Researchers studying inter-listed stocks trading on the Toronto Stock Exchange have found that the effects of inter-listing on stock prices flow both ways.

The study, Cross-Border Listings and Price Discovery: Evidence from U.S. Listed Canadian Stocks, was authored by Cheol Eun of the Georgia Institute of Technology and Sanjiv Sabherwal and Sabherwal from the University of Rhode Island. It is to be published in a forthcoming issue of the Journal of Finance.

The study examines the contribution of U.S. stock exchanges to the price discovery of Canadian stocks cross-listed in the U.S. Using a sample of 62 Canadian stocks listed on the TSX that are also listed in the U.S. on the NYSE, AMEX, or Nasdaq, the authors found that not only do the prices from local trading affect the prices in the U.S., but the trading carried out on the U.S. exchanges contributes to price discovery, too.

For a majority of the stocks, the U.S. prices adjust more to the TSX prices, rather than vice-versa. The stocks that showed the least effects from U.S. trading were BCE, TD Bank, Royal Bank and Bank of Montreal. However, the U.S. share of price discovery ranges from 0.2% to 98.2%, with an average of 38.1%. So some stocks had their prices driven more by U.S. trading activity.

The authors also examined the factors that affect the extent to which the U.S. exchange contributes to price determination. They conclude that the greater the competition offered by the U.S., the greater the U.S. contribution to price discovery. “First, a larger U.S. share of trading suggests greater competition from the U.S. as well as greater informativeness of the U.S. trading relative to the TSX trading, and we find that the adjustment by the TSX prices to the U.S. prices is more for stocks with a higher U.S. share of total trading.”

“Second, a smaller ratio of spreads on the U.S. exchange and the TSX implies a larger competitive threat from the U.S., as well as more informed trading in the U.S., and we find that the TSX share of total adjustment in prices is inversely related to the ratio of spreads on the U.S. exchange and the TSX.”

“Third, consistent with the argument that the medium-size trades have a higher information content than small- and large-size trades, we find that the U.S. contribution to price discovery increases as the proportion of medium-size trades in the U.S. relative to the TSX increases.”