Emerging Market Adrs Study

The dissertation is composed of three major parts.American Depository Receipts (ADRs) are shares of common stock of foreign companies denominated in dollars that trade in the US capital market. My purpose is to examine the pricing, after-market performance of ADR IPOs and ADRs portfolio.Firstly, I find certain unique institutional characteristics of ADRs imply that the pricing of ADR IPOs may be different from traditional US IPOs. ADR IPOs often represent large companies that are leaders in their domestic markets, and many of them are internationally well known. The ADRs issuer incurs listing expenses and undergoes strict procedures to prepare accounting statements in accordance with SEC rules and US GAAP. Several large ADRs IPOs have been used for privatizations of state owned corporations. Privatization has been known to improve operating performance and efficiency. For emerging markets, ADR IPOs raise critical investment capital to fund profitable projects. These feature, especially the additional costs of compliance to list in the US market, provide an alternative signaling mechanism that the ADR IPO issuer does not need to use underpricing to signal quality. Only firms with good prospects and confidence undergo the listing procedures and incur the additional expenses. But the results of this study show that aftermarket returns of US IPOs are not significantly greater than those of the ADRs IPOs for most of the periods. This supports the argument that ADRs IPOs are less underpriced not because they belong to low quality firms, but because cross-border listing provides them with an alternative signaling mechanism.Secondly, I empirically test the impact of several sources of spillover effects on ADRs and non-ADRs firms by utilizing a vector autoregression (VAR) model. In particular, the analysis focuses on spillover effects across-the U.S. equity market, the Mexican ADRs and domestic equity markets, and the Chilean ADRs and domestic equity markets. The study concentrates on the 1995-1999 period associated with a growing phase of the Latin American ADRs market. The findings indicate that equity market movements affect ADRs and non-ADRs firms differently and suggest several portfolio diversification strategies that might be worthwhile for investors. While investors might diversify internationally with any one of these securities, they improve diversification benefits by purchasing securities less sensitive to movements in their home equity markets. Indeed, the higher (lower) the sensitivity of these securities to movements in the investors' home equity market, the lower (higher) their benefits of diversification. Overall, findings suggest three diversification strategies. First, they may invest in Latin American firms traded through ADRs in the U.S. equity market. Second, they may invest in the underlying stocks of Latin American ADRs traded in Latin American stock exchanges. Third, investors may invest in non-ADRs firms traded in Latin American stock exchanges. This dissertation contributes to the current literature by investigating whether U.S. and Latin American investors improve portfolio performance by investing in ADRs or non-ADRs firms.Finally, I present a comment on the relationship between ADRs and the development of China's securities market, and make up a developing strategy for it.