Exchange trading rules, governance, and trading location of cross-listed stocks

This paper shows that stock exchange trading rules are of central importance for the trading location of cross-listed stocks. We consider various measures of sovereign governance and shareholder rights across both developed and emerging countries to assess the complementary effects of other legal and institutional drivers of trading activity. The data indicate that the proportion of trades that occurs on an exchange increases at a decreasing rate with the strength of stock exchange trading rules. The effectiveness of stock exchange rules increases with the strength of regulatory institutions in the country hosting the stock exchange. Furthermore, corroborating with our full sample findings, difference-in-difference tests indicate that the promulgation of the Markets in Financial Instruments Directive, which strengthened trading rules within the European Union (EU), has increased the amount of trade in the EU.