Measuring the Impact of Stock Exchange Rules on Volatility and Error Transmission – The Case of European Cross-Listed Equities

This paper investigates the relationship between spillover effects and stock market regulations for a sample of cross-listed European firms. Using LaPorta et al.’s (1998) stock exchange regulatory classification we identify firms that have cross-listed on foreign exchanges with either tougher, weaker or similar accounting disclosure, bankruptcy and shareholder protection rules. We then use the GARCH approach suggested by Karolyi (1995) and Engle and Kroner (1995) to estimate volatility and error transmission for our sample of cross-listed equities, taking into account regulatory differences between exchanges. Our results show how differences in stock exchange rules can influence spillovers between foreign cross-listed equities and the respective market indices. Accounting disclosure rules also seem to have less of an effect on cross-listed share volatility transmission than do differences in shareholder and bankruptcy protection rules.