The Quarterly Review of Economics and Finance 54 (2014) 417–427

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The Quarterly Review of Economics and Finance

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The impact of ADR activity on stock market liquidity: Evidence from

Latin America
Alma D. Hales a,∗ , André V. Mollick b,1
a
Tennessee Tech University, Department of Economics, Finance and Marketing, 1 William L. Jones Drive, Cookeville, TN 38505, United States
b
University of Texas-Pan American, Department of Economics and Finance, 1201W. University Drive, Edinburg, TX 78539, United States

a r t i c l e i n f o a b s t r a c t

Article history: This paper examines the impact of ADR activity on liquidity of four major Latin American stock markets.
Received 27 March 2013 We construct a measure of ADR activity in U.S. markets for a sample of ADRs trading during January
Received in revised form 11 February 2014 2003–December 2010, which is subsequent to the financial liberalization episodes and currency crises
Accepted 9 March 2014
that shocked emerging markets in the 1990s. The sample lists 164 depositary receipt programs (Levels I, II,
Available online 18 March 2014
and III): 16 from Argentina, 81 from Brazil, 19 from Chile, and 48 from Mexico. Using System GMM methods
to handle the potential effects from stock market development on economic growth and ADR issuance,
Keywords:
we find that higher ADR turnover in U.S. markets has positive effects on domestic market turnover,
ADR activity
Latin America
particularly for issuance of exchange-listed (Levels II and III) ADRs. This positive relationship is not a
Liquidity statistical artifact created by the global financial crisis of 2008.
United States © 2014 The Board of Trustees of the University of Illinois. Published by Elsevier B.V. All rights reserved.

1. Introduction system, 56% of U.S. holdings of Latin American equity, in 2007,

This paper examines the impact of American Depositary Receipt
(ADR) activity on the liquidity of four Latin American stock
markets (Argentina, Brazil, Chile and Mexico) during the period
2003–2010. ADRs are negotiable instruments issued in the U.S.,
in dollars, but they represent ownership of foreign equities. ADRs
offer U.S. investors familiar trade, clearance and settlement pro-
cedures in addition to competitive foreign-exchange rates on
currency conversions for dividends and other cash distributions.
More importantly, an ADR investment offers U.S. investors inter-
national diversification benefits as pointed out by Officer and
Hoffmeister (1987), Wahab and Khandwala (1993), Choi and Kim
(2000), Alaganar and Bhar (2001), and Arnold, Nail, and Nixon
(2004).
These benefits help explain the consistent rise in U.S. invest-
ment in ADRs from Latin America since 2003, except for a major
contraction associated with the global financial crisis of 2008. The
role of ADRs as convenient vehicles for U.S. investors seeking to
hold foreign equity is particularly important in Latin America.
For instance, according to the U.S. Treasury International Capital
∗ Corresponding author. Tel.: +1 931 372 3717; fax: +1 931 372 6249.
E-mail addresses: ahales@tntech.edu, alma@hales.us (A.D. Hales),
amollick@utpa.edu (A.V. Mollick).
1
Tel.: +1 956 665 2494; fax: +1 956 665 5020.
were in the form of ADRs. This percentage is significantly higher
than any other region in the world—Europe and Africa (20%) and
Asia (14%). In addition, as reviewed by Karolyi (1998, 2006), ADRs
also benefit their respective issuers because they offer an expanded
shareholder base, higher liquidity, higher global visibility, and a
lower cost of capital. Despite the documented benefits of flourish-
ing U.S. investment in ADRs from Latin America and the relative
macroeconomic stability in Latin American economies, De la Torre
and Schmukler (2007) find that Latin American stock markets are
smaller and less active than similar developing economies. The dis-
parity between still flourishing ADR activity and dampened stock
market conditions in Latin America generates the following ques-
tion: Has growth in ADR activity inhibited the development of Latin
American stock markets?
The empirical evidence for earlier periods is mixed. Fernandes
(2009) finds that despite the negative effects of ADR issuance on
the liquidity of domestic stocks, the net impact of ADR issuance
is positive, particularly for firms whose returns are highly corre-
lated to those of the cross-listing firm. Moel (2001) and Levine
and Schmukler (2007) find, however, that ADR growth is detri-
mental to the development of the domestic stock market, while
Karolyi (2004) suggests that ADR activity does not hurt or bene-
fit stock market development: it is an outcome of poor domestic
conditions. These mixed results reflect the dual outcomes associ-
ated with ADR growth. On the one hand, ADR activity increases the
liquidity, visibility and shareholder base of issuing firms, with the

