STOCKS AFFECTED BY LOCATION OF TRADE? 105adjusting for corporate tax considerations and control rights, are effectively
split in the proportion of 60:40.^4 Information clarifying the linkages be-
tween the two parent companies is widely available. In addition to being
explained at the beginning of each Annual Report, the connections are de-
tailed in 20F submissions to the SEC and are the subject of an analyst/
investor guide (Royal Dutch Shell 1994). There is also considerable public
information about the relative pricing of Royal Dutch and Shell, and
“switch” trades are known by traders as those that seek to take advantage
of price disparities between Royal Dutch and Shell.
Royal Dutch and Shell trade on nine exchanges in Europe and the United
States, but Royal Dutch trades primarily in the United States and the
Netherlands (it is in the S&P 500 and virtually every index of Dutch
shares) and Shell trades predominantly in the United Kingdom (it is in the
Financial TimesAllshare Index, or FTSE). Geographical ownership and
trading information for Royal Dutch and Shell is shown in table 3.1. Log
deviations from the expected price ratio are graphed in figure 3.1.
Figure 3.1. Log deviations from Royal Dutch/Shell parity. Note: This figure shows
on a percentage basis the deviations from theoretical parity of Royal Dutch and
Shell shares and ADRs traded on the NYSE. Data are from the Center for Research
in Security Pricing (CRSP).
(^4) Royal Dutch and Shell Transport shall share in the aggregate net assets and in the net ag-
gregate dividends and interest received from Group companies in the proportion of 60:40. It is
further arranged that the burden of all taxes in the nature of or corresponding to an income
tax leveeable in respect of such dividends and interest shall fall in the same proportion (Royal
Dutch 20F, 1993, pp. 1–2). See also Rosenthal and Young (1990).