Common stock returns and international listing announcements: Conditional tests of the mild segmentation hypothesis

Recent theoretical work on mild segmentation suggests that tests of dual listing should be conducted as joint tests: (a) a test of changes in market integration that may a€ect asset returns through investors portfolio reallocations as the choice set changes, and (b) a test of changing risk premium/information e€ects. Previous empirical studies on common stocks have been unable to identify signi®cant positive abnormal returns associated with international listing. However, such studies have not formally tested for changes in market integration through time. In addition, they have not examined announcement dates, which should be the focal point in testing for valuation e€ects. Unlike previous studies, our analysis concentrates on both the period surrounding the earliest public announcements by Canadian companies of their intentions to seek a US listing for their common shares on the NYSE, AMEX, or NASDAQ as well as the date of US listing during the period 1985±96. This period encompasses signi®cant changes in the regulatory environment which might be perceived to enhance the integration of the two markets. Relying on a conditional asset pricing model subject to time-varying volatility, the results Journal of Banking & Finance 24 (2000) 471±502 www.elsevier.com/locate/econbase * Corresponding author. Tel.: +1-757-683-5521; fax: +1-757-683-5639. E-mail addresses: [email protected] (J. Doukas); [email protected] (L.N. Switzer). 1 Tel.: +514-848-2960; fax: +514-848-4593. 0378-4266/00/$ see front matter Ó 2000 Elsevier Science B.V. All rights reserved. PII: S 0 3 7 8 4 2 6 6 ( 9 9 ) 0 0 0 4 6 1 of this study fail to support the view that market integration has increased between the Canadian and US stock markets over the 1985±96 period. The signi®cantly positive announcement e€ects of Canadian stock listings in the US stock market are consistent with the view that the two markets remain mildly segmented despite the elimination of several institutional changes that should have enhanced capital market integration between the two stock markets. Our evidence also implies that ®rms operating in mildly segmented capital markets can attain a lower risk premium through international stock listings. Ó 2000 Elsevier Science B.V. All rights reserved. JEL classi®cation: G12; G14; G15