http://dx.doi.org/10.1016/j.qref.2014.03.005
1062-9769/© 2014 The Board of Trustees of the University of Illinois. Published by Elsevier B.V. All rights reserved.
418 A.D. Hales, A.V. Mollick / The Quarterly Review of Economics and Finance 54 (2014) 417–427
potential to boost interest and confidence in the remaining domes-
tic market stocks, thus spurring development. On the other hand,
these potential benefits must be balanced against the costs of cross-
listing, particularly the migration of trade from the domestic to the
foreign market. Trade migration to the foreign market leads to a
deterioration of local market operations causing more domestic
firms to seek opportunities in foreign markets, further inhibiting
development at home, other things the same.
This paper contributes to the existing literature in the following
ways. First, the analysis measures ADR activity with data from the
ADR trading in the United States. Most existing literature meas-
ures ADR activity using data from the domestic market, but this
approach is limited. Specifically, the traditional approach can over-
state the importance of the ADR segment if the ADRs are dormant
in U.S. markets (typically ADRs trading over- the- counter (OTC))
and understate the importance of the ADR segment for those ADRs
for which the majority of trading has shifted to the U.S. (exchange-
listed issues). By measuring U.S. trading activity, we update the
quantification of ADR liquidity in four stock markets: Argentina,
Brazil, Chile and Mexico. Second, this study distinguishes between
types of ADRs (exchange listed issues versus OTC issues) with
an additional distinction for exchange listed issues into Level II
(straight cross-listings) and Level III (capital raising issues). Since
Level III ADRs are typically issued by large, high-growth firms,
as documented by Boubakri, Cosset, and Samet (2010), they can
have a different impact on stock market development than ADRs
aimed primarily at broadening the shareholder base. Third, this
study incorporates dynamic panel data models to examine the
relationship between ADR activity and stock market liquidity.
Claessens, Klingbiel, and Schmukler (2006), for example, suggest
that countries with better fundamentals allow for more interna-
tionalization. ADR activity may simultaneously affect and be an
outcome of stock market development, which can be better han-
dled by dynamic panel data models than static panels.
Using system generalized method of moments (SGMM) for firm-
level data of 164 major Latin American ADRs between January 2003
and December 2010, the results indicate a positive impact on stock
market turnover (measured by the value of shares traded scaled
by market capitalization, as explained below) that arises as the
turnover of the ADR segment trading in the United States increases.
This finding suggests that failing to account for the ADR segment’s
activity in the foreign market provides an incomplete picture of
the role of ADR activity in domestic stock market development.
Furthermore, we find that the positive effects of ADR activity on
domestic market turnover arise primarily from the issuance of
exchange-listed ADRs. Our results show a positive and statisti-
cally significant relationship between ADR turnover and market
turnover for ADRs of Levels II and III but not for Level I ADRs.
Finally, our results show that turbulence in financial markets dur-
ing the peak of the global financial crisis impacted the relationship
between ADR activity and market liquidity. However, the posi-
tive relationship between ADR turnover in U.S. markets and the
turnover of Latin American markets is not a statistical artifact
driven by the effects of the crisis.
The remainder of this paper is organized as follows: Section
2 reviews the related literature. Section 3 describes the sample
and measures employed. Section 4 details the methodology while
Section 5 presents the empirical results. Section 6 concludes.
2. Related literature
Because ADR issues increase the international exposure of
domestic firms, they can potentially impact the stock market.
As discussed by Karolyi (2006), ADR activity can influence stock
market development in one of two ways. First, if cross-listings act
as market liberalization events, firms that cross-list attract global
attention and bring increased visibility, credibility and enhanced
liquidity to other local market stocks. Consequently, local financial
intermediaries feel competitive pressure from global markets and
begin improving the efficiency of trading systems, through greater
transparency and more stringent disclosure requirements. Ulti-
mately, this leads to integration with global markets, resulting in
higher economic development and growth. Alternatively, if cross-
listings divert trading away from the local market they negatively
impact the market’s quality. In this case, the benefits of cross-listing
accrue only to the large, cross-listing firms which enjoy greater visi-
bility and enhanced liquidity but their strictly domestic peers suffer
as the local stock market deteriorates.
The existing evidence offers mixed results on the effects of
international cross-listing on local stock market development.
Fernandes (2009), for example, documents that despite the neg-
ative effects of trade migration, the net impact of ADR issuance,
particularly (but not limited to) a country’s first ADR issue, is
positive with spillover effects for other domestic firms. This sug-
gests that ADR issuance acts as a firm-level liberalization effect:
the positive spillover effects arise from improved risk sharing
and accrue primarily to domestic firms whose returns are highly
correlated with the cross-listing firm. However, Moel (2001)
finds mixed results with respect to the impact of ADR issues
on stock market development using annual data for a sample
of 28 countries during the period 1988–1997. The results for
three aspects of stock market development (liquidity, growth,
and openness) suggest that ADRs negatively affect liquidity and
growth but they increase disclosure and openness. The negative
impact of ADR growth is higher for Africa and Latin America.
Karolyi (2004) extends this analysis using monthly, firm-level
data for twelve emerging markets and considers four measures
of stock market activity: market capitalization, number of listed
companies, turnover, and capital flows. His results suggest that
ADR growth increases cross-border capital flows and stock mar-
ket development, but only large, cross-listing firms reap the
benefits. The remainder of the market (firms that do not issue
ADRs) deteriorates. Levine and Schmukler (2007) adopt a dif-
ferent approach by examining the impact of internationalization
(including ADR issues, cross-listing on a foreign exchange, and issu-
ing capital abroad) on the domestic stock market activity of 55
countries. Their findings indicate that internationalization is neg-
atively related to the turnover of domestic firms due to several
factors, including trade migration to international financial mar-
kets.
The empirical evidence on the impact of ADR activity on domes-
tic stock market development is inconclusive. One important
limitation of the approaches above is that internationalization is
treated as exogenous to stock market development. Yet exogene-
ity is highly unlikely since internationalization and stock market
development are not independent processes. While the level of
internationalization may impact stock market development, it is
also a consequence of different levels of development. For instance,
Claessens et al. (2006) use annual data for 78 countries during the
period 1984–2000 and find that countries with better economic
fundamentals have greater stock market development and more
internationalization.
3. The sample
We begin the sample construction with the listing of ADR
programs (only Levels I, II, and III, active and terminated) from
Argentina, Brazil, Chile and Mexico available from DataStream
 A.D. Hales, A.V. Mollick / The Quarterly Review of Economics and Finance 54 (2014) 417–427 419

Table 1
Descriptive statistics: stock market development in Latin America and the U.S.

Capitalization Value of shares traded

$U.S. $U.S. % Of GDP, value % Of capitalization,

Billions Billions traded turnover

Argentina 2004 40.59 4.84 3.16 11.92

2006 51.24 5.28 2.46 10.30
2008 39.85 6.64 2.02 16.67
2010 63.91 3.81 1.03 5.95

Brazil 2004 330.35 104.56 15.75 31.65

2006 710.25 275.93 25.33 38.85
2008 591.97 750.25 45.38 126.74
2010 1545.57 868.81 41.58 56.21

Chile 2004 116.92 11.96 12.70 10.23

2006 174.42 27.97 19.18 16.03
2008 131.81 35.64 20.67 27.04
2010 341.80 53.82 26.38 15.75

Mexico 2004 171.40 45.07 5.93 26.30

2006 348.35 95.65 10.05 27.46
2008 234.05 112.80 10.21 48.19
2010 454.35 119.12 11.50 26.22

United States 2004 16,323.73 19,354.90 164 118.57

2006 19,425.85 21,509.98 250 110.73
2008 11,737.65 33,267.64 450 283.43
2010 17,138.98 64,014.24 211 373.50

Notes: Annual stock market capitalization and value of shares traded (in current $U.S. billions) for Latin American markets are calculated from monthly data extending from
January 2003 to December 2010. Values are computed at year end. For the Latin American markets, stock market data are from the World Federation of Exchanges and GDP
data are from the International Monetary Fund’s Principal Global Indicators and International Financial Statistics databases. Annual data for the United States are from the
World Bank.

