The Informational Efficiency of Cross-Listed Securities and the Quality of Institutions

Keech and Munger (2015) argue that the failures of markets are often preceded by the failures of governments to define the necessary institutions needed for the success of markets. In this paper, we attempt to test this hypothesis by examining whether institutional quality is associated with higher levels of informational efficiency in financial markets. To do so, we use a unique empirical design that holds the structure of financial markets constant while exploiting crosssectional variation in the level of institutional quality. In particular, we examine the association between the informational efficiency of cross-listed securities on US markets and the home country's level of institutional quality. Results provide some general evidence that the quality of institutions in the home country is associated with greater informational efficiency in the crosslisted securities. These findings are supportive of the Keech and Munger (2015) hypothesis