مهاجرت، سرریزها و انحراف تجارت: تاثیر بین المللی در فعالیت های بازار سهام داخلی

This paper studies the relation between internationalization (firms cross-listing, issuing depositary receipts, or raising capital in international stock markets) and the trading activity of the remaining firms in domestic markets. Using a panel of 3000 firms from 55 emerging economies during 1989–2000, we find that internationalization is negatively related to the trading activity of domestic firms. We identify two channels. First, the trading of international firms migrates from domestic to international markets and this migration along with the reduction in domestic trading of international firms has negative spillover effects on domestic firm trading activity. Second, there is trade diversion within domestic markets as trading activity shifts out of domestic firms and into international firms.

What is the impact of firms that participate in international stock markets on the trading activity of the remaining firms in the domestic market? We address this question by studying the effects of firms becoming “international” (by participating in international equity markets through issuing depositary receipts, cross-listing, or raising new capital) on the trading activity of “domestic firms” (the firms that do not internationalize). Understanding the effects of internationalization on trading activity is important because domestic market trading affects the growth rate and performance of firms, industries, and the overall economy.1 To study the effects of internationalization, we use trading information on over 3000 firms across 55 emerging market countries during the years 1989 to 2000. We measure trading activity using turnover, which equals the value of a firm’s transactions in a market divided by the firm’s market capitalization. Turnover, and similar trade-based indicators, are frequently used to proxy for liquidity since (i) theory and evidence suggest a close association between turnover and bid-ask spreads, (ii) many countries do not have bid-ask spread information (especially time series data), and (iii) some research finds that turnover can be a better proxy for liquidity than bid-ask spreads due to problems with measuring spreads.2 We measure the country-level degree of internationalization by the share of international firms in a country in a given year. By providing empirical evidence on how internationalization is related to domestic trading activity, we shed light on different theories that yield conflicting predictions on the effects of internationalization. Consider first the “migration and spillovers” argument. According to the migration view, internationalization will induce a shift in the trading of international firms out of the domestic market and into major international financial markets. This may occur because major international markets have lower information and transaction costs (Lang et al., 2003 and Chowdhry and Nanda, 1991). Spillovers mean that a drop in the domestic trading of international firms hurts the trading and liquidity of domestic firms. Indeed, using data from the United States, Chordia et al. (2000) find that liquidity is not simply an asset-specific attribute; rather, individual asset liquidity tends to co-move with aggregate market liquidity. Spillovers could occur because of fixed costs associated with operating a market, running brokerage firms, clearing and settling transactions, among other things. Thus, a drop in the domestic trading of international stocks could increase the per-trade cost of domestic stock transactions and reduce the trading and liquidity of domestic firms.3 Combined, migration and spillovers imply that internationalization reduces the trading activity and liquidity of domestic firms. Some disagree with the migration and spillovers view and instead argue that internationalization improves the domestic market. In contrast to the migration view, Hargis (2000) argues that cross-listing can transform a segmented equity market with low liquidity into an integrated market with high trading activity and liquidity. Similarly, Alexander et al., 1987 and Domowitz et al., 1998 hold that internationalization may actually stimulate domestic trading of international firms due to the increased integration of markets. Also, if internationalization increases transparency, this could increase the domestic trading of international firms with positive spillover effects for the rest of the domestic market (Hargis and Ramanlal, 1998). Other skeptics of the migration-spillovers view could question the existence and magnitude of spillovers. Thus, it is an empirical question as to whether internationalization induces migration and spillovers, or whether internationalization boosts the trading activity of domestic firms. Second, consider the “domestic trade diversion” view, which argues that internationalization induces a compositional shift in domestic market trading. Firms that internationalize may become more attractive to traders in the domestic market if internationalization induces improvements in reputation, disclosure standards, analyst coverage, and the shareholder base.4 Thus, traders in the domestic market may shift their trading out of domestic firms and into the domestic trading of international firms. All else equal, this domestic trade diversion implies less trading of domestic firms and greater trading of international firms in the domestic market. Some theories, however, conflict with the trade diversion view and instead argue that internationalization may enhance integration and thereby boost liquidity of domestic firms (e.g., Alexander et al., 1987, Domowitz et al., 1998 and Hargis, 2000). This could occur because integration increases the liquidity of all firms in the local markets. Moreover, integration may induce a compositional shift in domestic trading toward domestic firms as the trading of international firms migrates abroad. Again, theory provides conflicting predictions about the impact of firms that choose to internationalize on domestic firms, which in turn motivates this paper’s empirical inquiry. The paper first finds that as more firms become international, the turnover of domestic firms diminishes. Next, the paper studies the channels through which international firms can affect the turnover of domestic firms. There is evidence of migration: as the fraction of international firms rises, the trading of international firms shifts from domestic markets to international markets. Furthermore, we find evidence of spillovers: the domestic trading of international shares is strongly, positively related to the turnover of domestic firms. Hence, the data are consistent with the migration and spillovers view: as the turnover of international firms in the domestic market dries up because of migration, the turnover of domestic firms diminishes because of spillovers. Furthermore, besides the migration and spillover channel, we find evidence supporting the domestic trade diversion channel. The data suggest that as firms internationalize, the domestic market intensifies its trading of those international shares, while trading of firms that do not internationalize wanes. This does not overturn the finding that internationalization reduces the domestic turnover of international shares. The trade diversion result is consistent with, albeit not an unambiguous proof of, theories that emphasize that when a firm internationalizes this enhances its reputation, transparency, and shareholder base in ways that make it more attractive relative to domestic firms. In sum, domestic trade diversion is another mechanism through which internationalization reduces the turnover of firms that do not internationalize. Our work provides several contributions to two recent examinations of the association between the fraction of a country’s stocks that issue American Depositary Receipts (ADRs) and domestic market turnover (Moel, 2001 and Karolyi, 2004). First, we study the channels through which internationalization influences the turnover of domestic stocks, evaluating the importance of the migration-spillovers and trade diversion channels. Second, we substantially expand the sample size. Third, we measure the main explanatory variable more broadly, by moving beyond the depositary receipt market in New York to include depositary receipts, cross-listings, and private placements in New York and other financial centers. Fourth, we incorporate time-varying data on the international trading activities of international firms. This allows us to estimate more precisely the impact of internationalization on domestic equities because we control for country-specific news that influences global trading of that country’s shares, while also obtaining separate estimates of international trading on the domestic market. Fifth, to further isolate the marginal impact of internationalization, we control for firm-specific characteristics, including firm size, which existing studies do not. Our paper also contributes to the more established literature on international firms, since we examine the impact of firms that internationalize on both (a) the trading of international firms in the domestic market and (b) the trading of domestic firms. This large literature studies the impact of internationalization on various characteristics of international firms.5 The rest of the paper is organized as follows. Section 2 discusses the data. Section 3 discusses the econometric methodology and presents the results. Section 4 concludes.

