Why do Foreign Investors Demand Comparability? Evidence from Unsponsored ADRs

52 Pages Posted: 8 Mar 2020 Last revised: 23 Oct 2020

See all articles by Alon Kalay

Alon Kalay

Michigan State University - Eli Broad College of Business

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT)

Yu Ting Forester Wong

University of Southern California - Leventhal School of Accounting

Date Written: October 20, 2020

Abstract

We study the sources of demand for accounting comparability. We hypothesize that U.S. investors
interested in investing in a foreign firm potentially have two different types of demands for
comparability: (i) comparability to U.S. firms which report under U.S. GAAP (which we label as
U.S. comparability) and (ii) comparability to other foreign firms which the investor is interested
in investing in (which we label as regional comparability). The findings in prior literature
examining U.S. institutional investors are consistent with channel (i). We explore unsponsored
ADRs as a setting where we expect channel (ii) to be particularly important. We find that regional
(but not U.S.) comparability increases the ex-ante likelihood that a depository bank selects a
foreign firm for the creation of unsponsored ADRs, and the ex-post trading in the unsponsored
ADR by U.S. investors. Our results imply an implicit tradeoff in the costs and benefits of increased
comparability and suggest that one has to consider not only if comparability matters in a specific
context, but also to whom it is aimed for.

Keywords: Accounting comparability, Unsponsored cross listing, Institutional investors, Information processing costs

JEL Classification: M41, G15, G11

Suggested Citation

Kalay, Alon and Verdi, Rodrigo S. and Wong, Yu Ting Forester, Why do Foreign Investors Demand Comparability? Evidence from Unsponsored ADRs (October 20, 2020). Available at SSRN: https://ssrn.com/abstract=3537111 or http://dx.doi.org/10.2139/ssrn.3537111

Alon Kalay (Contact Author)

Michigan State University - Eli Broad College of Business

632 Bogue St
East Lansing, MI 48824
United States

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
100 Main Street E62-666
Cambridge, MA 02142
United States
(617) 253 2956 (Phone)

Yu Ting Forester Wong

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

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