The Effects of Dual Listing on Share Prices and Liquidity in the Absence of Registration Costs

doi:10.4236/jssm.2011.41003

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Journal of Service Science and Management, 2011, 4, 15-21

doi:10.4236/jssm.2011.41003 Published Online March 2011 (http://www.SciRP.org/journal/jssm)

The Effects of Dual Listing on Share Prices and

Liquidity in the Absence of Registration Costs

Shmuel Hauser, Rita Yankilevitz, Rami Yosef

Ono Academic College, I Kiryat Ono, Israel.

Email: [email protected], shau[email protected], [email protected]

Received January 10th, 2011; revised February 17th, 2011; accepted February 22nd, 2011.

ABSTRACT

In the year 2000, the Israeli Securities Authority (ISA) initiated a new amendment to the Securities Law aimed at pro-

moting dual listing of Israeli companies, already traded in the US, and not in Israel, by exempting them from the burden

of additional reporting to the ISA. According to this amendment, the ISA agreed to rely solely on the reporting re-

quirements of the US SEC. Since then, more than 30 Israeli companies, traded on Nasdaq decided to list their shares on

the TASE as well. This event allows us to examine the effect dual listing had on share prices and liquidity in a unique

setup that annuls the costs of dual listing registration. The main findings are as follows: 1) trade volume of the dual

listed companies has grown by about 123% on; 2) about 42% of the total volume is on the TASE without adversely a f-

fect the trading volume on the Nasdaq; 3) as a result, share prices went up by about 9%. One possible policy implica-

tion of these find ings is the positive in fluence harmon ized sup ervision may have over internationa l capital markets such

as the Single Passport in Europe.

Keywords: Dual Listing, Liquidity

1. Introduction

In the year 2000, a ‘Dual-Listing Law’ was amended to

the Securities Law with the intent of promoting dual list-

ing on the Tel Aviv Stock Exchange (TASE). The

amended law exempts firms already traded in the US

from the burden of reporting to the ISA (Israeli SEC) in

addition to the US reporting requirements.1 Following

this amendment more than 30 Israeli companies, traded

on NASDAQ, decided to dual list their shares on the

TASE.

This unique event allows us to examine the effect dual

listing has on share prices and liquidity, in almost labo-

ratory conditions given that the new “dual-listing law”

annuls registration costs and other regulatory costs typi-

cal to multiple listing in foreign countries. The impor-

tance of examining these issues goes beyond the Israeli

capital market considering the immense effort made by

International Organization of Securities Commissions

(IOSCO) in recent years to harmonize the supervision

over world financial markets and considering Europe’s

harmonized disclosure regime (Single Passport) that al-

lows for a significant reduction in the costs of raising

capital in various capital markets of the EU (European

Directive 8).2

The sample consists of 30 firms, whose shares were

traded only on the Nasdaq, that took advantage of the

easements in the law, to dual list their shares for trade on

the TASE as well. Contrary to previous studies examin-

ing this issue, the costs of dual listing these companies on

the TASE are negligible since the listing requires only a

notification to the TASE and ISA and does not require

prospectus and additional reporting to them beyond those

required in the US.

Dual listing of shares, outside the local market, is

common to many international financial markets. In re-

cent years, the number of companies seeking to raise

capital in foreign markets had risen dramatically and

motivated the discussion in the literature regarding costs

and benefits of dual listings in foreign capital markets.

1Without this amendment to the Securities Law, companies traded in

the US were required to submit a prospectus to the ISA, receive a per-

mit for publishing it, and present current and immediate reports, in

accordance with the Israeli law, the GAAP and starting in 2008 – the

IFRS.

The economic rational that underlies this phenomena is

that such a decision is expected to take place when bene-

2In January of 2008, the dual listing law was extended to the French

market too.

