To read the full version of this content please select one of the options below:

Crossing the Tasman: Determinants of price discovery for Australia-New Zealand cross-listed shares

Bart Frijns (Department of Finance, Auckland University of Technology, Auckland, New Zealand.)
Aaron Gilbert (Department of Finance, Auckland University of Technology and Auckland Centre for Financial Research, Auckland, New Zealand)
Alireza Tourani-Rad (Department of Finance, Auckland University of Technology, Auckland, New Zealand.)

Pacific Accounting Review

ISSN: 0114-0582

Article publication date: 10 November 2014

Abstract

Purpose

The purpose of this paper is to investigate price discovery for cross-listed stocks on the New Zealand Exchange (NZX) and the Australian Stock Exchange (ASX) and find out the determinants of price discovery between the two markets.

Design/methodology/approach

Gonzalo Granger Component Shares and Hasbrouck Information Shares were estimated annually for a sample of 19 cross-listed stocks between 1998 and 2012. Then dynamic panel regressions were used to investigate the driving factors behind price discovery between the NZX and ASX.

Findings

Strong downward trends were observed in the contribution to price discovery of the NZX, both for New Zealand firms cross-listing on the ASX and Australian firms cross-listing on the NZX. While in the early years in our sample period, price discovery is dominated by the home market, by 2012, 50 per cent of price discovery for New Zealand firms takes place on the ASX, and the NZX acts as a satellite market for Australian firms. It was also observed that the NZX share of trading activity has a strong positive effect on the NZX level of price discovery, while there is a negative relationship with relative bid–ask spreads.

Practical implications

Results suggest that the importance of the NZX relative to the ASX with regards to price discovery is decreasing over time. Given the importance of price discovery for exchanges, such a finding is concerning for the NZX. The determinants of price discovery found in the paper, such as relative volume and spreads, do, however, offer some guidance on how the NZX could regain price discovery.

Originality/value

This paper offers a longer and broader analysis of price discovery between the NZX and ASX, two highly integrated markets, and extends previous work by exploring the drivers of price discovery in a panel setting.

Keywords

Acknowledgements

The authors wish to thank Chris Swasbrook and participants of the New Zealand Capital Markets Symposium 2013, Auckland, New Zealand for their useful comments and suggestions.

Citation

Frijns, B., Gilbert, A. and Tourani-Rad, A. (2014), "Crossing the Tasman: Determinants of price discovery for Australia-New Zealand cross-listed shares", Pacific Accounting Review, Vol. 26 No. 3, pp. 177-195. https://doi.org/10.1108/PAR-06-2013-0053

Publisher

:

Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited