Underpricing and Aftermarket Performance of American Depository Receipts (ADR) IPOs

Posted: 28 Feb 2010

See all articles by Demissew Diro Ejara

Demissew Diro Ejara

University of New Haven

Chinmoy Ghosh

University of Connecticut - Department of Finance

Date Written: 2004

Abstract

American depositary receipts (ADRs) are negotiable instruments representing foreign company shares traded in US dollars in the US capital market. We present comparative analyses of the pricing and aftermarket performance of Initial Public Offerings (IPOs) by ADRs and a matching sample of US firms over the 1990–2001 period. Offered by large, well-known multinationals, ADR IPOs go through a detailed scrutiny, and incur significant costs, during the pre-IPO period to recast financial statements in conformity with SEC rules and the US GAAP. This mitigates the information asymmetry between the IPO firm and investors. We categorize the ADR issuing country as developed or emerging, and our sample includes several cases of privatization of state owned corporations. The analyses indicate that (1) ADR IPOs are significantly less underpriced than comparable US IPOs; (2) IPOs from developed countries are more underpriced; and (3) Privatization IPOs are less underpriced than non-privatizations. The lower underpricing of ADR IPOs persists even after differential IPO attributes, the traditional proxies for information asymmetry and, the unique characteristics associated with ADR IPOs, are accounted for. We conclude that extant literature offers only partial explanation for this puzzling phenomenon.

Keywords: American Depositary Receipts, Initial Public Offerings, Privatization, Cross-Listing, Aftermarket Performance

JEL Classification: G12, G15, G24, G32

Suggested Citation

Ejara, Demissew Diro and Ghosh, Chinmoy, Underpricing and Aftermarket Performance of American Depository Receipts (ADR) IPOs (2004). Journal of Banking and Finance, Vol. 28, No. 12, pp. 3151-3186, 2004 , Available at SSRN: https://ssrn.com/abstract=1560485

Demissew Diro Ejara (Contact Author)

University of New Haven ( email )

300 Boston Post Road
Pompea College of Business
West Haven, CT 06516
United States
(203) 932-7150 (Phone)

Chinmoy Ghosh

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-3040 (Phone)
860-486-0349 (Fax)

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