Three Essays on International Finance and International Capital Markets.

Abstract

This dissertation consists of three essays examining informational and behavioral frictions in international financial and capital markets. Chapter II investigates whether characteristics of the home country capital market environment, such as information disclosure and investor rights protection, continue to affect ADRs cross-listed in the U.S. I find that characteristics of the home markets continue to be relevant, especially for emerging market firms. Less transparent disclosure, poorer protection of investor rights and weaker legal institutions are associated with higher levels of information asymmetry. My finding suggests that cross-listing in the U.S. should not be viewed as a substitute for improvement in the quality of local institutions. Chapter III addresses the question of whether it is possible to profit from timing the exchange rate markets by examining foreign firms' decision to issue ADRs. Specifically, we test whether foreign firms consider currency market conditions in their ADR issuance decisions. We find that foreign firms tend to issue ADRs after their local currency has been abnormally strong against the U.S. dollar and before their local currency becomes abnormally weak. Currency market timing is especially significant for companies who are more likely to be affected by higher currency exposure and emerging market companies. It is more pronounced during currency crises and after the market integration, and when the ADR issue raises capital. Currency market timing is also economically significant. These findings suggest that some companies may have private information about foreign exchange market. Chapter III examines behavioral bias in global financial markets. It investigates the relation between lunar phases and stock market returns of 48 countries. The findings indicate that stock returns are lower on the days around a full moon than on the days around a new moon. The magnitude of the return difference is 3% to 5% per annum based on analysis of global portfolios. The return difference is not due to changes in stock market volatility or trading volumes. The lunar effect is not explained away by announcements of macroeconomic indicators, nor is it driven by major global shocks. Moreover, the lunar effect is independent of other calendar-related anomalies.