International at the end of 2010.2 Level I ADRs are traded in over-
the-counter (OTC) exchanges while Levels II and III ADRs are traded
on the New York Stock Exchange (NYSE) or NASDAQ. Further-
more, Levels II and III ADRs differ significantly in purpose. The
former are issued with the intent to meet U.S. investor demand
for foreign equity while the latter raise capital in the U.S. market.
We include only ADRs trading during the period January 2003 to
December 2010 and whose activity is verifiable through the Bank of
New York’s, Citibank’s, JP Morgan Chase’s and/or Deutsche Bank’s
depositary receipt databases.3 ADRs with no verifiable underlying
stock, and stocks with missing or distorted price and/or volume
data are excluded. In cases where two (or more) ADRs correspond
to the same underlying stock, the underlying stock is included
only once. These filters result in 164 ADRs included in the sam-
ple: 16 from Argentina; 81 from Brazil; 19 from Chile; and 48 from
Mexico.
2
While London and Frankfurt have become important outlets for cross-listings
more recently, we utilize only U.S. trading data in the construction of the ADR activ-
ity variable due to the relevance of New York for Latin American countries, and for
equity markets in particular. For simplicity the text references only ADRs but to
obtain a complete picture of the impact of depositary receipt activity on the liquid-
ity of the domestic stock market, Global Depositary Receipts (GDRs) with trading
activity in the United States are also included. These GDRs are classified as Level III
ADRs when they raise new capital and as Level II ADRs when they are straight cross-
listings. Other types of ADRs include: private placements under Rule144A (in which
shares are placed amongst qualified institutional buyers (QIBs)) and Regulation S
issues in which capital is raised outside the United States. Our focus is on ADRs of
Levels I, II, and III because trading data on Rule 144A and Regulation S issues are
limited.
3
Where DataStream International data and depositary receipt databases differ,
the New York Stock Exchange, Over-the-Counter Bulletin Board (OTCBB) and the
Electronic Data Gathering, Analysis and Retrieval (EDGAR) system of the SEC verify
the relevant data.
3.1. Measuring stock market development
Our analysis focuses on the liquidity of Latin American stock
markets. To capture the depth of the market, we use Value Traded
which is the total value of shares traded in the stock market each
month, scaled by GDP. This measure captures trading activity in the
market given the size of the country’s economy. A potential prob-
lem with this variable is that it ignores the size of the stock market.
A small but active market is better developed than a large, inactive
market; yet both will exhibit low Value Traded. To account for
this shortcoming, we include a second liquidity measure, Market
Turnover, which is the total monthly value of shares traded in the
stock market scaled by the market capitalization. This yields infor-
mation about the liquidity of the market given its size.
Table 1 shows an overview of stock market conditions in Latin
America and the United States during 2003–2010. The values are
calculated on an annual frequency to highlight general patterns of
development. For the Latin American countries, we obtain stock
market values from the World Federation of Exchanges and GDP
data from the International Monetary Fund’s Principal Global Indi-
cators and International Financial Statistics databases. We obtain
all U.S. data from the World Bank. Table 1 suggests that Latin Amer-
ican stock markets are underdeveloped with respect to both size
and liquidity. Both the capitalization and value traded of the four
Latin American markets combined fall significantly below values
for the U.S. market.
Table 1 also displays average statistics for Value Traded. The
depth of U.S. markets is still evident as the value of shares traded
exceeds GDP across all years presented. This pattern does not hold
for Latin American markets, but average Value Traded indicates that
the most liquid stock market in Latin America is Brazil followed by
Chile, Mexico and Argentina. To evaluate the value of shares traded
relative to the size of the stock market, we employ Market Turnover,
which is shown in the last column of Table 1. This variable suggests
a slightly different pattern than Value Traded regarding the liquidity
420 A.D. Hales, A.V. Mollick / The Quarterly Review of Economics and Finance 54 (2014) 417–427

Table 2
Descriptive statistics: ADR activity measures for Latin America.

Capitalization Value traded domestically Value traded in the U.S.

$U.S. Billions % Of market $U.S. Billions % Of market $U.S. Billions % Of capitalization

Argentina 2004 24.391 67.0 0.143 35.8 0.196 0.79

2006 31.632 68.2 0.117 26.2 0.339 1.07
2008 29.853 58.9 0.125 22.5 0.463 1.51
2010 27.273 56.6 0.125 37.4 0.408 1.44

Brazil 2004 127.708 52.6 5.391 62.3 5.279 4.20

2006 319.217 52.7 13.262 57.9 19.490 6.14
2008 598.540 52.4 38.202 61.6 70.505 12.33
2010 842.915 63.3 46.530 64.2 61.520 7.38

Chile 2004 28.458 30.6 0.437 44.0 0.350 1.22

2006 44.500 29.9 0.895 38.9 0.555 1.23
2008 56.719 30.5 1.297 45.5 1.695 3.0
2010 75.218 27.4 1.505 35.7 1.559 2.1

Mexico 2004 94.949 65.3 2.495 67.4 3.789 4.02

2006 193.336 70.2 4.727 59.6 8.996 4.73
2008 202.727 57.0 6.461 69.1 15.916 7.92
2010 227.120 59.5 6.338 64.0 9.342 4.21

Notes: Average monthly data on ADR activity in current U.S. dollars for the period 2003–2010. Includes all Level I, II, and III depositary receipt programs trading between 2003
and 2010, available from DataStream International and verifiable via the Bank of New York, Citibank, or Deutsche Bank. Monthly ADR capitalization is obtained by adding
the market capitalization of all the ADR issues identified on a daily basis and taking the monthly average of these sums. The ADR value traded is obtained by first adding
the daily value traded of each ADR identified in the sample (number of shares traded multiplied by the closing price (converted to U.S. dollars at the corresponding closing
spot rate)) to obtain the daily value traded of the ADR segment, then the value traded of the ADR-segment is added across all trading days of each month. Closing prices,
trading volume, and exchange rate data are from DataStream International. Data on total market capitalization and value of shares traded are from the World Federation of
Exchanges.

