ADR IPOs and impact of ADR listing on stock market development

Date of Completion

January 1998


Business Administration, General|Economics, Finance|Business Administration, Banking




This dissertation has two essays. The first essay is a comparative study of American Depositary Receipts (ADR) initial public offerings (IPO) and local US IPOs in terms of initial pricing and aftermarket performance. According to asymmetric information hypothesis, IPOs are underpriced. The additional listing and regulatory compliance costs involved in cross-border security offering signal the firm's confidence in its prospects that ADR IPOs should not be underpriced as much as regular IPOs. Consistent with this hypothesis, ADR IPOs are less underpriced by 9.94% compared to a sample of US IPOs or by 4.77% after controlling for differences in size, risk, underwriter reputation, and other factors which affect IPO pricing. In the aftermarket, both ADR and US IPOs underperform the market consistent with established theory. ADR IPOs underperform. the US IPO sample, but the differences are not significant over most of the periods in the aftermarket. ^ The second essay investigates impact of ADR listing on the trading volume and volatility of the domestic market. Empirical evidence shows increase in both trading volume and price volatility in the domestic market after ADR listing. The increase in volatility is attributed to noise resulting from public information as opposed to from increase trading friction. This suggests improvement in liquidity following ADR listing. Comparison across country groups indicates marginally higher gain for emerging market stocks. ^