ADRs and underlying stock returns: empirical evidence from India

Abstract

The present study empirically investigates the dynamic linkages between American Depository Receipts (ADRs) and their respective underlying stock returns of Indian stock market. Study analyzes daily data from the respective date of issue of that ADR to April 30, 2013 by applying augmented Dickey–Fuller unit root test, Johansen cointegration test, Granger causality test, vector error correction model, impulse response function and variance decomposition. The empirical result shows that both underlying stocks and ADRs are level stationary and long-run equilibrium relationship exists between them. Further, Granger causality test uncovers that ADRs lead underlying stocks. Additionally, impulse response function reveals that both underlying stocks and ADRs positively affect each other. Likewise, variance decomposition provides evidence that underlying stocks explain around half of the variance of ADRs. Major conclusion of this study is that price discovery takes place in ADR market, proposing that arrival of new information disseminates faster in ADR market.

This is a preview of subscription content, access via your institution.

Fig. 1

References

  1. Alaganar VT, Bhar R (2002) Information and volatility linkage under external shock: evidence from dually listed Australian stocks. Int Rev Financ Anal 11:59–71

    Article  Google Scholar 

  2. Alaganar VT, Bhar R (2004) Impact of international listing on return distribution: an intervention analysis with Australian stocks. J Asia Pac Econ 9(1):101–117

    Article  Google Scholar 

  3. Aquino KP, Poshakwale S (2006) Price determinants of American Depositary Receipts (Adr): a cross-sectional analysis of panel data. Appl Financ Econ 16:1225–1237

    Article  Google Scholar 

  4. Bae SC, Ho KT, Li M (2008) Foreign exchange exposure and risk premium in international investments: evidence from American depositary receipts. J Multinatl Financ Manag 18(2):165–179

    Article  Google Scholar 

  5. Bekaert G, Harvey CR, Lumsdaine RL (2002) Dating the integration of world equity markets. J Financ Econ 65(2):203–247

    Article  Google Scholar 

  6. Bessler W, Kaen FR, Kurmann P, Zimmermann J (2012) The listing and delisting of German firms on NYSE and NASDAQ: were there any benefits? J Int Financ Mark Inst Money. doi:10.1016/j.intfin.2012.01.001

  7. Bouges JC, Jain R, Puri YR (2009) American Depository Receipts and calendar anomalies. Appl Financ Econ 19:17–25

    Article  Google Scholar 

  8. Callaghan J, Kleiman R, Sahu A (1999) The market adjusted investment performance Of ADR IPOs and SEOs. Glob Financ J 101:123–145

    Article  Google Scholar 

  9. Charitou A, Louca C (2009) Cross-listing and operating performance: evidence from exchange-listed American depositary receipts. J Bus Financ Acc 36(1 & 2):99–129. doi:10.1111/j.1468-5957.2009.02123.x

    Article  Google Scholar 

  10. Choi YK, Kim D (2000) Determinants of American Depositary Receipts and their underlying stock returns: implications for international diversification. Int Rev Financ Anal 9:351–368

    Article  Google Scholar 

  11. Copeland TE (1976) A model of asset trading under the assumption of sequential information arrival. J Financ 31(4):1149–1168

    Article  Google Scholar 

  12. Dickey DA, Fuller WA (1979) Distribution of the estimators for autoregressive time series with a unit root. J Am Stat Assoc 74(366):427–431. doi:10.2307/2286348

  13. Dickey DA, Fuller WA (1981) Likelihood ratio statistics for autoregressive time series with a unit root. Econom J Econom Soc 49(4):1057–1072. doi:10.2307/1912517

  14. Doidge C, Karolyi GA, Stulz RM (2003) Why are firms that list in the U.S. worth more? J Financ 53:2107–2137

    Google Scholar 

  15. Domowitz I, Glen J, Madhavan A (1998) International cross-listing and order Flow migration: evidence from an emerging market. J Financ 53(6):2001–2027

    Article  Google Scholar 

  16. Ejara DD, Ghosh C (2004) Under pricing and after market performance of American Depository Receipts (ADR) IPOs (initial public offerings). J Bank Financ 28:3151–3187

    Article  Google Scholar 

  17. Ely D, Salehizadeh M (2001) American depositary receipts: an analysis of international stock price movements. Int Rev Financ Anal 10:343–363

    Article  Google Scholar 

  18. Engle RF, Granger CWJ (1987) Co-integration and error-correction: representation, estimation and testing. Econometrica 55:251–276

