Liquidity Corrected Variance Ratios and the Effect of Foreign Equity Ownership on Information in an Emerging Market

We ask whether foreign equity ownership increases or decreases the stability of information signals that are absorbed into prices, hence affecting price volatility and the quality of the domestic stock market in an emerging economy. We address both the effect of ownership restrictions exogenously imposed on the holdings of common stock and the impact of introducing or widening foreign ownership through cross-listing of securities in a foreign market. A methodology for variance ratio analysis is introduced, that isolates information effects, correcting for liquidity and volume differences across stock series experiencing different degrees of foreign ownership. The technique is applied to the Mexican stock market, whose institutional structure and recent historical development provides a unique laboratory for such analysis. We find that foreign ownership may raise or lower the overall variance of price changes of an equity stake, but it does not affect the volatility of information in the absence of cross-listing of the security. Foreign ownership introduced or accompanied by cross-listing of a stock series raises the variance of returns. This effect is found to operate in part through increases in volume traded on the domestic market following the listing, but also includes an independently identifiable increase in the volatility of information