across Latin America. Brazil continues to exhibit the highest lev-
els of liquidity, but now it is followed by Mexico, then Chile and
finally Argentina. The difference indicates a large number of listed
but inactive stocks in the Chilean market. The statistics also show
high values of Market Turnover across all countries in 2008, con-
sistent with the global financial crisis. This supports the findings of
Levy Yeyati, Schmukler, and Van Horen (2008), who document that
emerging markets exhibit large price downturns and higher trad-
ing activity during crises. Overall, the summary statistics suggest
that liquidity was on the rise in Brazil, Chile and Mexico before
the shocks associated with the global financial crisis, but condi-
tions after the crisis surpassed their pre-crisis levels only in Brazil.
However, for Argentina liquidity conditions appear to deteriorate
consistently through the sample period.
3.2. Measuring ADR activity
Existing literature, such as Karolyi (2004), Moel (2001), and
Claessens et al. (2006) has measured ADR activity by examining a
stock market’s share of ADR listings, share of market capitalization
and share of value traded domestically captured by ADR issuing
firms. However, the benefits of ADR issuance do not arise by the
mere issuance of the security. An ADR issue that is not traded by
U.S. investors may as well be non-existent.4 In this study, we there-
fore focus on measuring ADR activity using information on the ADR
segment’s liquidity in U.S. markets. For comparison, in Table 2 we
provide descriptive statistics for liquidity of the ADR segment at
home and abroad, which we discuss below in conjunction with
Fig. 1.
To examine the liquidity of the ADR segment, we begin by
obtaining the monthly value traded in the home and U.S. markets.
The daily value traded of each ADR in the sample is the product
of: the number of shares traded and the closing price each day
(converted to U.S. dollars at the corresponding closing spot rate for
shares trading in the home market). To obtain the monthly value,
the daily value traded is aggregated across firms and across all trad-
ing days of each month. DataStream International provides all data
necessary for calculating value traded of the ADR segment.
Fig. 1 displays the trends in the monthly value traded of the
stock market and the ADR segment. The figure shows that the
ADR segment composes a significant amount of value traded in the
domestic market. These patterns are confirmed in Table 2. In Brazil
and Mexico domestic value traded is dominated by ADR-related
stocks (by Column (4), more than 50% in all years). We find slightly
lower values in the remaining countries: the ADR segment con-
stitutes approximately 30% of the stock market in Argentina and
40% in Chile.5 More importantly, Fig. 1 highlights the difference in
activity between the ADR trading in the U.S. and that of its cor-
responding stock trading in the home market. In Argentina, Brazil,
and Mexico, the dollar trading volume of ADRs exceeded that of the
underlying stocks through most of the sample period. The value of
Chilean ADRs traded in the U.S. trailed that of the underlying stocks
trading in the Chilean market during the early part of the sample
period but surpassed it by 2008. Furthermore, Fig. 1 suggests that
in several cases the value of ADRs traded in the U.S. exceeded the
value of shares traded in the entire domestic market especially in

4
Consider the following possibility: First, an actively traded firm in Mexico taps
the ADR market through a Level I ADR. The ADR trades for a few days upon issuance
then becomes dormant in the U.S. market. The underlying stock remains actively
traded. Measuring liquidity of the ADR segment using data only on the underly-
ing stock would overstate the importance of the ADR issue. Alternatively, certain
ADR issues from the four Latin American countries considered here, particularly
exchange-listed programs, exhibit higher dollar trading volumes in the U.S. market
than in the respective home market. For these firms, measuring liquidity of the ADR
segment using only data on the underlying stock understates the importance of the
ADR issue.
5
Overall, these summary statistics coincide with those reported for the year 2000
in Karolyi (2004). Regarding ADR Capitalization (% market), the means for this sam-
ple follow the same pattern but are smaller in magnitude. For ADR Value Traded
Domestically (% market), the patterns are also similar except in Argentina. Because
the sample in Karolyi (2004) stops in 2000 and the sample in this study begins in
2003, the difference likely reflects substantial changes occurring in the stock market
as a result of the Argentinian crisis of 2002.
 A.D. Hales, A.V. Mollick / The Quarterly Review of Economics and Finance 54 (2014) 417–427 421

Fig. 1. Value traded of cross-listed companies in Latin America and the United States ($U.S. billions). Notes: Average monthly data in current U.S. dollars for the period
2003–2010. Each graph displays the value of stocks traded in the stock market (Market), the value traded of the ADR segment in the United States (ADR (U.S.)) and the value
traded market of the ADR segment’s underlying stocks in the domestic market (ADR (Home)). Data on the total value of stocks traded in the market are from the World
Federation of Exchanges. Value traded for ADRs and their underlying stocks are based on author’s calculations using price and volume data from DataStream International.
The ADR value traded in the domestic market is converted to U.S. dollars using the WM/Reuters closing spot rates. Only Levels I, II, and III ADRs are included.

Mexico where the relationship was observed through most of the
sample period.
Given the importance of trading in the U.S., we construct a vari-
able that captures the liquidity of the ADR segment in the U.S.
market. In Table 2, we also report data on the capitalization of the
ADR segment. The values suggest that the largest ADR segment
is from Brazil followed by Mexico, Chile and Argentina. Consis-
tent with the value of shares traded, the ADR segment comprises a
significant portion of the total market capitalization—over 50% in
Argentina, Brazil, and Mexico and approximately 30% in Chile. We
measure the liquidity of the ADR segment relative to its size so we
construct the variable ADR Turnover which measures the value of
ADR shares traded in the U.S. scaled by the market capitalization
of the ADR segment.6
Table 2 suggests that the patterns for liquidity of the ADR seg-
ment in the U.S. resemble the liquidity patterns of the domestic
markets. On average, based on ADR Turnover, the most liquid ADR
segment was that of Brazil followed by Mexico, Chile and Argentina.
In addition, across each Latin American country, ADR Turnover was
6
Constructing the monthly capitalization of the ADR segment requires adding the
capitalization of all the identified ADR issues on a daily basis. Then the monthly aver-
age of these sums yields a monthly measure of ADR-related capitalization. Although
ADRs represent claims to the same cash flows as their underlying stocks, because the
two trade in different markets, their prices, even after adjusting for foreign currency
conversions, are not always equal, as shown by Grossman et al. (2007), Chan, Hong,
and Subrahmanyam (2008), Eichler, Karmann, and Maltritz (2009), and Gagnon and
Karolyi (2010). Graphical inspection suggests that the capitalization of ADR-issuing
firms does not differ substantially when measured using U.S. prices versus home
market prices. To be consistent with existing literature, we use home share prices
for calculating the capitalization of the ADR segment in the empirical analysis.
highest during 2008 which may reflect sell-offs during the 2008
financial crisis. However, unlike the patterns for domestic market
liquidity, ADR liquidity appears to be on the rise throughout the
sample period in all countries except Mexico where ADR Turnover
is lower in 2010 than it was in 2006.
4. Methodology
An important characteristic of the stock market and ADR seg-
ment activity variables is that their construction includes stock
prices. Since stock prices generally follow a random walk, there
is a possibility that the constructed series have unit roots. We
conduct the Im, Pesaran and Shin (2003) panel unit root tests on
value traded, turnover, and ADR turnover. The tests reject the null
hypothesis that all panels contain unit roots for each of the series.
We then conduct the Hadri (2000) LM tests of stationarity which
test the opposite null hypothesis, namely that all panels included
are stationary. These tests also reject the null that all panels are
stationary. Therefore, these results suggest that some, but not all,
of our panels contain a unit root. We also apply Augmented Dickey
Fuller (ADF) tests on individual series. Consistent with the panel
results, individual ADF tests are unable to reject the null hypothe-
sis that the series have a unit root for value traded in all countries
except Argentina. However, the ADF tests reject the nonstationa-
rity of Market Turnover in all countries except Chile. The tests also
reject the null of a unit root in ADR Turnover in all countries except
Mexico.7
7
Panel and individual unit root tests are available from the authors upon request.
422 A.D. Hales, A.V. Mollick / The Quarterly Review of Economics and Finance 54 (2014) 417–427
To account for the persistence of the market liquidity variables
the econometric model includes lagged stock-market liquidity
as an explanatory variable. Since we examine the relationship
between ADR activity and stock market liquidity and its variation
across countries, our empirical strategy attempts to maximize the
use of both the time and cross-country dimensions of the available
data. The dynamic equation takes the form:

yi,t = ˇ0 + ıyi,t−1 + ˇ1 xi,t + zi,t + ui,t , (1)
where yi,t represents Value Traded or Market Turnover, xi,t repre-
sents ADR Turnover, zi,t is a vector of control variables, and ui,t is an
error term that contains country and time specific fixed effects as
follows: ui,t = i + εt + i,t , where the i,t are assumed to be inde-
pendent and identically distributed with mean zero and variance
2 .
The impact of international cross-listings on domestic market
activity is ambiguous. Cross-listings can act as market liberaliza-
tion events such that cross-listing firms attract global attention
and bring increased visibility, credibility and enhanced liquidity
to other local market stocks. Hargis (2000) predicts that after
cross-listing the market capitalization and liquidity of the domestic
market should increase.8 This coincides with the overview of the
evolution of foreign participation (including ADR issues) and the
corresponding stock market development of Latin American stock
markets provided by Hargis (1998). In addition, more recent evi-
dence in Halling, Pagano, Randl, and Zechner (2008) indicates that
domestic turnover increases in the year of cross-listing and remains
higher for cross-listing firms from developed countries. Therefore,
the domestic market appears to benefit from the increased com-
petition between foreign and domestic market makers and the
additional information generated in the foreign market. Ultimately,
this suggests that increases in ADR Turnover lead to higher liquidity
in the home market or equivalently: from Eq. (1), ˇ1 > 0.
However, Hargis and Ramanlal (1998) suggest that the ben-
efits of internationalization on domestic market development
depend on a complex interaction of variables including informa-
tion transparency and the cross-listing firm’s ability to expand its
shareholder base. Consistent with this view, Domowitz, Glen, and
Madhavan (1998) use Mexican data to document that the impact of
cross-listing on the liquidity and volume traded in the home mar-
ket varies based on the foreign ownership restrictions of the share
class. Internationalization can even be detrimental to the home
market; if order flow migrates to the foreign market, liquidity and
trading volume decrease at home. In the case of trade migration,
the benefits of cross-listing accrue only to the large, cross-listing
firms which enjoy greater visibility and enhanced liquidity but their
strictly domestic peers suffer as the local stock market deteriorates.
The empirical findings of Moel (2001) and Karolyi (2004) support
this notion as they document that increases in ADR activity nega-
tively affect the size and liquidity of non-ADR stocks. Furthermore,
Levine and Schmukler (2007) document an inverse relationship
between internationalization and the turnover of strictly domes-
tic firms. The authors identify two transmission channels for the
adverse effects of trade migration: spillover effects and trade diver-
sion (a compositional shift in the domestic market as investors
switch away from purely domestic firms into international firms
increasing the relative importance of international firms as a share
8
Hargis (2000) also predicts that after cross-listing, the price and liquidity of a
stock should increase. The empirical evidence supports this prediction; firms that
issue ADRs experience the benefits of integration: higher trading volume, higher
liquidity and a lower cost of capital: i.e., Foerster and Karolyi (1998), Karolyi (2004),
and Miller (1999).
of the entire market).9 If the trade migration channel is opera-
tive, then the impact of ADR Turnover on domestic market liquidity
should be negative: from (1), ˇ1 < 0.
Eq. (1) also includes a set of control variables in the vector zi,t
such as economic growth, inflation, trade openness, the size of each
country’s stock market and the existence of any capital controls.
While existing evidence in King and Levine (1993a, 1993b) and
Levine and Zervos (1998) suggests that financial development leads
to positive economic growth, there is the existence of bidirectional
causality between financial development and growth. Financial
development influences economic growth, but economic growth
will affect a country’s financial development. As the economy
grows, the financial sector will evolve to respond to the chang-
ing demands of the real sector. Therefore, economic growth should
be positively related to stock market development. The monthly
growth rate of each country’s Industrial Production Index (IP) con-
trols for changes in economic growth. While GDP per capita is the
typical control for macroeconomic development, since GDP data
are only available on a quarterly basis, we employ the Industrial
Production Index which is reported every month.
In addition, the empirical approach controls for the impact of
inflation because financial contracting is difficult in environments
of high inflation since future real values are unpredictable. Even
in low or moderate inflationary environments, inflation is prob-
lematic because it drives down the real rate of return on assets.
This increases credit market frictions that result in credit rationing
which can potentially distort financial market performance as
shown by Boyd, Levine, and Smith (2001). Therefore, inflation, as
measured by changes in each country’s Consumer Price Index (CPI)
should be negatively associated with stock market development.
Our analysis also controls for the potential impact of trade openness
on stock market development. One strand in the literature argues
that trade openness and financial openness are simultaneously
necessary to deliver financial development: Rajan and Zingales
(2003) and Baltagi, Demetriades, and Law (2009). Others argue that
trade openness is a prerequisite for financial liberalization, such as
Chinn and Ito (2006). Either way, trade openness should be posi-
tively associated with stock market development. The natural log of
the monthly sum of exports and imports (scaled by GDP) captures
trade openness.
We also control for characteristics of the four Latin American
stock markets, namely size and regulatory restrictions that may
potentially affect their liquidity.10 We measure market size using
the log of each market’s capitalization and expect larger markets
to be more liquid. We also consider restrictions on capital mar-
ket transactions because they can impact stock market activity
as documented by Eichler (2012), who finds that capital controls
help explain mispricing on a sample of 536 cross-listed stocks. We
follow the approach in Eichler (2012) and use the dataset provided
by Schindler (2009) which contains information on various capital
controls including restrictions on (a) purchases or sales of equity
domestically by nonresidents of each country and (b) purchases or
9
First, the authors document a negative relationship between the share of inter-
national firms and the domestic turnover of international firms and a positive
relationship between the domestic turnover of international firms and the domes-
tic turnover of domestic firms. Therefore, as internationalization increases, trade
migrates away from the domestic market to major international financial centers.
In turn, these negative effects of internationalization on the domestic turnover of
international firms spill over and decrease the turnover of the strictly domestic
firms. Second, they find that an individual firm’s share of the total stock market’s
turnover increases when the firm becomes international: the trade diversion effect.
10
We thank an anonymous referee for this suggestion.
 A.D. Hales, A.V. Mollick / The Quarterly Review of Economics and Finance 54 (2014) 417–427 423

Table 3
Fixed effects and SGMM estimates. Impact of ADR turnover on stock market liquidity in Latin America.

