Global Liquidity Provision and Risk Sharing
50 Pages Posted: 22 Jan 2015 Last revised: 22 Jul 2015
Date Written: July 1, 2015
This study examines the role of international markets for liquidity provision and risk sharing using a full sample of U.S. firms traded on 20 foreign exchanges with stock return and liquidity data from 1950. The tests show that in market downturns the liquidity of cross-listed firms is significantly higher than that of companies that are listed only domestically. This result is especially strong when firms are cross-listed on multiple exchanges, as well as in larger and more liquid markets. The liquidity enhancement from the firm’s presence in foreign stock markets is particularly effective for firms with high return volatility, high foreign income, and high probability of informed trading. The subsequent estimation reveals that foreign trading in firm shares leads to significant reduction in two liquidity betas, which are based on the sensitivity of firm liquidity to its domestic market liquidity and its domestic market return. Our findings therefore highlight the importance of global financial markets for supplying liquidity and reducing liquidity risk.
Keywords: Foreign listing, Funding liquidity, Market segmentation, S&P 500 Index
JEL Classification: G11, G14, G15
Suggested Citation: Suggested Citation