    Article  MATH  MathSciNet  Google Scholar 

  19. Errunza VR, Miller DP (2000) Market segmentation and the cost of capital in international equity markets. J Financ Quant Anal 35(4):577–600

    Article  Google Scholar 

  20. Esqueda OA, Jackson DO (2012) Currency depreciation effects on ADR returns: evidence from Latin America. J Econ Financ 36(3):691–711

    Article  Google Scholar 

  21. Fang H, Loo JCH (2002) Pricing of American depositary receipts under market segmentation. Glob Financ J 13:237–252

    Article  Google Scholar 

  22. Foerster S, Karolyi GA (2000) The long-run performance of global equity offerings. J Financ Quant Anal 35(4):499–528

    Article  Google Scholar 

  23. Hargis K (1996) ADRs in emerging equity markets: market competition or fragmentation. University of South Carolina, Working Paper

  24. Hsu J, Tsai LH (2008) An investigation on information transmission between stocks of far eastern countries and their American depositary receipts. Emerg Mark Financ Trade 44(4):40–61

    Article  Google Scholar 

  25. Hsu J, Wang HY (2008) Why do price spreads between domestic shares and their ADRs vary over time? Pac Econ Rev 13(4):473–491. doi:10.1111/j.1468-0106.2008.00413.x

    Article  MathSciNet  Google Scholar 

  26. Jennings RH, Starks LT, Fellingham JC (1981) An equilibrium model of asset trading with sequential information arrival. J Financ 36(1):143–161

    Article  Google Scholar 

  27. Jiang CX (1998) Diversification with American depositary receipts: the dynamics and the pricing factors. J Bus Financ Acc 25:683–699

    Article  Google Scholar 

  28. Johansen S (1992) Determination of cointegration rank in the presence of a linear trend. Oxford Bull Econ Stat 54:383–397

    Article  Google Scholar 

  29. Johansen S, Juselius K (1990) Maximum likelihood estimation and inference on cointegration with applications to the demand for money. Oxford Bull Econ Stat 52(2):169–210. doi:10.1111/j.1468-0084.1990.mp52002003.x

    Article  Google Scholar 

  30. Kadapakkam PR, Misra L (2003) Return linkages between dual listings under arbitrage restrictions: a study of Indian stocks and their London global depositary receipts. Financ Rev 38:611–633

    Article  Google Scholar 

  31. Karolyi GA (2004) The role of American depositary receipts in the development of emerging equity markets. Rev Econ Stat 86(3):670–690

    Article  Google Scholar 

  32. Karolyi GA, Stulz RM (1996) Why do markets move together? An Examination of U.S.—Japan stock return comovements. J Financ 51(3):951–986

    Article  Google Scholar 

  33. Kato K, Linn S, Schallheim J (1991) Are there arbitrage opportunities in the market for American depositary receipts? J Financ Mark Inst Money 1:73–89

    Google Scholar 

  34. Kim M, Szakmary AC, Mathur I (2000) Price transmission dynamics between ADRs and their underlying foreign securities. J Bank Financ 24:1359–1382

    Article  Google Scholar 

  35. Kruse T, Webb M, Webb S (2011) Foreign firms listing in the U.S.: signaling commitment to the U.S. market. Int Bus Econ Res J 10(12):107–115

  36. Kutan AM, Zhou H (2006) Determinants of returns and volatility of Chinese ADRs at NYSE. J Multinatl Financ Manag 16(1):1–15

    Article  Google Scholar 

  37. Lee LK (2008) A cointegration analysis of price transmission between ADRs and dually listed South Korean stocks. Math Comput Simul 78(2 & 3):200–208

    MATH  Google Scholar 

  38. Li MYL (2009) Nonlinear interrelations between ADRs and their underlying stocks revisited: application of threshold VECM. Appl Econ Lett 16:1867–1873

    Article  Google Scholar 

  39. Liang Y, Mougoue M (1996) The pricing of foreign exchange risk: evidence from ADRs. Int Rev Econ Financ 5:377–385

    Article  Google Scholar 

  40. Mak BSC, Ngai AMS (2005) Market linkage for dual-listed Chinese stocks. Chin Econ 38(2):88–107

    Google Scholar 

  41. Maldonado R, Saunders A (1983) Foreign exchange restrictions and the law of one price. Financ Manag 12:19–23

    Article  Google Scholar 

  42. Martell T, Rodriguez L Jr, Webb G (1999) The impact of listing Latin American ADRs on the risks and returns of the underlying shares. Glob Financ J 10:147–160

