International stock exchange listing and the reduction of political risk

The impending 1997 assimilation into the People's Republic of China made the 1980s a challenging period for Hong Kong, one in which Kong Kong‐based companies relocated their corporate domiciles to other countries as political insurance. International listing, however, is another way for companies to reduce political risk. This paper examines the post‐1985 effects of Hong Kong‐based company stocks being quoted on London's International Stock Exchange. We document that there is no price effect for these companies after the first trading day and a significant increase in the average trading volume surrounding the event day. This may be attributed to the London market makers who build up their stakes before the listing and who unwind their positions in the Hong Kong market after the event day. We also find that there is, on average, a decrease in systematic risk of these companies after being traded on the London market. Furthermore, the evidence shows that there is an increase in systematic risk for companies that are not listed in London after 4 June 1989, however, not for those London‐listed Hong Kong companies. The results constitute evidence to support the inference that there is a reduction of local political risk for internationally listed companies. Copyright © 1995 John Wiley & Sons, Inc. All Rights Reserved