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We examine the contribution of cross-listings to price discovery for a sample of Canadian stocks listed on both the Toronto Stock Exchange (TSE) and a U.S. exchange. We ¢nd that prices on the TSE and U.S. exchange are cointegrated and mutually adjusting. The U.S. share of price discovery ranges from 0.2 percent to 98.2 percent, with an average of 38.1 percent. The U.S. share is directly related to the U.S. share of trading and to the ratio of proportions of informative trades on the U.S. exchange and the TSE, and inversely related to the ratio of bid-ask spreads.WITH THE ENHANCED GLOBALIZATION of ¢nancial markets, the number of non-U.S. ¢rms cross-listing shares on a U.S. exchange has substantially increased. Attracting non-U.S. listings is now a top priority of the U.S. stock exchanges. At the end of 2000, 420 non-U.S. ¢rms were listed on the New York Stock Exchange (NYSE).The number of foreign ¢rms listed on Nasdaq was even higher.The popularity of international cross-listings has prompted many academic studies on the topic. 1 Most of these studies focus on the bene¢ts of international cross-listings, including the reduced cost of capital and the enhanced liquidity of a ¢rm's stock.Studies such as Alexander, Janakiramanan (1987, 1988) and Foerster and Karolyi (1993) suggest that the cost of capital declines because the portion of the risk premium that compensates for cross-border investment barriers dissipates. Miller (1999) and Foerster and Karolyi (1999) propose increased investor recognition as another possible explanation. Several studies examine changes in trading volume and costs due to international cross-listing. Foerster and Karolyi (1998) ¢nd that the bid-ask spreads in Canada decrease after the cross-listing of Canadian stocks in the United States. Domowitz, Glen, and Madhavan (1998) suggest that the impact of cross-listing is complex and depends on the degree of quote transparency, that is, the extent to which price information is observable in the two markets. Smith and So¢anos (1997) examine if cross-listing is a zerosum game, with increased trading in the United States being o¡set by reduced THE JOURNAL OF FINANCE VOL. LVIII, NO. 2 APRIL 2003 n Eun is at Georgia Institute of Technology and Sabherwal is at the University of Rhode Island. We thank Rick Green (the editor), Ajay Khorana, Cli¡ord Lee, Henry Oppenheimer, Stephen Sapp, and Steve Smith for helpful comments and Shih-Ching Jeng for research assistance. We are especially grateful to an anonymous referee for detailed and insightful comments. All errors are our own.1 Karolyi (1998) provides a useful survey of international cross-listing. 549trading in the home market. They ¢nd that the home-market value of trading increases substantially after foreign ¢rms list on the NYSE. The aforementioned studies, however, have not addressed the following important question: Do international cross-listings of stocks contribute to the price discovery of these stocks? One objective of this study is to examine the extent to which the U.S. stoc...

This paper derives a closed-form valuation model in a two-country world in which the domestic investors are constrained to own at most a fraction, 6, of the number of shares outstanding of the foreign firms. When the "5 constraint" is binding, two different prices rule in the foreign securities market, reflecting the premium offered by the domestic investors over the price under no constraints and the discount demanded by the foreign investors. The premium is shown to be a multiple of the discount, the multiple being the ratio of the aggregate risk aversion of the domestic and foreign investors. Given the aggregate risk-aversion parameters, the equilibrium premium and discount are determined by the severity of the 6 constraint and the "pure" foreign market risk. IN ADDITION TO THE expanded opportunity set facing investors, international investment entails two unique dimensions which would not particularly matter in domestic investment-namely, the problem of exchange risk and the problem of market segmentation. For this reason, an "international" asset pricing model is expected to address at least one of these two international problems. Since Solnik's [15] pioneering work appeared, various researchers, such as Grauer-Litzenberger-Stehle [11], Kouri [13], Fama-Farber [8], Stulz [19], and Adler-Dumas [2], have derived alternative versions of the international asset pricing model. Apart from the effect of a widened choice universe, these studies are primarily concerned with the effect of exchange risk on portfolio behavior and on equilibrium asset pricing. Owing to the aforementioned studies, we now have a deeper understanding of the nature of exchange risk and its effect on the capital market equilibrium. In contrast, research in the area of market segmentation is still in its nascent stage, leaving much to be done.Barriers to international investment may take many forms such as exchange and capital controls by governments, which restrict the access of foreigners to the local capital markets, reduce their freedom to repatriate capital and dividends, and limit the fraction of a local firm's equity that foreigners may own. Individuals may be inhibited by a lack of information, the fear of expropriation, or more generally, by discriminatory taxation. The existence of such barriers will constrain the portfolio choice of the individuals, and hence the resulting equilibrium may very well be different from that under no barriers. As previously mentioned, * College of Business and Management, University of Maryland and the School of Business, State University of New York, respectively. We appreciate helpful comments made by the participants of the finance seminars at Minnesota and Maryland. We also thank an anonymous referee for his or her comments. Cheol S. Eun gratefully acknowledges support from the General Research Board of the University of Maryland. 897 898 The Journal of Finance there have been relatively few works addressing the effect of barriers to international investment. Using numerical analysis, Stapleton and...

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