The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States


  • Stephen R. Foerster,

    1. Richard Ivey School of Business, University of Western Ontario
    Search for more papers by this author
  • G. Andrew Karolyi

    1. Fisher College of Business at Ohio State University
    Search for more papers by this author
    • *

      Foerster is with the Richard Ivey School of Business, University of Western Ontario, and Karolyi is with the Fisher College of Business at Ohio State University. We are grateful for data assistance from John Griffin, Rick Johnston, and Sonali Chalishazar; for background information from Jim Shapiro (NYSE), Mike Shokhouhi (NASD), Vince Fitzpatrick and Joe Velli (Bank of New York), Mark Bach (Citibank), and Rene Vanguestaine (JP Morgan); and for comments from Yakov Amihud, John McConnell, Darius Miller, René Stulz (editor), and an anonymous referee. Comments of conference participants at the 1997 NBER Market Microstructure Conference, the 1997 AFA, 1997 FMA International, 1997 Berkeley Program in Finance, the 1996 Vanderbilt Conference on Investing Internationally, and the 1996 Northern Finance Association meetings, and workshops at HKUST, Laval University, Queen's University, the University of Toronto, and the University of Waterloo greatly improved the paper. Nelson Mark kindly provided access to the Harris Bank interest rate data. We thank the Social Sciences and Humanities Research Council of Canada and the Richard Ivey School of Business Plan for Excellence for financial support, as well as Ohio State University's Dice Center and Summer Fellowship program. All remaining errors are our own.


Non-U.S. firms cross-listing shares on U.S. exchanges as American Depositary Receipts earn cumulative abnormal returns of 19 percent during the year before listing, and an additional 1.20 percent during the listing week, but incur a loss of 14 percent during the year following listing. We show how these unusual share price changes are robust to changing market risk exposures and are related to an expansion of the shareholder base and to the amount of capital raised at the time of listing. Our tests provide support for the market segmentation hypothesis and Merton's (1987) investor recognition hypothesis.