The Effects of Dual Listing on Share Prices and Liquidity in the Absence of Registration Costs

fits of the aforesaid registration are comparatively higher

then the regulatory costs of registering them [1]. Thus, in

theory, dual listing on foreign capital markets may have

either positive, negative or no influence at all.3

The negative influence might stem from additional

costs incurred by the other market regulator [8]. These

costs include, among other things, the cost of issuing, the

cost of adjustment to a foreign market, adjustment to

different standards and disclosure requirements for in-

vestors by means of financial reports, immediate reports,

etc. They might also explain why companies decide to

disclosure requirements are less stringent, rather than on

markets with tighter regulation.4

The positive influence of dual listing emanates primar-

ily from potentially improved liquidity and share prices,

increased exposure of the company to a larger pool of

clients on other markets, higher likelihood of raising

capital at a relatively low cost, due to easier and cheaper

access to other sources of capital and a more efficient

transfer of information to investors [5,7,11,12]. The posi-

tive influence is also consistent with Metron’s model [7]

and Hauser-Lauterbach findings (2005) that the broad-

ening of the investment base positively affects share prices

and liquidity.

Some of these claims were examined by Bancel and

Mitto [13] who had carried out a survey among Euro-

pean managers of their opinion on the costs and benefits

of dual listing in a foreign country. The main finding was

that about 60% of the respondents thought that the bene-

fits of dual listing outweigh the costs. In the opinion of

the mangers respondents, the main benefit is increased

liquidity and improvement in the quality of the reporting

(full disclosure). Bancel and Mitto [13] also found that

when these benefits are negligible, the effect of dual-

listings turns to be negative.

In light of the aforesaid, we hypothesize that dual list-

ing is beneficial - improved liquidity and higher share

prices - if the listing costs and/or additional regulatory

costs are negligible.

2. Data and Methodology

2.1. Data

Table 1 below lists the 30 dually-listed firms included

Table 1. Sample.

Market Value

(Millions of NIS)

Announcement

Date of Dual

Listing

NASDAQ Ticker

611.6 13/11/2000 MGIC

794.6 28/11/2000 MTLK

1,312.7 03/11/2000 SCIX

579.0 07/01/2001 TSEM

393.3 16/01/2001 BPHX

339.3 13/06/2001 JCDA

201.6 25/06/2001 MAGS

3,889.2 28/06/2001 PTNR

489.0 22/07/2001 ALVR

424.9 10/10/2001 AUDC

610.8 27/12/2001 CGEN

112.4 01/01/2002 BOSC

403.5 24/03/2003 LNOP

197.4 15/05/2002 ORCT

192.7 16/06/2002 NVMI

119.2 08/07/2002 MNDO

448.7 15/10/2002 RVSN

213.4 03/03/2003 SPNS

401.8 14/08/2003 FNDT

701.6 19/02/2004 GILT

3,612.7 22/03/2004 GIVN

1,343.2 10/05/2004 RDWR

985.4 22/07/2004 ALDN

509.8 06/09/2004 CRNT

649.5 28/02/2005 IGLD

5,778.3 06/03/2005 PRGO

214.5 03/08/2005 TATTF

240.3 15/12/2005 CAMT

168.3 22/12/2005 SILC

305.0 13/02/2006 RDCM

3Howe, Madura and Tucker [2] found evidence that share prices de-

cline following their dual listing outside the US. Howe and Kelm [3],

Damoradan and et al. [4], also found negative influence dual listing in

foreign countries had on share prices. However, Saudagaram [5], Mitto

[6], Merton [7] and others pointed out possible improvement in share

rices due to company's exposure to capital markets offering addi-

tional possibilities for raising capital as well as increased efficiency in

transfer of information, which might reduce the cost of capital and

raise firms’ value.

4See, for example, Fuerst [9] and Cantale [10].

This table lists the companies included in the sample used in this study that

consists of Israeli companies, that were first listed for trade on the Nasdaq

and which decided to dual list their shares on the TASE as well following

the “Dual Listing Law”.

The Effects of Dual Listing on Share Prices and Liquidity in the Absence of Registration Costs 17

the sample. All of them were first listed for trade on the

Nasdaq and only then decided5 to list their shares on the

TASE, following the “Dual-Listing Law” that exempted

them from further reporting obligations in addition to the

ones required by the US SEC.

The data include daily share prices in the US of each

company, TA100 stock index in Israel and composite

NASDAQ stock index in the US.6 It covers a period that

commences 3 years prior to the announcement of dual

listing in Israel, and ending 3 years after the announce-

ment. The data also include trading volume of each

company in both markets commencing two months prior

to the dual listing day and ending two months after-

wards.7 All of which, were taken from yahoo-finance.

