Information asymmetry, closed-end funds, and American Depository Receipts

This dissertation consists of three essays examining the degree of information asymmetry in closed-end funds and American Depository Receipts. The purpose of the first essay is to provide a systematic empirical comparison of the different proxy variables used to measure information asymmetry. I construct different information asymmetry measures based on a firm's growth opportunities, the market microstructure of the firm's stock, the stock's return structure and analysts' forecasts of a firm's earnings per share and examine their correlations under different sampling situations. I also study the ability of the microstructure-based measures, which are calculated contemporaneously, to detect trends in corporate finance proxies, which are measured quarterly. I find that the market microstructure measures tend to be highly correlated with one another. Moreover, they are related to firm characteristics that ex ante should be associated with information asymmetry. The market microstructure measures tend to be related to analyst forecast errors only for large, widely followed firms. My results also indicate that monthly changes in the microstructure measures of information asymmetry are significantly correlated with annual changes in the corporate finance proxy variables.; In the second essay I examine the magnitude and the cross-sectional determinants of the adverse selection component of the spread for a sample of 266 closed-end funds traded on the New York Stock Exchange. I find no evidence that the adverse selection component of the spread for closed-end funds is related to portfolio turnover, the discount/premium to net asset value, the volatility of the discount or the expense ratio. However, I find a positive relation between blockholdings and the adverse selection component of the spread. I argue that uncertainty in the market about private benefits being paid to blockholders leads to these higher adverse selection costs. Unlike Neal and Wheatley (1998), I find that the adverse selection component is, on average, 50 percent lower for domestic and international equity closed-end funds than for a matched control firm. Finally, I find that the fund's adverse selection component is significantly lower than the weighted average of the adverse selection components of the stocks in the fund's portfolio. These results are consistent with Gorton and Pennacchi (1993) and Subrahmanyam (1991), who suggest that combining individual securities into baskets may reduce the adverse selection costs of trading.; The objective of the third essay is to examine the market microstructure of American Depository Receipts (ADRs) traded on the New York Stock Exchange (NYSE). Using a comprehensive sample of ADRs and transactions data obtained from the NYSE Trade and Quote (TAQ) database, I find a significant relation between various measures of market liquidity and proxies for the extent to which the home market and the NYSE are informationally linked. A cross-sectional analysis indicates that, other things being equal, ADRs from emerging markets have higher spreads, greater adverse selection costs, and less quoted depth than those from developed markets. Compared to similar NYSE firms, ADRs from emerging markets have greater spreads and higher adverse selection costs. Intra-day analysis reveals that trading volume in ADRs is concentrated during periods when both the home market and the NYSE are open. During these overlapping periods, quoted depth tends to be higher and quoted spreads are lower.