γ 1 S + γ c, + β c, + θ ' M + λ1 F + δ1 nc + δ τ + ε. (5) he difference beween equaion (1) and equaion (5) is ha equaion (5) conrols for he aggregae liquidiy of inernaional firms in he domesic marke. Specifically, equals he domesic urnover of inernaional firms in counry c a ime. coefficien on able 5 provides posiive evidence of large spillovers. here is a posiive and significan in all of he specificaions. he aggregae urnover of inernaional firms in he domesic marke posiively influences he urnover of individual domesic firms above and beyond (i) he aggregae urnover of inernaional firms in inernaional markes (, ), (ii) he degree of c inernaionalizaion ( S ), (iii) macroeconomic and counry-specific conrols ( M ), (iv) firmspecific rais ( F ), and (v) counry and ime effecs ( nc τ and respecively). he impac is economically large. A one sandard deviaion decrease in he domesic urnover of inernaional 17
firms (0.46) ranslaes ino a reducion of 0.13 in domesic firm urnover (-0.46*0.9). Since he sample mean value of urnover of domesic firms is 0.51, his implies ha a one-sandard deviaion drop in inernaional firm urnover in he domesic marke lowers domesic firm urnover by 6 percen of he sample mean. hese spillover resuls confirm and exend research from U.S. markes (Chordia, Roll, and Subrahmanyam, 000). Across 55 markes during he years 1989-000, we find ha an individual equiy s urnover reflecs he marke s overall level of aciviy afer conrolling for firm-specific and counry-specific facors. he regression resuls presened in ables -5 are consisen wih he migraion and spillovers channel. We find ha (a) inernaionalizaion reduces he domesic urnover of inernaional firms and (b) he domesic urnover of inernaional firms exers a posiive impac on he urnover of domesic firms. aken ogeher, hese resuls imply ha inernaionalizaion hurs he urnover of domesic firms hrough he migraion and spillovers channel. he migraion and spillovers channel is no he whole sory. n able 5 when we conrol for he urnover of inernaional firms in he domesic marke, S sill eners negaively and significanly. he urnover of domesic firms is negaively influenced by he share of inernaional firms in a marke, beyond he effecs of he aggregae rading of inernaional firms in he domesic economy ( ) and in inernaional markes (, ), and afer conrolling for counry-specific and c firm-specific facors. f he migraion-spillovers channel were he only channel hrough which inernaionalizaion affeced he urnover of domesic socks, hen S should ener insignificanly afer conrolling for he spillovers channel. he fac ha S remains significan suggess ha inernaionalizaion is influencing domesic urnover hrough an addiional mechanism. 18
C. he rade Diversion Channel 1. Mehod rade diversion is an addiional channel hrough which inernaionalizaion can influence he rading aciviy of domesic socks. We assess wheher inernaionalizaion induces a composiional shif in domesic marke rading, ou of domesic socks and ino he rading of inernaional socks. More specifically, does he proporion of he overall urnover of he domesic sock marke accouned for by a paricular firm rise simply because i becomes an inernaional firm? o sudy he rade diversion channel, we esimae he following equaion: S = φ 1 + φ + θ ' M + κ MCap + λ1 F + δ1 nc + δ τ + ε. (6), is firm j s share of urnover in counry c in year relaive o he oal urnover of S j = D+ c, counry c s domesic sock marke in year, where oal urnover includes he domesic rading of boh domesic and inernaional firms. We also used value raded insead of he urnover raio and obained similar resuls. j, is a dummy variable ha equals one if he company is inernaional and zero oherwise. Noe ha his dummy urns from zero o one when a firm inernaionalizes. j, c, is he inernaional rading of company j and equals zero for domesic firms. MCap j, c, is he marke capializaion of firm j. We include his variable o conrol for he fac ha he share of urnover in firm j migh end o rise when he price of he sock rises or when he number of shares ousanding increases. 10 10 n he previous specificaions, we do no include marke capializaion among he independen variables because he dependen variables are already scaled by marke capializaion. 19