The trading volume on the TASE was translated daily

from NIS to $US, according to daily representative ex-

change rate (NIS/$US) obtained from the Central Bank.

2.2. Methodology

We start with a comparison of the average daily trading

volume in the two months preceding the dual listing day

of the TASE to that of the two months following that day.

Then, we conduct an event study to measure the excess

rates of return in a 30-day window that starts fifteen days

prior to the TASE announcement day. The excess rates

of return were calculated based on daily share prices in

the US and those of the TA100 and Nasdaq indices in

Israel and the US, respectively according to the following

model: __

where m

signifies the stock index in Israel (IS) and in the US.8

The parameters of the market model were estimated on

the basis of daily data, of the six months preceding the

30-day period used for the event study. Then, we have

analyzed, by means of regression, the effect of liquidity

on share prices.

US IS

itiiim USimIS

RRR

 



3. Empirical Findings

3.1. Liquidity

The positive influence of dual listing emanates primarily

from potentially improved liquidity and share prices,

increased exposure of the company to a larger pool of

clients on other markets, higher likelihood of raising

capital at a relatively low cost, due to easier and cheaper

access to other sources of capital and a more efficient

transfer of information to investors. The positive influ-

ence is also consistent with Metron’s model [7] and

Hauser-Lauterbach findings (2005) that the broadening

of the investment base positively affects share prices and

liquidity.

Table 2 presents the findings regarding changes in the

liquidity of each share following the dual listing. We find

that trading volume had risen, on average, from about

$128,000 per share to about $ 378,000, following dual

listing. This figure represents a rise of about 123% in the

overall trade volume in the US and Israel, of dual listed

companies, when compared to the trade volume in the

US alone prior to the dual listing. We also found that 23

of 30 firms in our sample had experienced a positive

change in their trade volume. Following the dual listing

day, about 42% of the overall trading volume was done

on the TASE, without affecting the trade in the US. In

the US, we have found an insignificant rise of 1.3% (p -

value = 0.900) in the trade volume of shares on NASDAQ,

Table 2. The influence of dual listing on trading volume.

Median Average

52,139 127,952 Trade volume before (in the US)

188,722 377,906 Trade volume after (Israel and the US)

(0.019) (0.044) p-value

63.3% 123% % change in the overall trade volume

(0.001) (0.001) p-value

2.4% 1.3% % change in trade volume in the US only

(0.827) (0.900) p-value

31.5% 42.5%

% trade volume in Israel out of the total

trade volume in Israel and in the US

(0.000) (0.000) p-value

5The study considers only firms that decided to cross list their shares

and nit all firms that eligible to do it but chose not to do it. One could

argue when coupled this fact with the possibility that only firms with

good future prospects cross-listed their shares the results suffer fro

selection bias. Although the paper does not explicitly address this

roblem, we believe that our sample does not suffer fro selection bias

for two main reasons. First, the dual-listing rules apply to firms with

market capitalization higher then 250 million dollars and most of them

did cross-list their shares. Second, few firms chose not to do it. One o

the is Check Point who had excellent future prospects during the sam-

le period and chose not do it because their share were very liquid un

the market.

6We assume that share prices behavior in Israel is similar to that in the

US. See [14].

7At times, the reported trade volume on NASDAQ is divided into two,

since all the trade is carried out through market makers that act as

brokers. In fact, market makers buy to their accounts and later sell

from their accounts to various clients. In this study we didn't divide

the NASDAQ trading volume into two. If we were to do so, the posi-

tive results would have been even more dramatic. The results were

ractically the same when we different lengths of window for the

trading volume.

8We also used Equation (1) to estimate the excess rates of return and

found that the results were pratically the same.

The table presents statistical data of daily trading volume during the two

months preceding the beginning of trading on the TASE and during the two

months following that day. The trading volume during the two months,

following dual listing, includes trading in Israel along with that on the

Nasdaq. The trading volume on the TASE in NIS, was converted into US$

according to the daily exchange rate. Numbers given in brackets represent

p-value, for examining the hypothesis that the average or median are not

significantly different from zero.

The Effects of Dual Listing on Share Prices and Liquidity in the Absence of Registration Costs

indicating the growth in trade volume stems primarily

from the opportunity to trade on the TASE. One of the

possible explanations is that the costs of buy- sing and

selling shares on foreign capital markets were too high

for most Israeli investors prior to the dual-listing.

