This paper investigates the liquidity effect in asset pricing by studying the liquidity-premium relationship of an American depositary receipt (ADR) and its underlying share. Using the [Amihud, Yakov, 2002. Illiquidity and stock returns: cross-section and time series effects. Journal of Financial Markets 5, 31-56] measure, the turnover ratio and trading infrequency as proxies for liquidity, we show that a higher ADR premium is associated with higher ADR liquidity and lower home share liquidity, in terms of changes in these variables. We find that the liquidity effects remain strong after we control for firm size and a number of country characteristics, such as the expected change in the foreign exchange rate, the stock market performance, as well as several variables measuring the openness and transparency of the home market.
American depositary receipts (ADRs), Dual listing, Liquidity, Turnover, Premium, Asset pricing
Finance and Financial Management | Portfolio and Security Analysis
Journal of Banking and Finance
CHAN, Justin Sai Pang; HONG, Dong; and Subrahmanyam, Marti G..
A tale of two prices: Liquidity and asset prices in multiple markets. (2008). Journal of Banking and Finance. 32, (6), 947-960. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/4573
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