Exchange Rate Regimes and International Market Segmentation: Evidence from Pricing Effects of International Listings

Abstract

This study analyzes stock price reactions to listings of foreign stocks in the U.S. before and after the dismantling of the fixed exchange rate system resulting from the Smithsonian agreement of 1971. Listings during the fixed exchange rate regime had significantly greater abnormal returns than those during the floating exchange rate regime. The results are consistent with the notion that a switch to the floating exchange rate system enhanced integration in the international capital markets. A similar conclusion is drawn from the results obtained in testing the law of one price which is observed to hold immediately following the listings during the floating exchange rate regime. Our findings suggest that government controls are a source of segmentation in international markets, and their removal leads to a more integrated market. No evidence was found to suggest that non-Canadian markets are less integrated with the U.S. market than is the Canadian market with the U.S. market, nor was any differential price reaction observed between listings on NYSE/AMEX and OTC markets. However, the difference in price reaction between listings of sponsored and non-sponsored American Depository Receipts was positive and significant.

JEL Classification: F31, G15