It should be noted that the finding that dual listing had

a positive effect on trade volumes does not change even

when we deduced the change of the total trade volume on

the TASE during the sample periods On average, there

was a non significant drop in the trade volume of shares

(about 2.22%) on the market as a whole, in the two

months period after that date relative to that in the two

months prior to the dual listing day.

These findings appear to be inconsistent with Bancel

and Mitto [13] and others who found that when these

benefits are negligible, the effect of dual-listings turns to

be negative. We argue that the positive effect we find is

due to the absence of registration costs for dual listings

and that in such case there is a clear benefit to dual list-

ing, mainly due to increased liquidity.

3.2. Share Prices

Table 3 and Figure 1 present results on the effect of dual

listing on share prices. The main finding is a significant

rise in share prices, CAR (−15,14) = 8.9%, on average (p

- value = 0.028), and in the median, CAR (−15,14) =

14.3 % (p - value = 0.028) suggesting that the dual listing

had a significant positive effect on share prices.9 These

results are reinforced when we considered the effect on

share prices up to three months after the announcement

date of the dual listing. It appears that although the ex-

cess rates of return from the 15th day to the 90th day fol-

lowing the announcement of dual listing are negative,

CAR (15,90) = −0.06, they are not significant (p - value

= 0.367). These results differ from most studies, which

found that, in the short term, there is a rise in the rate of

shares, prior to trade registration, and a significant drop -

following it (for example - [10,15,16]).

3.3. Share Prices and Liquidity

According to Amihud and Mendelson [17] and others,

improved liquidity is expected to have positive effect on

share prices. We used the Newey-West HAC Standard

Errors & Covariance method to estimate the following

regression model:



15,140.0972740.004709 _i

CARd Volume



 (1)

(p - value =) (0.040) (0.0629)

20.041R

Table 3. Cumulative Abnormal Returns (CAR) around the

announcement day of dual listing on the TASE.

p-valueCAR(T) - %p-value AR(-15,T) -%T

0.26 0.688 0.26 0.688 −15

−14 0.02 0.686 −0.24 0.984

−13 0.39 0.507 0.37 0.694

−12 1.00 0.328 0.61 0.399

−11 0.05 0.298 −0.95 0.967

−10 −0.08 0.867 −0.12 0.964

0.969

0.08 0.869 0.15 −9

0.560 0.108 1.37 −8 1.44

0.670 1.84 0.482

0.40 −7

0.466

0.19 0.777 2.03

−6

0.830 −0.66

−5 −2.70 0.065

−0.30 0.743 −0.97 0.774 −4

0.543 −1.81 0.279 −0.84

−3

0.808

−0.75 0.335 1.06 −2

0.805 0.996 0.00 −1 −0.75

0.050 0.65 0.839

1.40 0

0.588

1.08 0.141 1.73 1

0.460

0.64 0.460 2.37

0.344

0.72 0.362 3.09

0.208

1.06 0.168 4.15

0.092

1.78 0.048 5.93

0.132

−0.56 0.443 5.37

0.203

−0.84 0.283 4.53

0.070

2.05 0.006 6.57

0.050

0.52 0.458 7.10

0.048

0.63 0.376 7.73

0.040

0.56 0.390 8.29

0.063

−0.88 0.133 7.41

0.050

0.71 0.261 8.12

0.028

0.80 0.196 8.91

0.367

−0.06 CAR(15,90)

AR measures the abnormal return on day T and CAR (−15,T) measures the

cumulative abnormal return for a period that commences 15 days prior to the

TASE announcement of dual listing and up to T days around the announce-

ment date (day 0). CAR (15,90) represents the cumulative abnormal return

for a period that commences 15 days following the TASE announcement of

ual listing and up to 90 days later.

9These results are robust to other models used to estimate CAR, such as

regression model (1). d

The Effects of Dual Listing on Share Prices and Liquidity in the Absence of Registration Costs

Figure 1. Cumulative abnormal returns (CAR) around the ann ouncement date of dual listing on the TASE.

where d_Volume represents the percentage change of

trading volume in both markets. The results show the

significant influence that increased liquidity had on share

prices following the dual-listing date of announcement.

These results are consistent with Merton’s claim [7] that

broadening the investment base in firm’s shares should

have a positive effect on their values.