Finally, we coninue o conrol for he rading of inernaional firms in inernaional markes. We do his o conrol for as many firm- and counry-specific facors as possible and focus on he marginal impac of inernaionalizaion on he proporion of domesic urnover accouned for by inernaional firms.. Resuls on he rade diversion channel he able 6 resuls indicae ha inernaionalizaion reduces he proporion of urnover of domesic firms in he local marke hrough he rade diversion channel. he coefficien, φ 1, on eners wih a posiive coefficien in all of he able 6 specificaions. hus, he proporion of he overall urnover of he domesic sock marke accouned for by a paricular firm rises simply because i becomes inernaional. ndeed, he coefficiens indicae ha inernaionalizaion raises an individual firm s share of domesic urnover by a leas 10 percen of he average firm s share of domesic urnover. Furhermore, noe ha he size of a company (oal asses) is posiively associaed wih he share of urnover of ha company in he local marke. n sum, he resuls are consisen wih he view ha inernaionalizaion induces a composiional shif in he local marke oward comparaively less rading of domesic sock and greaer urnover of inernaional socks. As noed in he nroducion, alernaive heories predic rade inensificaion, no rade diversion. hese alernaive views hold ha inernaionalizaion will induce more acive rading of domesic socks, no less. n conras, our resuls suppor he view ha inernaionalizaion induces rade diversion. As firms inernaionalize, he domesic marke becomes more focused on rading hose inernaional companies. 0
D. Robusness ess We subjeced hese resuls o six caegories of sensiiviy checks. Firs, we experimened wih hree differen approaches o defining inernaionalizaion. Firs, insead of basing he S indicaor on he number of firms becoming inernaional, we compued an inernaionalizaion measure based on he value raded of he inernaional firms. We confirmed his paper s findings. he nex approach o defining inernaionalizaion assesses he paricular mechanisms hrough which a company inernaionalized. hus, we examined separaely (i) firms ha inernaionalized hrough a public offering and (ii) firms ha inernaionalized hrough a privae placemen. f a company firs does a privae placemen and hen a public placemen, i is considered public afer he public placemen. Noe ha while public placemens clearly involve ongoing rading of domesic socks in foreign counries, raising capial hrough privae placemens is differen because he new shares are no necessarily raded abroad. hus, public offerings abroad may involve migraion/spillovers and rade diversion. Raising capial abroad in he absence of crosslising, however, will only poenially involve rade diversion in he domesic marke since simply raising capial abroad canno induce migraion of rading abroad. We confirm all of his paper s resuls for public placemens and he resuls on rade diversion for privae placemens. Furhermore, we examined he differen ypes of ADR programs. his is problemai however. One of his paper s conribuions is o obain more precise indicaors of inernaionalizaion ha exend beyond he ADR marke. hus, when we use hese subcaegories we are no using a comprehensive definiion of inernaionalizaion. We confirm all his paper s findings for he Level programs (deposiary receips raded in he over-he-couner, OC public markes) and Level and programs (deposiary receips lised on a U.S. exchange and hose sold 1
in a public offering, respecively). When using he Regulaion 144A privae placemens in he U.S., since hese shares are sold o qualified insiuional buyers and rade on he PORAL sysem wih very limied liquidiy, we can only assess he rade diversion effec. n sum, when we define inernaionalizaion only as public placemens, we confirm his paper s resuls; when we define inernaionalizaion only as privae placemens, we confirm his paper s resuls on rade diversion; when we define inernaionalizaion only as Level ADR programs, we confirm his paper s resuls; when we define inernaionalizaion as only Level and ADR programs, we confirm his paper s resuls; and, when we define inernaionalizaion only as 144A privae placemens, we confirm his paper s resuls on rade diversion. he las approach o re-defining inernaionalizaion excludes firms ha raise privae capial in inernaional markes and do no issue deposiary receips or cross-lis. hese cases are only a small proporion (less han 10 percen) of he inernaionalizaion episodes. Excluding hem did no aler he resuls of he paper a all. Second, we incorporaed addiional ime-varying macroeconomic and counry-specific conrol variables o evaluae he independen impac of inernaionalizaion on domesic urnover. For insance, we included he inflaion rae since inflaion may inerfere wih rading and reduce marke urnover (Boyd, Levine, and Smih, 001). We conrolled for economic growh since business-cycle phenomenon may influence marke aciviy. We examined erms of rade changes since shocks may imporanly influence equiy marke ransacions. n oher specificaions, we included he real ineres rae, a broad index of financial liberalizaion developed by Kaminsky and Schmukler (003), and a ime rend. ncluding hese addiional macroeconomic conrols did no change he resuls on he impac of inernaionalizaion on he urnover of domesic firms.
