Are Indian ADR Premiums Mispriced?
DOI:
https://doi.org/10.47941/ijf.1192Keywords:
American Depositary Receipts (ADR), Premium, Order imbalanceAbstract
Purpose: Indian ADRs have been observed to trade at premiums to the price of the underlying shares flouting the law of one price theorem. Therefore, it becomes imperative to investigate whether the observed premiums are mispricing or investor demand. This paper examines the Indian ADRs trading at a significant premium for an extended period.
Methodology: The paper studies all ten Indian ADRs traded from 2001 to 2006. It uses NYSE Trade and Quote Database to compute order imbalance for analysis of the mispricing. It employs multivariate regression models to examine the premiums.
Findings: The results suggest that Indian ADR returns are closely associated with the underlying market returns. Premiums are negatively related to the underlying stock returns. The ADR prices only adjust partially to the prices of the underlying stock. The ADR and underlying stock have a separate process for price formation in their respective markets. Using order imbalance of small and total trades of ADRs, this study shows that Indian ADR premiums are significantly and positively related to the buy demand of investors. Overall, the results support the idea that investor demand drives the Indian ADR premiums and is not mispriced.
Unique Contribution to Theory, Policy, and Practice: The study provides valuable information on the same security traded in different trading locations and market segmentations. It offers insight into an emerging market stock listed in the most developed financial markets. It expands the literature on order imbalanced and dual-listed securities, particularly for ADRs. The order imbalance can be decomposed into short- and long-run components, showing how both parts influence ADR returns and premiums/discounts.
Downloads
References
Amihud, Y., A. Hameed, W. Kang and H. Zhang, 2015, “The illiquidity premium: International evidence,” Journal of Financial Economics, Vol. 117, No. 2, pp. 350–68.
Atanasova, C. and M. X. Li, 2018, “Multi-market trading and liquidity: Evidence from cross-listed companies,” Journal of International Financial Markets, Institutions and Money, Vol. 53, pp. 117–38.
Bae, S. C., Kwon, T. H., and Li, M. (2008) Foreign exchange rate exposure and risk premium in international investments: Evidence from American depositary receipts. Journal of Multinational Financial Management 18(2), 165–179.
Barber, B.M. Odean, T. and Zhu, N. (2008), “Do retail trades move markets?” The Review of Financial Studies, Vol. 22 No. 1, pp. 1-36.
Beckmann, K. S., Ngo, T., and Wang, D. (2015) The informational content of ADR mispricing. Journal of Multinational Finance Management 32–33, 1–14.
Chan, J. S. P. Hong, D. and Subrahmanyam, M. G. (2007), “A tale of two prices: Liquidity and asset prices in multiple markets”, Journal of Banking & Finance, Vol. 32 No. 6, pp. 947-960.
Chan, K. Hameed, A. and Lau, S. T. (2003), “What if Trading Location is Different from Business Location? Evidence from the Jardine Group”, The Journal of Finance, Vol. 58 No. 3, pp. 1221–1246.
Froot, Kenneth A., and Emil M. Dabora (1999) ‘How are stock prices affected by the location of trade?’ Journal of Financial Economics 53(2), 189 – 216
Hietala, Pekka T. (1989), “Asset pricing in partially segmented markets: Evidence from the Finnish Market”, The Journal of Finance, Vol. 44 No. 3, pp. 697-718.
Hughen, J. C. and McDonald C. G. (2005), “Who are the noise traders?” The Journal of Financial Research, Vol. 28 No. 2, pp. 281-298.
Jithendranathan, T., Nirmalanandan, T. R., and Tandon, K. (2000). Barriers to international investing and market segmentation: Evidence from Indian GDR market. Pacific-Basin Finance Journal 8(3–4), 399–417.
Kadapakkam, P and Misra, L. (2003), “Return Linkages between Dual Listings under Arbitrage Restrictions: A Study of Indian Stocks and their London Global Depositary Receipts”, The Financial Review, Vol. 38 No. 4, pp. 611-633.
Lamont, Owen A., and Richard H. Thaler (2003) ‘Anomalies: The law of one price in financial markets.’ Journal of Economic Perspectives 17(4), 191–202
Lee, C.M. and Radhakrishna, B. (2000), “Inferring investor behavior: Evidence from TORQ data”, Journal of Financial Markets, Vol. 3 No. 2, pp. 83-111.
Puthenpurackal, J. (2006), “Explaining premiums in restricted DR markets and their implications: The case of Infosys”, Financial Management, Vol. 35 No. 2, pp. 93-116.
Stigler, M., Shah, A., and Patnaik, I. (2010) Understanding the ADR premium under market segmentation. National Institute of Public Finance and Policy Working Paper.
Wu, J., Lin, J., Yang, Z., and Dong, L. (2020) Effects of cross-border capital flows on stock returns of dual-listed firms in mainland China and Hong Kong: Evidence from a natural experiment. Pacific Economic Review 2020, 1–29.
Zhang, X. C., Jia, Y. D., and Lv, T. T. (2020) The impacts of the US dollar index and the investors' expectations on the AH Premium: A macro perspective. The People's Bank of China Working Paper No.2020/4.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2023 Umesh Kumar
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution (CC-BY) 4.0 License that allows others to share the work with an acknowledgment of the work’s authorship and initial publication in this journal.
