From Bonding to Avoiding: Evidence from ADR Delisting

Abstract:     
This paper examines the impact of the delisting of Level II and Level III ADRs on the home stock market. The specially constructed sample allows us to examine the bonding hypothesis without the self-selection bias. I find that both voluntary and involuntary delisting announcements result in a negative (market) impact over a 31-day event window (from the announcement date to 30 trading days after). However, this market reaction diverges over a longer event window. The negative impact is transitory for involuntary delisting but persistent for voluntary delistings. I further examine the proportion of adverse selection cost in the post-delisting bid/ask spread and document the market maker's increased concern of agency cost from voluntarily delisted firms, even after controlling for the degree of integration between the ADR market and the home stock market. Most importantly, the spread due to adverse selection cost explain a significant portion of cross-sectional variation in the cumulative abnormal return around delisting.

Number of Pages in PDF File: 43

Keywords: delisting, agency cost, bonding, avoiding, bid/ask spread

JEL Classification: F30, G15

working papers series