hird, we conrolled for addiional firm-specific and indusry-specific characerisics. his is imporan since firm-specific rais may lead high-performing firms o inernaionalize and poorly performing firms o remain domesic. hus, we included indusry dummy variables and informaion on firm sales and profis. his did no change he findings. While we are unable o rule ou he possibiliy ha some hird facor is driving he resuls, he findings remain robus o many conrols. Fourh, o measure spillover effecs in a differen way, we esimaed equaions (3), (4), and (5) including he aggregae domesic urnover of boh domesic and inernaional firms, insead of he urnover of only inernaional firms. We confirmed his paper s conclusions. Fifh, we experimened wih differen samples. here may be concerns abou he enry and exi of firms. hus, we re-did he analyses using a subsample of firms ha exis for he enire period and obained he same conclusions. Also, 18 ou of 55 counries have zero or only one inernaional firm. hus, we re-did he analyses eliminaing hese counries and go he same resuls. Sixh, we examined wheher inernaionalizaion has a differen impac on domesic firms depending on heir size or oher characerisics. hus, we assessed wheher he urnover of big firms ha do no inernaionalize falls more or less han smaller firms ha do no inernaionalize. We also examined firm profiabiliy and sales. hese ineracion erms did no ener significanly. V. Conclusions his paper finds ha he inernaionalizaion of sock markes is negaively relaed o he rading aciviy of domesic firms in emerging markes. n paricular, he paper idenifies wo channels hrough which inernaionalizaion appears o affec negaively rading aciviy. Firs, rading migraes o inernaional financial markes, having negaive spillover effecs on he rading of domesic firms in domesic markes. hese spillover resuls indicae ha an individual equiy s 3
rading aciviy depend imporanly on he marke s overall aciviy. Second, here is rade diversion in domesic markes as rading shifs from domesic o inernaional socks wihin he local marke. he findings in his paper have opened several avenues for fuure research. Firs, he effecs of inernaionalizaion seem o be differen in emerging economies han in European markes (see Halling, Pagano, Randl, and Zechner, 005). While for emerging economies he marke appears o sele overseas, for European counries he mos imporan marke seems o be he domesic one. herefore, i would be very ineresing o analyze o wha degree he characerisics of he hos and home counries (and exchanges) deermine hese differen equilibrium oucomes. would also be ineresing o undersand o wha exen here are differences wihin emerging and European counries. Second, a heoreical model ha more comprehensively specifies he mechanisms influencing he impac of inernaionalizaion on domesic markes would subsanively sharpen he inerpreaion of he empirical resuls. hird, alhough his paper finds srong evidence of spillovers, we do no idenify he source of hese spillovers. o beer undersand he operaion of financial markes, fuure research migh usefully invesigae he naure of spillovers. Levine and Schmukler (006) ake a sep in his direcion by examining spillovers on oher liquidiy measures. Fourh, i would be ineresing o sudy he ne effec of inernaionalizaion in emerging economies. Some papers have argued ha inernaionalizaion has posiive effecs on he firms ha inernaionalize. his paper has shown ha inernaionalizaion hurs he rading aciviy of domesic firms. Furhermore, as menioned above, research finds ha domesic marke urnover is imporan for he cos of capial, firm performance, and economic growh. hus, if inernaionalizaion helps inernaional firms and hurs domesic firms, a criical quesion emerges: wha is he ne effec for he domesic economy of firms ha inernaionalize? Wha is he fuure for domesic markes and 4
companies ha are unable o inernaionalize? hese quesions migh represen fruiful areas for fuure research. 5
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