Determinants of American Depositary Receipts and their underlying stock returns: Implications for international diversification

Abstract

We empirically examine several major determinants of American Depositary Receipts (ADRs) and their underlying stock returns for the period of 1990-1996 and discuss implications for international diversification and market segmentation. In general, the local factors (market or industry) explain ADRs and their underlying stock returns across both countries and industries better than the world factor for our sample period. This is especially true for emerging markets in comparison with developed markets. One notable exception is Japan. The importance of the world industry factor relative to the local industry factor is shown to depend on the industrial globalization. The explanatory power of the exchange rates for ADRs was not as strong as expected. Finally, we conclude that ADRs, especially those of the emerging markets, provide US investors with an effective way to internationally diversify.