How cross-listings from an emerging economy affect the host market?

► We examine how cross-listings from China affect the Hong Kong market. ► We find that market capitalization and turnover increase while volatility decreases. ► However, cross-listings have the “crowding out” effect on Hong Kong local stocks. ► Cross-listings also deteriorate the information environment in Hong Kong market. ► The negative impact of cross-listings on the host market should not be ignored. We study the impact of mainland Chinese listings in Hong Kong on the quality and development of the Hong Kong equity market. At the macro-level, we find that the increasing presence of mainland Chinese stocks in Hong Kong increases the size, trading volume, and its link with the China and world markets but reduces the overall volatility of the Hong Kong stock market. At the firm level, the increase affects the market quality, resulting in lower turnover rate, higher Amihud illiquidity ratio, and higher spread for non-mainland Chinese firms. Furthermore, such an increase in presence causes Hong Kong stocks to move in a more synchronized way and reduces these firms investment sensitivity to stock price movement, implying deterioration in the information environment. As a whole, the increasing presence of Chinese companies in Hong Kong brings benefits to the Hong Kong market, yet not without cost.