Short Selling and Price Discovery: Evidence from American Depositary Receipts

37 Pages Posted: 14 Apr 2011

See all articles by Paul Brockman

Paul Brockman

Lehigh University - College of Business

Grace Qing Hao

Department of Finance and Real Estate, The University of Texas at Arlington

Date Written: January 29, 2011

Abstract

The underlying shares of some American Depositary Receipts (ADRs) can be short sold in their home markets while others cannot. This institutional feature offers a unique opportunity to investigate the relation between short selling and price discovery. We hypothesize and confirm that ADR short selling on a U.S. exchange is more informative when the ADRs’ underlying shares cannot be short sold in the home market. We find that the top quintile portfolio of heavily shorted ADRs significantly outperforms the bottom quintile by over 2.6% per month when the ADRs’ underlying shares cannot be short sold in the home market. In contrast, there are small and less significant differences between the top and bottom quintile returns when the ADRs’ underlying shares can be short sold in the home market. These and related results suggest that short sellers make a significant contribution to the price discovery process. Short sellers’ trading activity, representing over 20% of total ADR share volume, increases the benefits of cross-listing on U.S. exchanges.

Keywords: American Depositary Receipts (ADRs), Short Sales, Price Discovery

JEL Classification: G12, G14, G15

Suggested Citation

Brockman, Paul and Hao, Grace Qing, Short Selling and Price Discovery: Evidence from American Depositary Receipts (January 29, 2011). Journal of Financial Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1808269

Paul Brockman

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

Grace Qing Hao (Contact Author)

Department of Finance and Real Estate, The University of Texas at Arlington ( email )

701 S. West Street
Arlington, TX 76019
United States

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