    Article  Google Scholar 

  43. Mendiola A (2010) ADR effects on domestic Latin American financial market. J Econ Financ Adm Sci 15(28):45–64

    Google Scholar 

  44. Miller DP, Morey MR (1996) The intraday pricing behavior of international dually listed securities. J Int Financ Mark Inst Money 6:79–89

    Google Scholar 

  45. Moffett MH, Stonehill AI, Eiteman DK (2003) Fundamentals of multinational finance. Addison-Wesley, Reading

  46. Morgan JP (2012) J P Morgan ADR review. Retrived May 2, 2013 from https://www.adr.com/Home/LoadPDF?contentGroup=2745_ADR_Documents&CMSID=9845fd45c152407487c2a6112837ae39

  47. Morgan JP (2013) J P Morgan depository receipt. Retrived on May 2, 2013 from https://www.adr.com/DRSearch/CustomDRSearch

  48. O’Connor TG (2009) Is there a cross listing premium for non-exchange traded depositary receipts? Int Res J Financ Econ 25:183–202

    Google Scholar 

  49. Park J, Tavakkol A (1994) Are ADR’s a dollar translation of their underlying securities? The case of Japanese ADRs. J Financ Mark Inst Money 4:77–87

    Google Scholar 

  50. Patro KD (2000) Return behavior and pricing of American Depositary Receipts. J Int Financ Mark Inst Money 9:43–67

    Article  Google Scholar 

  51. Phylaktis K, Manalis G (2005) Price transmission dynamics between informationally linked securities. Appl Financ Econ 15:187–201

    Article  Google Scholar 

  52. Rabinovitch R, Ana CS, Susmel R (2003) Returns on ADRs and arbitrage in emerging markets. Emerg Mark Rev 4:225–328

    Article  Google Scholar 

  53. Rosenthal L (1983) An empirical test of the efficiency of the ADR market. J Bank Financ 7(1):17–30

    Article  Google Scholar 

  54. Schaub M (2004) Market timing effects on the investment performance of Asia-Pacific and European ADRs listed on the New York stock exchange. Appl Financ Econ 14:1059–1066

    Article  MathSciNet  Google Scholar 

  55. Schaub M (2007) After-market performance of industrial American Depository Receipts: does level of issue and market timing affect returns? J Asset Manag 8(4):259–266

    Article  Google Scholar 

  56. Schaub M, Swanstrom M (2005) Long term market timing wealth effects associated with Latin American ADRs listed on the New York Stock exchange. J Financ Econ Pract 5(2):40–49

    Google Scholar 

  57. Shah V, Srinivasan P (2010) Financial engineering and innovation as risk management tools: the case of Indian companies during global financial crisis. IUP J Risk Insur VII(1 & 2):50–66

  58. Suarez ED (2005) Arbitrage opportunities in the depositary receipts market: myth or reality? J Financ Mark Inst Money 15:469–480

    Article  MathSciNet  Google Scholar 

  59. Tribukait H (2002) The invisible enforcer? Price behavior of Mexican firms cross-listed on the NYSE around earnings announcements. Harvard University Department of Economics, working paper

  60. Tunahan H, Dizkırıcı AS (2012) Return determinants of ADRs: evidence from cointegration and Granger causality analysis on Turkcell. Int Res J Financ Econ 94:172–188

    Google Scholar 

  61. Wahab M, Lashgari M, Cohn R (1992) Arbitrage opportunity in the American Depository Receipts market revisited. J Int Financ Mark Inst Money 2(3):97–130

    Google Scholar 

  62. Xu XE, Fung HG (2002) Information flows across markets: evidence from China-backed stocks dual-listed in Hong Kong and New York. Financ Rev 37:563–588

    Article  Google Scholar 

  63. Young W, Li CA (2011) Price transmission between stocks of European countries and their American depositary receipts. Appl Financ Econ 21:825–835

    Article  Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Samveg A. Patel.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Patel, S.A. ADRs and underlying stock returns: empirical evidence from India. AI & Soc 30, 299–310 (2015). https://doi.org/10.1007/s00146-014-0551-x

Download citation

Keywords

  • American Depository Receipt
  • Price discovery
  • VECM
  • Impulse response function and variance decomposition