International Listings of Stocks & their effect on Domestic Shares

DATA, METHODOLOGY, HYPOTHESIS TESTING AND ANALYSIS The main purpose of this study is to examine the effect of the Indian foreign listings on the domestic stocks of the listing firms after the listing. More specifically, we examine if the listing of DRs can be associated with Exchange rates to the underlying stock after the listing. In order to get the relationship of Share Price of State Bank of India Ltd. between Domestic Index i.e. BSE (Bombay Stock Exchange), GDR (Global Depository Receipt) and the Exchange Rate i.e. Rupee / US Dollar we can run a Correlation to test their relationship. The daily adjusted closing price of State Bank of India Ltd on BSE, FTSE i.e. GDR price and Exchange rates on trading days are taken from Yahoo Finance, Financial Times & Rates F X. TABLE 1 BSE (Rs) 1 0.921972542 -0.591812484 FTSE ($) GDR Exchange Rates

BSE (Rs) FTSE GDR ($) Exchange Rates

1 -0.61663977

Measuring Correlation The correlation coefficient, symbol r, measures the degree/strength of linear correlation or relationship between variables. This coefficient can take any value between -1 and +1. When r = +1 indicates When r = 0 indicates When r = - 1 indicates perfect positive correlation no linear correlation perfect negative correlation

Here we can observe that the relationship between FTSE GDR ($) and BSE (Rs) is 0.921972542 which states that there is strong positive relationship between them as the value is very close to +1. But the relation between Exchange rates and BSE (Rs) is -0.591812484 which is a negative value showing a perfect negative correlation which means it doesnt have strong positive relationship with BSE (Rs) and same is the case with Exchange rates and FTSE GDR ($) as the value is -0.61663977, so we can say that there is only strong relationship between FTSE GDR ($) and BSE (Rs). Therefore now we will use regression for determining their level of relationship.

Here we have two explanatory variables; therefore the appropriate model to choose is Multiple Variables Regression Model. BSE is the dependent variable Y; FTSE GDR Price and Exchange Rates (Rs/$) are respectively explanatory variables X1 and X2. The random error term is added to make the model probabilistic and not deterministic.

Y = + 1 X 1 + 2 X 2 + Or in simple terms Y=a+b1x1+b2x2+e

X = Independent Variables (FTSE GDR Price and Exchange Rates (Rs/$) Y = Dependent Variable (BSE Share Price) = Intercept of Regression line = Slope of Regression line e= Random Error The above equation states that the change in the value of Y when the value of x1 and x2 are 1. The change in value of Y will be value of + value ..of .. 1 + value ..of ..2 + the .error .term . TABLE 2

C o e f f ic S t na tns d a r d Et rSr to ar t P - v a lu eL o w e r 9 5 %p p e rL o 5 %e r U9 5 .p0 e%r 9 5 . 0 % ie U 9w p I n t e r c e p t 8 0 5 . 2 0 45 27 70 1. 2 8 5 0 619. 4 1 1 903. 2 9 3 4 7 9 2 -9322 4 . 0 1 79 1 2 4. 41- 23 52 64 6. 0 117913244. 4 2 5 6 6 6 2 1605 34 6 1 X V a r i a b l e 11 8 . 6 0 1 2 00. 9 03 20 6 5 7 21495. 9 8 7 71 .77 40 78 90 1 E - 41 06 . 7 5 82401. 4 7 2 1 6 .373518 24 01 .447424 0 0 3 3 1 4400 X V a r i a b l e -2 9 . 5 3 1 7 7 12 05 .49 24 8 8 8-10 6. 8 7 0 507. 03 4 25 8 4 1 5- 4 1 . 2 1 1 62 5 11 46 84- 13 01 6. 25 1 11625. 1 4 8 1 0 6 5 5 8 7 3 . 5 64

In our example we get Y = 805.204271+ 18.60120902x1 + [-9.531772542]x2 +e It states that whenever there is an increase or decrease in one unit of x1 and there is no change in the value of x2 then value of Y will increase or decrease by 18.60120902 + the error term i.e. e and whenever there is an increase or decrease in one unit of x2 and there is no change in the value of x1 then value of Y will increase or decrease by [-9.531772542] + the error term i.e. value of e.

However the best-fit-line does not show the level of relationship between the variables, but it simply draws the best fit line for any given sets. There is another significant statistics tool Coefficient of determination that is used to find out the relationship between variables. It is popularly known as R2 or R-square and the value of its range is between 0 to 1. This shows the percentage changes in the dependent variable(y) whenever there is a change in the independent variables(x1 and x2). We got the value of R-square by using regression on the excel sheet which is shown in table 3 i.e. 0.850765506 or 85.0765506% of the changes in the y variable when there is a change in x variables. It is believed that coefficient of determination is helpful in determining the nature of variables better if it is probably high.

