How Are Stock Prices Affected by the Location of Trade
Kenneth A. Froot, Harvard University

The project paper (co-authored with Emil Dabora) examines trading in three pairs of “Siamese twin” companies. Twins are companies that are essentially similar in terms of ownership rights and cash flows, but which trade under different names in different markets. For example, Royal Dutch Petroleum and Shell Transport and Trading, plc are a pair of “twins.” The authors find that the prices of the twins are more closely correlated with their home market indices than standard valuation theory would suggest. The authors examine some possible explanations for the result, but ultimately conclude that markets are segmented by frictions other than international transactions costs. (Accepted Fall 1996.)