ADR Holdings of U.S.- Based Emerging Market Funds

50 Pages Posted: 22 Mar 2005 Last revised: 24 Feb 2012

See all articles by Reena Aggarwal

Reena Aggarwal

Georgetown University - Robert Emmett McDonough School of Business ; European Corporate Governance Institute (ECGI)

Sandeep Dahiya

Georgetown University - Department of Finance

Leora F. Klapper

World Bank; World Bank - Development Research Group (DECRG)

Multiple version iconThere are 2 versions of this paper

Date Written: October 8, 2010

Abstract

The benefits of cross-listing for a foreign "issuer" are extensively documented in the literature, however it is not clear what motivates "investors" to hold American Depositary Receipts (ADRs) rather than the underlying stock of these issuers. We analyze the investment allocation decision of mutual fund managers to invest in emerging market firms that are listed in their domestic markets and have also issued ADRs in the U.S. Although legal provisions are typically assumed to affect ADRs and their underlying domestic shares equally, investors holding ADRs may have a higher level of legal protection as these securities are issued and traded in the U.S. We find that ADRs are the preferred mode of holdings if the local market of the issuer has weak investor protection, low liquidity and high transaction costs, and if the firm is small and has limited analyst following. We also find that not all ADR listings are associated with low liquidity in the underlying security. In fact, firms with strong liquidity for their underlying security are likely to be held via their underlying security rather than the ADRs. This suggests that ADR listings of local firms might not negatively impact local markets if the investment climate is good.

Keywords: ADR, Emerging Markets, Portfolio Allocation, Shareholder Rights

JEL Classification: G11, G15, G18, G23, K22

Suggested Citation

Aggarwal, Reena and Dahiya, Sandeep and Klapper, Leora F., ADR Holdings of U.S.- Based Emerging Market Funds (October 8, 2010). Available at SSRN: https://ssrn.com/abstract=686302 or http://dx.doi.org/10.2139/ssrn.686302

Reena Aggarwal (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

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Washington, DC 20057
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HOME PAGE: http://explore.georgetown.edu/people/aggarwal/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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Belgium

Sandeep Dahiya

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-3832 (Phone)

Leora F. Klapper

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
202-473-8738 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/lklapper

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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