Academic journal article Journal of Economics, Finance and Administrative Science

ADR Effects on Domestic Latin American Financial market/Los Efectos ADR En Los Mercados Domesticos Financieros De Latinoamerica

Academic journal article Journal of Economics, Finance and Administrative Science

ADR Effects on Domestic Latin American Financial market/Los Efectos ADR En Los Mercados Domesticos Financieros De Latinoamerica

Article excerpt

Research has established that cross listing significantly affects the ADR's underlying share (1) trading process in the domestic exchange. Examples of these effects include higher valuations and improvements in an investor's appreciation of the firm's information (Coffee, 1999; Reese & Weisbach, 2002; Doidge, Karolyi, & Stulz, 2003); declines in cost of capital (Errunza & Miller, 2000; Foerster & Karolyi, 1993, 1999; Domowitz, Glen, & Madhavan, 1998); positive abnormal stock returns in the pre-cross-listing period (Foerster & Karolyi, 1993, 1999; Jayaraman, Shastri, & Tandon, 1993; Viswanathan, 1996; Miller, 1999; Errunza & Miller, 2000; Kim & Singal, 2000); improvement in firm visibility and information environment (Baker, Nofsinger, & Weaver, 2002; Lang, Lins, & Miller, 2003; Bailey, Karolyi, & Salva, 2006); spillover of cross-listing effects to singly-listed stocks (Fernandes, 2003; Melvin & Valero-Tonone, 2003; Lee, 2003); a migration of trading volume (Smith & Sofianos, 1997; Pulatkonak & Sofianos, 1999; Levine & Schmukler, 2003; Domowitz, Glen, & Madhavan, 1998). The purpose of this paper is to revisit and extend previous research work that examines the ADR-listing effects on the stock returns of all domestically-listed stocks in Latin American exchanges. Initially, the analysis is done considering the singly- and cross-listed stocks separately; next, all the information of the domestically-listed stocks is pooled to determine possible differences in the trading process across the two groups of securities.

This approach builds on previous research work (2) and, additionally, takes into consideration three important factors affecting ADR listings. First, including only Latin American stocks ensures that the time zone differences across local and US exchanges are, at most, two hours. (3) Second, to facilitate the identification of spillovers (4), the examination of ADR-listing effects is done separately on singly- and cross-listed stocks; in a subsequent step, all the information (from the singly- and cross-listed stocks) is pooled to determine whether differences exist across these two groups of securities. Third, Heckman's (1979) procedure is used to control for the differences in the characteristics of the firms with cross- and singly-listed stocks; without this procedure, a non random sample selection occurs given that the behavior of cross- and singly-listed stocks is examined separately.

The main results of this paper are as follows: ADR-listing effects on the domestically-listed stocks are significant and affect singly- and cross-listed stocks in different ways. As expected, ADR-listing results in an increase in the importance of the world exchange index in explaining the behavior of cross-listed shares. However, for the singly-listed shares, ADR-listing induces a significant increase in the importance of the domestic exchange variables to explain the trading behavior of this group of stocks. I interpret this finding as an increase in the isolation (from international markets) of singly-listed shares in the post-cross-listing period.

This paper is organized as follows: The first section includes a summary of the sources and characteristics of the data used for empirical tests. Section two presents a discussion of Heckman's technique and its empirical implementation to determine the Inverse Mills Ratio (probability of cross-listing) for each stock. The behavior of the stock returns is included in the third section.

DATA

The information collected includes firm and exchange related information from four Latin American countries: Argentina, Brazil, Chile and Mexico. (5) The period analyzed extends from January 1, 1992 to December 31, 2002 (6). The total number of firm/shares considered in the sample is 926, of which 203 (22%) have cross-listed securities (See Table 1).

To minimize the possibility of a non-synchronous trading bias, I exclude the securities that trade in less than 30% of the available trading days. …

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