Table 3 Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 0.922369506 0.850765506 0.848257363 80.03141128 122

Null Hypothesis Testing: The null hypothesis is calculated at 95% confidence interval. It means that alpha () or the significance level is 0.05 or 5%. The main purpose of testing is that it facilitates us in making decision or judgement to either the tested statement is probably true or false. This method is usually expressed in terms of a probability i.e. P-value that helps in quantifying the strength of the evidence against the null hypothesis in favor of the alternative. The other hypothesis i.e. alternative hypothesis is what we expect to be true if the null hypothesis is false. We cannot prove that the alternative hypothesis is true but we may be able to describe that the alternative is much more credible than the null hypothesis given the data. H0: = 0, there is no relationship between Dependant and Independent Variable. H1: 0, there is relationship between Dependant and Independent Variable.
P-value < 0.001 0.001 < P-value < 0.01 0.01 < P-value < 0.05 0.05 < P-value < 0.10 Ve ry s trong e vide nce agains t the null hypothe s is in favor of the alte rnative . Strong e vide nce agains t the null hypothe s is in favor of the alte rnative . M ode rate e vide nce agains t the null hypothe s is in favor of the alte rnative . W e ak e vide nce agains t the null hypothe s is in favor of the alte rnative .

TABLE 4 s

C o e f f ic ie tnat n d a r d E tr rSot ra t P - v a lu e L o w e r 9 5U% p p e r L9o 5w% e r 9 5p. 0 % r 9 5 . 0 % S s U pe I n t e r c e p t 8 0 5 . 2 0 4527701. 2 8 5 0 6 1 .24 1 1 9 0 .21963045 7 9 2 9- 2 2 4 . 0 117913244. 1 -2352646. 60 1 17 91 32 44 .14 2 5 6 6 6 9 3 3 4 X V a r i a b l e 1 1 8 . 6 0 1 2 0 990320 6 5 7 2 1 9 . 9 8 7 1 77407890 1 E - 4 10 6 . 7 5 8 2 0 .447424 01 06 3. 7 5 8 4 1 4 47 42 4 0 0 3 3 1 . 45 7. 41 31 20. X V a r i a b l e 2- 9 . 5 3 1 7 7 2 5 4 92 4 8 8 8 1 0 . 8 7 0 5 0 .03482587 4 1 5 -43 1 . 2 1 11625. 1 6 4 -13016. 5 51 1 16 25 .116448 1 0 6 5 5 10. -6 7 48 2

Using regression method after hypothesis testing of raw data I have found out that p-value of my sample of 122 observations is 0.160579292 which is comparatively much higher than the value of significance level. The relationship is significant considering p-value of x variable 1 i.e., 7.70801E-40 but there is insignificant relationship in x variable 2. Therefore, according to the laid down principles that are given in the above table, it is concluded that the alternative is much more credible than the null hypothesis. Moreover, I accept that there is a significant relationship between the Dependent variable (BSE) and one Independent variable (GDR) but there is insignificant relationship between the dependent variable and the other Independent variable (Exchange Rates).

CONCLUSION The effect of international listings on the returns of the domestic shares remains an unsolved issue in the finance research. Some research models showed a positive impact on the returns; prior empirical studies have recorded mixed evidences. Majority of the prior studies have either relied on an exclusive sample of foreign listed developed markets firms or a mixed sample of foreign listed firms drawn from the developed and emerging markets. There is a lack of studies that have examined the issue by focusing on an exclusive sample of foreign listed firms drawn from the emerging market(s). This study assesses the impact of overseas listings on the returns available from the domestic underlying shares by studying a sample of 122 adjusted closing share prices of State Bank of India Ltd in BSE (Bombay Stock Exchange) and its FTSE GDR adjusted closing price and Exchange Rates between Rupees and Dollar. Different analysis of GDRs listings at LSE (London Stock Exchange) revealed that the firms listing their GDR programs at LSE experience most adverse impact on the prices of the underlying domestic shares. The GDR listing in our sample shows significant impact on the prices of the underlying domestic shares. The differential impact of GDR listings can partly be attributable to the difference in characteristics of the firms tapping the GDR markets. Analysis of the impact of GDR listings is mainly based on a sample of 122 observations but in future, researchers need to study a larger sample in order to verify the results of impact of GDR listings.