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T his study compares the stock market liquidity of single-listed and cross-listed American Depositary Receipts (ADRs). Single-listed ADRs trade in U.S. exchanges; however, their underlying stock is not listed in their home market. Contrary to cross-listed ADRs, if a single-listed ADR program closes, investors are left with illiquid and unlisted ordinary shares, which may affect their ADR shares' liquidity. Because the underlying stock of single-listed ADRs is not listed on any exchange, we cannot estimate the relationship between ADR shares' liquidity in U.S. exchanges, and that of underlying stocks in home markets. 1 Consequently, this article only focuses on ADRs' market liquidity.
Some experts have explored factors that affect ADRs' liquidity. For instance, examining 2004 ADRs from 29 countries, Chung [2006] studied the relationship between an ADR's liquidity and investor protection levels and found that firms providing adequate investor protection tend to have higher ADR liquidity and that liquidity costs from poor investor protection are higher during financial crises. Focusing on Latin America, Silva and Chávez [2008] found significant differences in liquidity costs of ADRs and stocks from Argentina, Brazil, Chile, and Mexico during 1992 to 2001. Recently, Dey and Wang [2012] examined the liquidity of 15 Chinese ADRs with underlying H-shares listed on the Hong Kong Stock Exchange, reporting that trading volume and turnover are consistent determinants of return spread between ADRs and their underlying stock.
Other studies have shown factors that do not affect ADRs' liquidity. For example, Huang and Stoll [2001] studied how ADRs' liquidity was affected by exchange rate volatility during the United Kingdom's withdrawal from the European Exchange Rate Mechanism in 1992, as well as during the 1994 Mexican peso devaluation, concluding that exchange rate volatility has no impact on market liquidity. Similarly, Clarke and Shastri [2001] found that insider trading enforcement has no effect on ADRs' liquidity.
Notwithstanding, just a few studies--most from China--focus on single-listed ADRs or even acknowledge their existence (Brockman [2011]). For example, including 13 single-listed Chinese ADRs in their sample, Bae and Wang [2012] studied the effect on firm valuation of having the word "China" included in the company name of Chinese stocks listed on U.S. exchanges, finding that, controlling for risk and liquidity, China-named stocks outperform non-China-named stocks. Also concentrating on China, including...