SYNOPSIS
We investigate whether cross-border stock exchange segmentation is a viable solution to persisting national institutional differences. To do so we examine the effect of exchange segmentation accompanying the Euronext merger on the liquidity and reporting quality of firms listed on the four exchanges (Amsterdam, Brussels, Paris, and Lisbon) participating in the merger. Euronext integrated the four trading platforms and started clearing all trades through one system. While trading, clearance, and settlement became common for all Euronext firms, these firms continued to be regulated by the regulatory agencies of their own home exchanges, and the strength of enforcement differed considerably across the four exchanges. At the same time, Euronext required higher, uniform disclosure for firms choosing to list on its two named segments, which could lead to increased liquidity if the segments successfully circumvented national limitations on regulation. We document significant increases in liquidity and accounting quality for segment firms relative to non-segment firms, in particular for those segment firms that complied more fully with the provisions of their pre-commitments. Taken together, our findings suggest that exchange segmentation at the time of a cross-border exchange merger might circumvent the inadequacy of national security regulators.
