This article appeared in the December 2009 Listed @ ASX newsletter.

Academic study shows positive impact of ADR listing on domestic liquidity

A recent Market Insights paper by academics from the Finance Discipline at the University of Sydney assessed the impact of an American Depository Receipt (ADR) programme on the domestic liquidity of the issuing company and found improvements in liquidity following the first trade of the ADR in the US.

ASX has regular access to independent research capability by leading Australian academics through its relationship with SIRCA and the study was conducted under these access arrangements.

Cross listing advocates argue that cross listing is advantageous for both the listed company and its investors. The study sought to assess whether the benefits to companies often advanced for cross listing, such as diversifying and broadening their investor base and enhancing liquidity, are attainable through assessing the impact of ADR programmes on ASX listed companies. Using trade data of the 122 active Australian issued ADRs, covering the period 1983-2008, the study specifically examined the change in liquidity in the home market after trading in the ADR commences.

The overall results suggested that listing an ADR improves the liquidity and hence the visibility of the company. Specifically the study found that:

  • The reduction of proportional bid-ask spread for active ADR companies was more than double that of comparative control stocks.
  • The increase in turnover for active ADR companies was more than double that of comparative control stocks.

The results suggest that traders (including market makers) in the US market source inventory from the Australian market to provide liquidity in the ADR market. Also the enhanced profile of the company in the US leads to greater market interest in the company resulting in increased trading in the Australian market by US investors.

A particularly interesting finding was that these results tended to be stronger for OTC stocks (over the counter stocks requiring a Level 1 ADR program) than for Exchange traded stocks (stocks traded on exchanges such as NASDAQ and NYSE requiring Level 2 and 3 ADR programs), contrary to the findings of prior studies undertaken in relation to ADRs issued by companies in emerging markets.  A possible explanation is that for companies from a sophisticated market, like Australia, adherence to the additional US regulations and full SEC registration is not as highly regarded in the US as it is for companies from emerging markets.

Also relevant was that liquidity improved in the period around the date the ADR first traded in the US rather than the earlier listing date.

The full research paper can be viewed at

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