We examine pairs of large, 'Siamese twin' companies whose stocks are traded
around the world but have different trading and ownership habitats. Twins
pool their cash flows, so, with integrated markets, twin stocks should move
together. However, the difference between the prices of twin stocks appear
s to be correlated with the markets on which they are traded most, i.e., a
twin's relative price rises when the market on which it is traded relativel
y intensively rises. We examine several explanations of this phenomenon inc
luding: the discretionary use of dividend income by parent companies: diffe
rences in parent expenditures; voting rights; currency fluctuations; ex-div
idend date timing issues; and tax-induced investor heterogeneity. Only the
last hypothesis can explain some, but not all, of the empirical facts. We c
onjecture that: (a) country-specific sentiment shocks might affect share in
tensity, (b) investors are rational, but markets are segmented by frictions
other than international transactions costs, such as agency problems. (C)
1999 Elsevier Science S.A. All rights reserved.