This paper finds that the internationalization of stock markets is negatively related to the trading activity of domestic firms in emerging markets. In particular, the paper iden- tifies two channels through which internationalization appears to affect negatively trading activity. First, trading migrates to international financial markets, having negative spill- over effects on the trading of domestic firms in domestic markets. These spillover results indicate that an individual equity’s trading activity depend importantly on the market’s overall activity. Second, there is trade diversion in domestic markets as trading shifts from domestic to international stocks within the local market. The findings in this paper have opened new avenues for research. First, the effects of internationalization seem to be different in emerging economies than in European markets (see Halling et al., 2005 ). While for emerging economies the market appears to settle over- seas, for European countries the most important market seems to be the domestic one. It would be valuable to analyze what determines these different outcomes. Second, a theoret- ical model that more comprehensively specifies the mechanisms influencing the impact of internationalization on domestic markets would substantively sharpen the interpretation of the empirical results. Third, although this paper finds strong evidence of spillovers, we do not identify the source of these spillovers. Levine and Schmukler (2006) take a step in this direction by examining spillovers on other liquidity measures. Fourth, it would be valuable to assess the net effect of internationalization. Some argue that internationaliza- tion has positive effects on the firms that internationalize. This paper has shown that inter- nationalization hurts the trading activity of domestic firms. What is the future for domestic markets and companies that are unable to internationalize?