How Do Investment Banks Price Underwriting Services for American Depositary Receipts?

48 Pages Posted: 20 Jun 2006

See all articles by Hsuan‐Chi Chen

Hsuan‐Chi Chen

University of New Mexico - Anderson School of Management

Pei-Ching Yang

Yuan-Ze University, Department of Finance

Larry Fauver

University of Tennessee, Knoxville - Department of Finance; University of Tennessee

Date Written: October 5, 2006

Abstract

In this paper, we investigate how investment banks determine the gross spreads paid by American Depositary Receipts (ADRs) during 1981 to 2004. We then compare the gross spreads of ADRs to those of matching U.S. IPO and SEO firms to see if there are differences in gross spreads across types of firms. We conclude that ADR gross spreads can be explained by firm and offer characteristics, underpricing, gross spreads of matched U.S. IPOs and SEOs, the level of gross spreads in the domestic market, and whether the ADR firm has a prior listing. We argue that U.S. underwriters use available information in other markets when setting the gross spreads of ADRs (our reference hypothesis). This result has not been documented in prior research. We also find support for the negotiation hypothesis (integer offer price related to uncertainty) and the firm-level risk hypothesis that have been documented in earlier research.

Keywords: American Depositary Receipts (ADRs), Gross spread, Underwriters, Reference hypothesis, Firm-level risk

JEL Classification: F30, G10

Suggested Citation

Chen, Hsuan-Chi and Yang, Pei-Ching and Fauver, Larry, How Do Investment Banks Price Underwriting Services for American Depositary Receipts? (October 5, 2006). Available at SSRN: https://ssrn.com/abstract=891740 or http://dx.doi.org/10.2139/ssrn.891740

Hsuan-Chi Chen

University of New Mexico - Anderson School of Management ( email )

1924 Las Lomas NE
Albuquerque, NM 87131
United States

HOME PAGE: http://www.mgt.unm.edu/faculty/directoryArea.asp#FIN

Pei-Ching Yang

Yuan-Ze University, Department of Finance ( email )

135 Far-East Rd., Chung-Li 320
Taipei
Taiwan

Larry Fauver (Contact Author)

University of Tennessee, Knoxville - Department of Finance ( email )

424 Stokely Management Center
Knoxville, TN 37996
United States

University of Tennessee ( email )

424 Stokely Management Center
Department of Finance
Knoxville, TN 37996-0540
United States
865-974-1722 (Phone)
865-974-1716 (Fax)

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