Panel A: fixed effects Panel B: SGMM

Value traded Turnover Value traded Turnover

L.1 0.336*** 0.132 0.714*** 0.260***

(0.041) (0.076) (0.105) (0.048)
ADR Turnover 0.185** 0.150*** 0.114* 0.166***
(0.050) (0.012) (0.064) (0.007)
IP growth 0.049 0.021 0.035 0.017
(0.089) (0.023) (0.088) (0.021)
Inflation −0.194 −0.111 −0.135 −0.076*
(0.278) (0.050) (0.111) (0.043)
Openness −0.001 0.003 −0.002 −0.007***
(0.011) (0.003) (0.004) (0.001)
Market Capitalization 0.025* 0.002 0.009* 0.004***
(0.010) (0.001) (0.005) (0.000)
Nonresident Purchases −0.006* −0.003*** −0.001 −0.003***
(0.002) (0.000) (0.002) (0.000)
Resident Purchases −0.002 0.001 −0.000 0.001*
(0.002) (0.001) (0.001) (0.001)
Resident Sales −0.001 −0.000 −0.006*** 0.000
(0.003) (0.001) (0.002) (0.001)
Constant −0.628* −0.036 −0.234** −0.112***
(0.241) (0.018) (0.115) (0.008)
R2 78.04 64.23
AB (2) 0.50 0.61
AB (2) p-value (0.620) (0.541)
Sargan test 687.69 853.70***
Sargan test p-value (0.923) (0.003)

Notes: Latin American countries included are Argentina, Brazil, Chile and Mexico. Monthly data from January 2003 to December 2010. Panel A: Fixed effects regression of
Value Traded-value of shares traded scaled by GDP and Turnover-value of shares traded scaled by market capitalization on their respective lagged values L.1–L.6 (due to
space constraints, lags 2–5 are not shown, but are available upon request), ADR Turnover-value traded of ADR shares in the U.S. scaled by ADR capitalization), and control
variables-IP growth which is the monthly change in each country’s industrial production index; Inflation based on the Consumer Price Index; Openness measured by the
log of the sum of exports and imports scaled by GDP; and capital control variables that take on the value of 1 if the country imposes restrictions on domestic purchase by
nonresidents, purchases abroad by residents, and sales abroad by residents, respectively and zero otherwise. Robust standard errors are shown in parentheses. Panel B:
System GMM regression (with ADR Turnover and IP growth entered as endogenous variables and the number of instruments constrained by setting the maximum lags to 2)
of the variables described above.
*
Statistical significance at the 10% level respectively.
**
Statistical significance at the 5% level respectively.
***
Statistical significance at the 1% level respectively.

sales of equity abroad by residents in each country.11 This approach
requires creating binary variables that take on the value of 1 in the
presence of restrictions and zero otherwise. In our estimations, we
exclude controls on domestic sales by nonresidents because there
was little variation for this measure in our sample.
An additional component involves assessing possible impacts of
the global financial crisis on the relationship between ADR activity
and stock market development. Levy Yeyati et al. (2008) document
that in emerging markets, crises are associated with higher trad-
ing activity and falling market capitalization. Therefore, one must
ensure that changes in stock market conditions are not erroneously
attributed to changes in ADR activity when they really reflect effects
from the crisis. Consequently, empirical estimates are conducted
across two subperiods: pre-crisis and crisis/post-crisis. We employ
the following two dates to identify the beginning of the crisis:
September 2008 because, as documented by Bartram and Bodnar
(2009), this date reflects the collapse of financial markets after the
bankruptcy of Lehman and bailout of AIG; and May 2008 because
Dooley and Hutchison (2009) document evidence that conditions
in Latin American markets began deteriorating significantly during
this month.
We also consider whether the impact of ADR activity on stock
market liquidity varies based on the type of ADR-Level I, II, or
III. Level I ADRs allow foreign issuers to reap the benefits of a
11
Schindler (2009) provides data from 1995 to 2005. Data for later dates is col-
lected from various issues of the International Monetary Fund’s Annual Report on
Exchange Arrangements and Exchange Restrictions.
publicly traded security without the costs of changing their repor-
ting standards because they trade in OTC exchanges and do not
require registration with the Securities and Exchange Commission
(SEC) or adherence to U.S. Generally Accepted Accounting Princi-
ples (GAAP). Unlike Level I, issuers of Levels II and III ADRs must
meet SEC disclosure requirements and conform to U.S. GAAP which
enhances the legal protection of the firm’s investors and increases
the value of the firm (Coffee, 2002; Doidge, Karolyi, & Stulz 2003).
While Levels II and III ADR issuance is costly, these ADRs create
higher visibility for the issuers and are more liquid than Level I
ADRs. In addition, because Level III ADRs raise capital in U.S. mar-
kets, these issues receive more attention from the financial media
and greater analyst coverage further increasing the visibility of the
issuers. The greater visibility, particularly of Level III ADRs, suggests
that they are more likely to affect the domestic stock market.
Estimating (1) can be problematic because lagged stock mar-
ket development yi,t−1 depends on ui,t−1 and ui,t−1 is a function of
the country-specific effect, i . Since there is correlation between
the regressors and the error term, Ordinary Least Squares (OLS)
estimators are inconsistent. In addition, the fundamental factors
that drive stock market development also drive internationaliza-
tion as in Claessens et al. (2006). Internationalization can affect
and be affected by different levels of development making the
ADR activity variables endogenously determined. Furthermore, (1)
utilizes the growth rate of the industrial production index to mea-
sure economic activity. As discussed previously, there is likely
to be bidirectional causality between financial development and
economic growth. Consequently, changes in stock market activ-
ity should elicit changes in industrial production (the so-called
424 A.D. Hales, A.V. Mollick / The Quarterly Review of Economics and Finance 54 (2014) 417–427

Table 4
SGMM estimates. Impact of ADR turnover on stock market liquidity in Latin America, pre- and post-global financial crisis.