3.4. Market Dominance: Domestic or

Foreign

Following Chowdhry and Nanda [18], who argue that the

domestic market is the dominant market, we hypothesize

that the domestic (TASE) market is the dominant market,

in spite of the fact that these are Israeli firms that became

public in the foreign market and only then listed their

shares in the domestic market.

To investigate the hypothesis we ran the following re-

gressions:

01_2_ 3_

4_5

im USmISm US

mIS

RaaRaR aDR

aDR aD





  (2)

01_3 _5imUSmUS

RaaR aDR aD



  (3)

02_ 4_ 5imISmIS

RaaR aDR aD



 (4)

where Ri signifies the stock’s rate of return in $US, Rd _m

signifies return on the local share index (TA100) and R f

_m foreign market index (composite Nasdaq) rate of re-

turn, D is a dummy variable that receives the value of

zero for the period preceding the dual listing, and the

value of one for the period following the dual listing. i



measures the proportion of share’s variance of rate of

return explained by the i = US market and that by the

Israeli market i = IS where

nUS

nAll



 and

nIS

nAll



, is the in the first regression,

_nAll

_nUS

R and _nI

are the in second and third re-

gressions, respectively. If 1



is significantly greater

(smaller) then 2



, we conclude that the dominant market

is the American (Israeli) market.

The results indicate that in all three regressions, share

prices are significantly affected by the developments in

both the US and Israeli markets. (both a1 and a2 are sig-

nificant in Equation (1)). In only few cases there was a

significant change following the dual listing (a3, a4 and a5

in Equation (1)). The main finding is that the US market

(the foreign market) is the dominat market of these

dual-listed shares. Only in one stock (PTNR) the Israeli

market was found to be the dominant market. This find-

ing does does not support the hypothesis that the domi-

nant market is the domestic market. One possible expla-

nation is that the US market is by far a larger, deeper and

more liquid market then that of the Israeli market. An-

other possible explanation is that the IPOs of these firms

were in the US and not in the Israeli domestic market.

The Effects of Dual Listing on Share Prices and Liquidity in the Absence of Registration Costs

Table 4. This table examines which of the markets, the US or Israel is the dominant market using the following regression:

01_2_3 _4 _5

im USm ISm USmIS

RaaRaRaDRaDR a 





01_ 3_ 5

imUSmUS

RaaR aDRa



 



