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The Impact on Risk and Return of Listing Indian Stocks on U.S. Stock Exchanges
Abstract
This paper examines the risks and returns of Indian stock's following cross listing on the U.S. stock exchanges. We find no significant change in returns and also no systematic change in the underlying stock volatility. The findings show that market risk is unaffected across the companies and any change in risk profile is due to the change in firm specific risk. The finding of no systematic change in volatility is consistent with the finding of prior study by T.F. Martell, et al. (1999) of Latin American ADRs. The finding differs from other results for ADRs on European stocks, but is consistent with several prior findings on international stock listings. The results support predictions of Domowitz, Glen and Madhavan's (1998) model on international cross-listings. This model predicts that effect of such listings will differ across stocks because the net effect is indicative of the specific trade-off for each individual stock between benefits of enhanced inter-market competition and costs stemming from the diversion of information linked orders out of the domestic market.
This paper investigates the impact of the Global Financial Meltdown of 2008 on the stock returns of the underlying domestic shares of the Indian companies' listed ADRs / GDRs issues in NYSE, NASDAQ and LSE. An event study was conducted on the stock returns of the underlying domestic shares of the 11 Indian ADRs and 17 GDRs. For the study 15th September 2008 was considered the event day when two important events announced related to the US based big financial Arms, first was about the bankruptcy of Lehman Brothers and second was about the sale of Merrill Lynch to Bank of America. The Abnormal Returns (ARs), Average Abnormal Returns (AARs) and Cumulative Average Abnormal Returns (CAARs) were computed based on the single index model using daily closing price data of the underlying companies and S&P CNX Nifty. The behavior of these variables was examined for 30 days before and 30 days after the event day. The study found that the impact of the announcement on the event day was significant for the basket of underlying domestic shares of Indian ADRs while insignificant for the basket of underlying domestic shares of Indian GDRs. However during the event window of 61 days (i.e. -30 to +30) AARs and CAARs were negative on most of the days for both the baskets of ADRs / GDRs, that clearly indicated that announcements possess important information which leads changes in the underlying stock prices. Therefore study concluded that the announcements about the failure of big financial institutions meltdown hold important information to the basket of underlying domestic shares of Indian ADRs / GDRs. Further the trend of CAARs that declined continuously even several days after the event day indicated slow assimilation of information to the stock prices that concluded that Indian stock market was inefficient in the semi strong form of Efficient Market Hypothesis (EMH) during the study period.
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