Crisis start: September 2008 Crisis start: May 2008

Pre-Crisis Post-Crisis Pre-Crisis Post-Crisis

Value traded Turnover Value traded Turnover Value traded Turnover Value traded Turnover
*** *** * *** *** *
L.1 0.726 0.295 0.221 0.060 0.732 0.297 0.270 0.137*
(0.107) (0.055) (0.121) (0.096) (0.106) (0.049) (0.148) (0.081)
ADR turnover 0.135 0.149*** 0.355*** 0.224*** 0.181 0.172*** 0.250*** 0.213***
(0.126) (0.008) (0.066) (0.021) (0.139) (0.007) (0.060) (0.036)
IP growth 0.167* 0.054* −0.031 −0.002 0.181* 0.054* −0.011 −0.004
(0.095) (0.029) (0.030) (0.006) (0.096) (0.031) (0.054) (0.007)
Inflation −0.035 −0.037 −0.315** −0.175*** −0.067 −0.027 −0.222** −0.158**
(0.178) (0.039) (0.138) (0.066) (0.152) (0.048) (0.111) (0.062)
Openness −0.001 −0.007*** −0.015*** −0.010*** 0.000 −0.006*** −0.016*** −0.009***
(0.006) (0.001) (0.002) (0.001) (0.006) (0.001) (0.003) (0.001)
Market capitalization 0.006 0.003*** 0.038*** 0.007*** 0.006 0.003*** 0.037*** 0.007***
(0.005) (0.001) (0.008) (0.001) (0.004) (0.001) (0.009) (0.001)
Nonresident purchases −0.002 −0.002** 0.018*** −0.001 −0.002 −0.002*** 0.002 0.002**
(0.003) (0.001) (0.002) (0.001) (0.002) (0.001) (0.002) (0.001)
Resident Purchases −0.004 0.000 0.001 0.002** −0.004 0.001 −0.002 0.002
(0.003) (0.001) (0.003) (0.001) (0.003) (0.001) (0.003) (0.002)
Resident sales −0.001 0.000 −0.060*** −0.000 −0.000 −0.000 −0.056*** −0.001
(0.001) (0.001) (0.011) (0.001) (0.002) (0.001) (0.013) (0.001)
Constant −0.157 −0.088*** −0.994*** −0.196*** −0.142 −0.086*** −0.945*** −0.179***
(0.104) (0.029) (0.195) (0.039) (0.092) (0.025) (0.237) (0.031)
AB (2) 0.44 0.77 −0.04 0.44 0.38 0.84 −0.15 0.39
AB (2) p-value (0.658) (0.442) (0.972) (0.658) (0.706) (0.400) (0.881) (0.694)
Sargan test 473.66 577.74** 269.89*** 273.77 440.82 547.12** 305.51*** 319.76***
Sargan test p-value (0.919) (0.035) (0.006) (0.004) (0.930) (0.028) (0.006) (0.001)

Notes: Latin American countries included are Argentina, Brazil, Chile and Mexico. Monthly data from January 2003 to December 2010. System GMM regression (with ADR
Turnover and IP growth entered as endogenous variables and the number of instruments constrained by setting the maximum lags to 2) of Value Traded-value of shares
traded scaled by GDP and Turnover-value of shares traded scaled by market capitalization on their respective lagged values Lag 1, ADR Turnover-value traded of ADR shares
in the U.S. scaled by ADR capitalization), and control variables-IP growth which is the monthly change in each country’s industrial production index; Inflation based on the
Consumer Price Index; Openness measured by the log of the sum of exports and imports scaled by GDP; and capital control variables that take on the value of 1 if the country
imposes restrictions on domestic purchase by nonresidents, purchases abroad by residents, and sales abroad by residents, respectively and zero otherwise. Robust standard
errors are shown in parentheses.
*
Statistical significance at the 10% level respectively.
**
Statistical significance at the 5% level respectively.
***
Statistical significance at the 1% level respectively.

“wealth effect”). This casts doubt on exogenous economic activity
and thus suggests an endogenous IP growth rate.
To better handle these problems, we incorporate GMM estima-
tors and allow for endogenous regressors. While two methods are
available – the difference GMM (DGMM) estimator of Arellano and
Bond (1991) and the system GMM (SGMM) estimator of Arellano
and Bover (1995) and Blundell and Bond (1998) – the SGMM is
selected because Blundell and Bond (1998) show that in situa-
tions where the lagged dependent and explanatory variables are
persistent, the lagged-level instruments are weak, which compro-
mises the asymptotic precision of DGMM estimator. The system
approach jointly estimates the dynamic regression equation in
first differences and levels, using different sets of instruments for
each part. In generating the internal instruments necessary, this
method employs the lagged levels and the lagged differences of all
endogenous variables but only the lagged differences of exogenous
variables. The extra moment conditions of the SGMM estimator
improve precision and lower the finite sample bias.12
5. Results
Panel A of Table 3 displays the empirical results of our bench-
mark model which resembles the approach employed by Karolyi
(2004). This approach takes a regression with fixed effects and aug-
ments it with six lags of the dependent variable to alleviate the
bias that is associated with the dynamic nature of the equation.13
Due to space constraints, we report only the coefficients for the
first lag and the remaining coefficients are available upon request.
While Karolyi (2004) finds that ADR activity neither helps nor hin-
ders stock market development, our results suggest that as ADR
Turnover increases in U.S. markets, the domestic market benefits
from increased liquidity. The positive relationship holds for both
measures of stock market liquidity: value traded and turnover.
Although these coefficients highlight the importance of account-
ing for activity in U.S. markets, a limitation of this approach is that
it assumes exogeneity of all the regressors.
Since stock market liquidity and the degree of ADR Turnover may
be simultaneously determined, SGMM estimates of (1) allow for the
endogenous determination of ADR Turnover and growth in Industrial
Production. The results with the number of lags limited to 2, are
reported in Panel B of Table 3.14 The SGMM estimates complement
the benchmark fixed-effects model, in which ADR turnover and
industrial production growth are now allowed to respond to fluc-
tuations in the two dependent variables: value traded and turnover
of the home market. The results continue to indicate that if ADR

12
Roodman (2009) discusses the proliferation of instruments. One possibility is
to collapse the instrument matrix. The estimations constrain the number of instru-
ments by limiting the number of lags (to 2 and 1) and collapsing the instrument
matrix. In our samples, this collapsing approach did not help the specification tests
in most of the cases.
13
We test the appropriateness of the fixed effects model using a Hausman test. The
test statistics of 61.19 (0.0000) and 28.81 (0.0111) for Value Traded and Turnover,
respectively, support the use of fixed effects.
14
The specification with the maximum lags set to 2 minimizes the number of
instruments while maintaining acceptable diagnostics. Other specifications are
available upon request.
 A.D. Hales, A.V. Mollick / The Quarterly Review of Economics and Finance 54 (2014) 417–427 425

