The Market Integration And Financial Globalization

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The US capital market is considered as the largest and most liquid market in the world. As summarized in the study of Hail and Leuz (2009), the advantage of cross-listing on US exchanges over other exchanges can be attributed to the following reasons. First, 4In this study, ‘financial market integration’ and ‘financial globalization’ are treated as interchangeable term. 17 outside investor protection is strengthened, which allows firms to raise external finance more easily (e.g. Reese and Weisbach, 2002; Benos and Weisbach, 2004; Doidge et al., 2004). Second, non-US firms must comply with SEC disclosure, helping to enhance the market transparency and hence lower the firm’s cost of capital (e.g. Verrecchia, 2001; Lambert et al., 2007). Last but not least, cross listing on the US exchanges increases investor awareness and expands the firm’s investor base (e.g. Merton, 1987; Foerster and Karolyi, 1999). Given above merits, numerous non-US companies have chosen to cross list their shares on the US markets, typically in the form of American Depositary Receipt (ADR, hereafter). ADR is viewed as a convenient and cost-effective way for non-US companies to tap into the wealth US markets. Specifically, ADRs are negotiable certificates issued by a US depositary bank, which represent a specified number of foreign shares physically deposited in the US bank’s overseas branch or custodian. ADRs are traded, cleared and settled like any other US securities. From US investors’ perspective, ADRs provide an alternative to invest in foreign equities without the complexities associated with directly owning foreign stocks. Questions may be raised that are ADRs good substitute for their underlying foreign stocks; can investors seeking international expos... ... middle of paper ... ...lass with different risk-return characteristics. Second, a great deal of attention has been paid to ADRs from developed countries, whereas studies on emerging markets remain insufficient. It is hard to draw inferences from these studies in that their findings may be limited to a specific market. In order to better understand emerging market ADRs in a broad way, a more comprehensive analysis should be carried out in typical emerging markets. Finally, emerging markets have played an increasingly important role in the world economies and investors’ portfolio strategies. According to Bekaert and Harvey (2013), as of 2012, emerging markets accounted for over 30% of world GDP, increased from 15% in 1987. Among other, China accounted for about 13%. Brazil, Russia and India also feature in the top 10 in terms of contribution to the global GDP. Please refer to Table 1.1 below.

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