DRaaR aDRa



02_ 4_ 5imISmIS





Regression Coefficients

i=US I = IS

a5 a4 a3 a2 a1 a0 Firm

0.87 0.32 7.90% −0.0002 0.0777 *−0.4823 0.2435** 0.7942* 0.0004

MGIC

0.81

0.54

20.2%

0.0061

**−0.4396

*0.9871* −0.5514

1.0519*

−0.0058

MTLK

0.75

0.65

11.2%

−0.0001

0.1882**

−0.0579

0.3456*

0.3407*

−0.0000

SCIX

0.86

0.41

15.7%

−0.0002

0.6342

*−0.2745

0.1158

0.7506*

0.0002

TSEM

0.90

0.33

6.50%

0.0016

−0.2165

*0.2798* −0.3278

0.5432*

−0.0002

BPHX

0.98

0.34

5.30%

−0.0001

0.0886

**−0.2603

0.2740**

0.5504*

−0.0005

JCDA

0.72

0.50

2.60%

0.0001

0.0862

−0.2129

0.2816* 0.3203* 0.0009

MAGS

0.64

0.71

16.3%

0.0037

0.0662

0.0351

0.6184*

0.3592*

**−0.0032

PTNR

0.77

0.51

20.5%

0.0071

*−0.4444

−0.1853

0.8576*

0.7823*

*−0.058

ALVR

0.95

0.30

20.9%

0.0025

0.0567

**−0.3706

0.4292

1.2149*

−0.0027

AUDC

0.80

0.52

7.70%

0.0008

−0.1158

−0.1090

0.5531*

0.5301*

−0.0013

CGEN

0.73

0.57

9.40%

−0.0017

*−0.2555

*0.7902* −0.3507

0.6172*

−0.0004

BOSC

0.92

0.24

16.1%

−0.0029

0.0403

−0.2880

0.3794*

1.2628*

0.0023

LNOP

0.77

0.58

12.5%

0.0049* *−0.6965 −0.1658 0.9332* 0.7188* *−0.0023

ORCT

0.81

0.38

8.90%

0.0022

−0.2823

−0.2830

0.4418*

0.6014*

−0.0024

NVMI

0.89

0.47

6.90%

0.0018

−0.2704

−0.0179

0.5190*

0.5709*

0.0014

MNDO

0.76

0.49

16.2%

0.0024

*−0.5038

*0.7041* −0.2804

0.6729*

−0.0015

RVSN

0.83

0.47

4.10%

0.0021

**−0.3485

0.1241

0.4192*

0.3767*

−0.0023

SPNS

0.85

0.39

10.6%

0.0014

−0.0589

−0.1175

0.3037*

0.4753*

−0.0013

FNDT

0.94 0.34 6.50% 0.0055* 0.1549 −0.0865 0.2818*

0.7371* *−0.0058

GILT

0.93

0.26

4.80%

*−0.0041

0.1538

0.1414

0.0730

0.4329*

0.0028

GIVN

0.99

0.21

12.4%

−0.0004

−0.1614

0.0722

0.2434*

0.6587*

−0.0003

RDWR

0.93

0.30

3.70%

−0.0026

0.0664

0.6687*

0.1870**

0.3029*

0.0018

ALDN

0.74

0.51

7.10%

−0.0004

−0.2124

0.0663

0.4546*

0.4858*

−0.0018

CRNT

0.68

0.48

4.30%

−0.0013

−0.0173

0.1079

0.4023*

0.4980*

0.0020

IGLD

0.99

0.09

25.8%

−0.0002

−0.2829* 0.0310

0.0707

0.6792*

0.0001

PRGO

0.77

0.54

2.10%

0.0007

0.0195

0.3674**

0.2310*

0.1996**

0.0012

TATTF

0.78

0.40

4.40%

−0.0034

−0.0032

−0.0318

0.3790*

0.7979*

0.0021

CAMT

0.51

0.64

1.90%

−0.0010

−0.4205

0.3076

0.5264*

0.3919**

0.0032

SILC

0.74

0.41

4.90%

−0.0031

−0.2384

0.4318

0.4368*

0.6943*

0.0013

RDCM

where Ri signifies the stock's rate of return in $US, Rd _m signifi es return on the local sh are index (TA1 00) and Rf _m forei gn market index (composite

Nasdaq) rate of return, D is a dummy variable that receives the value of zero for the period preceding the dual listing, and the value of one for the

period f ollowing the d ual listing . i



meas ures the pro portion of s hare's varia nce of rate of return expl ained by th e i = S market and that by the Is-

raeli market i = IS where



 and

nIS

nAll



, is the

_nA

in th e first regressio n, and

2 2

_nUS

R_nI

are the 2

in second and third

regressio ns , resp ec tiv ely . I f 1



is significa nt ly g reat er (s ma ll er) t hen 2



, we conclude that the dominant market is the American (Israeli) market. ‘*’

nd ‘**’ represent a clear cut result on the level of 5% and 10%, accordingly. a

The Effects of Dual Listing on Share Prices and Liquidity in the Absence of Registration Costs 21

4. Summary

This paper examines the influence of an amendment to

the Securities Law, legislated in 2000, designed to en-

courage dual listing of Israeli companies, both in Israel

and the US, by exempting them from the burden of addi-

tional reporting to ISA. The main findings is that the

trade volume in shares of the dual listed companies in-

creased by about 123% and that the increased liquidity

had a positive effect on share prices, up to 9%, on aver-

age. We also find that the trade volume in Israel consti-

tutes about 42% of the overall trade volume in both Israel

and the US and that this growth did not affect trade vol-

umes in the US. These findings are consistent with Ami-

hud and Mendelson [17] regarding the effect of liquidity

on share prices, and with the model proposed by Merton

[7] regarding the broadening of invertors’ base and its

positive effect on both liquidity and share prices.

The importance of our findings, pertaining to the posi-

tive influence on trade volumes and share prices in the

absence of registration costs is due, inter alia, to the de-

velopment of harmonized supervision over the capital

markets worldwide, such as the “single passport” in

Europe, which significantly reduces the costs of capital

raising in various capital markets within the EU.

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