The determinants of price discovery: Evidence from US-Canadian cross-listed shares

We examine the determinants of price discovery for Canadian firms cross-listed on the main US stock exchanges over the period 1996-2011. Sampling at a one-minute frequency, we compute Gonzalo and Granger Component Shares (CS) and employ a system GMM approach to control for persistence in price discovery and endogeneity between CS and its determinants. We find that price discovery is highly persistent and that there is strong evidence of simultaneity between CS and its determinants. We conclude that lower relative spreads and higher relative trading activity increase an exchange's contribution to price discovery. We also document that it is small trades that drive price discovery, particularly since the introduction of decimalization.