Transparency and Liquidity in a Multi-Market Setting

Abstract

This study examines the effect of firm-level transparency on liquidity and trading in a multi-market setting, using the market for American Depository Receipts (ADR) as an example. Theory predicts competing effects of transparency on liquidity differences between stocks trading domestically and stocks trading in a foreign market, depending on why the stock trades in multiple markets. We show that an increase in transparency shifts part of foreign trading to the domestic market, yet improves foreign liquidity more than domestic liquidity and reduces foreign liquidity comovement. Collectively, our results show that transparency benefits foreign investors more than domestic investors and, consequently, may foster multi-market trading.