programs from Latin America are liquid in the foreign market, Table 5
SGMM Estimates. Impact of ADR turnover (by Level) on stock market turnover in
internationalization can increase liquidity in the domestic mar-
Latin America.
ket as shown by the positive coefficients on both Value Traded
and Turnover. Serial correlation tests in AB (2) are satisfactory in Level I Level II Level III
both cases. However, the SGMM results for Turnover should be L.1 0.336*** 0.274*** 0.281***
interpreted cautiously as the Sargan test rejects the validity of the (0.068) (0.053) (0.031)
overidentifying restrictions. The SGMM estimates also confirm the ADR turnover −0.130 0.095*** 0.098***
(0.092) (0.009) (0.009)
expected negative impacts of inflation and restrictions on domestic
IP growth 0.068* 0.057* 0.060*
purchases by nonresidents but the positive effect of market size on (0.036) (0.034) (0.033)
domestic market liquidity (as measured by turnover). Inflation −0.078* −0.050 −0.007
Our results suggest that when one accounts for ADR activity in (0.044) (0.052) (0.046)
Openness −0.007*** −0.010*** −0.007***
U.S. markets, there is a beneficial role to ADR issuance for domes-
(0.001) (0.001) (0.002)
tic market development in Latin America. Interestingly, for Latin Market capitalization 0.006*** 0.004*** 0.004***
America, the value traded of international stocks is typically higher (0.001) (0.001) (0.001)
abroad than domestically (see the discussion of Table 2 earlier); Nonresident purchases −0.002*** −0.002*** −0.002***
the value traded of international stocks in the foreign market can (0.001) (0.000) (0.000)
Resident purchases 0.000 −0.001 0.001
even exceed the total value traded in the domestic market. While
(0.001) (0.001) (0.001)
this pattern would predict the detrimental effects of trade migra- Resident sales 0.001 0.001 0.000
tion, our results indicate that increasing trading activity in the (0.001) (0.001) (0.001)
foreign market stimulates domestic trading activity. Therefore, for Constant −0.153*** −0.119*** −0.109***
(0.019) (0.024) (0.026)
these four Latin American countries, it appears that the foreign and
AB (2) 0.18 1.06 0.30
domestic markets are complementary and not substitute trading AB (2) p-value (0.855) (0.290) (0.767)
venues. This contrasts with the findings by Levine and Schmukler Sargan test 422.36 505.87 518.68
(2007). The difference likely arises because our focus is on the Sargan test p-value (0.803) (0.268) (0.155)
impact of foreign turnover and not the concentration of ADR firms Notes: Latin American countries included are Argentina, Brazil, Chile and Mexico.
within a domestic market. Halling et al. (2008) find positive effects Monthly data from January 2003 to May 2008. System GMM regression (with ADR
on domestic liquidity as a result of cross-listing but they find that Turnover and IP growth entered as endogenous variables and the number of instru-
ments constrained by setting the maximum lags to 2 of Turnover-value of shares
these positive effects do not accrue to emerging markets. However,
traded scaled by capitalization on its respective lagged value Lag 1, ADR Turnover-
their emerging market sample extends beyond Latin America and value traded of ADR shares in the U.S. scaled by ADR capitalization), and control -IP
includes only 27 Latin American cross-listed firms (as opposed to growth which is the monthly change in each country’s industrial production index;
the 164 ADRs included here). The cross-listing dynamics may be dif- Inflation based on the Consumer Price Index; Openness measured by the log of the
ferent in Latin America in the 2000s, especially when coupled with sum of exports and imports scaled by GDP; and capital control variables that take on
the value of 1 if the country imposes restrictions on domestic purchase by nonres-
the relative macroeconomic stability in the four countries during
idents, purchases abroad by residents, and sales abroad by residents, respectively
this time. and zero otherwise. Robust standard errors are shown in parentheses.
To unveil any potential effects arising from the global financial *
Statistical significance at the 10% level respectively.
***
crisis, the sample period is decomposed into two parts: the pre- Statistical significance at the 1% level respectively.
crisis period begins in January 2003 and extends through August
2008 while the crisis/post-crisis period extends from September
2008 until December 2010. The results are presented in Table 4. using SGMM with endogenous ADR activity and IP growth, and
The results indicate that the turmoil in financial markets during limiting the maximum number of lags to 2. Across all specifica-
the peak of the global financial crisis significantly impacted the tions the diagnostic tests are satisfactory, including the test on
relationship between ADR Turnover and stock market liquidity. instrument validity which indicated problems in some estimates
For example, the positive relationship between ADR Turnover and of Tables 3 and 4. The coefficient for the impact of ADR Turnover
Value Traded is observed only during the crisis/post-crisis period on Market Turnover is statistically insignificant for ADRs of Level I.
suggesting that the relationship is possibly driven by the massive However, the impact is positive and statistically significant (at the
sell-offs occurring during this time period. However, the relation- 1% level) for Levels II (0.095 coefficient) and III ADRs (0.098 coeffi-
ship between ADR Turnover and Market Turnover is robust to the cient). Therefore, the positive impact of ADR Turnover on domestic
effects of the crisis. The coefficients on ADR Turnover are positive market liquidity stems mainly from the turnover of exchange-listed
and statistically significant in both the pre-crisis and crisis/post- ADRs in U.S. markets. The lack of discernible impact on Level I but
crisis periods. Therefore, during tranquil periods, for Latin America, positive impact of Levels II and III highlights two important points.
an increasingly liquid ADR segment in the foreign market boosts First, an important part of measuring ADR activity is accounting
domestic market liquidity. Therefore, decomposing the sample for liquidity in U.S. markets. For positive effects from liquidity in
periods into sub-periods to account for the global financial cri- the U.S. market to spill over to the home market, the ADRs must
sis does not eliminate the primary finding that increasingly liquid be liquid in the U.S. market. However, Level I ADRs tend to have
ADRs in the U.S. market can foster domestic market liquidity, as low liquidity and high trading infrequency in U.S. markets. Across
measured by turnover. The result is robust to different definitions of all markets the value of Level I shares traded in the home market
the beginning of the crisis but it is important to note that similar to exceeds that of the ADRs trading in the United States. Therefore,
the full-period results, across the different specification the Sargan it is not surprising that we find no benefit arising from the Level I
test statistic rejects the validity of the overidentifying restrictions ADR segment. Second, the benefits from increased ADR turnover in
for market Turnover. Following Dooley and Hutchison (2009), May U.S. markets are primarily due to the effects from large cross-listed
2008 is also included to mark the beginning of the crisis period. firms that choose to adhere to the relatively strict listing require-
To address the research question in more detail, estimates of Eq. ments of U.S. markets. Both Levels II and III exhibit positive impacts
(1) by ADR level are provided next. Based on the findings in Table 4, because they have the strongest capacity for increasing visibility
we include only the effect of ADR activity on market Turnover, by and credibility of the domestic market because they enjoy the high-
level and during the pre-crisis period. Table 5 displays the results est coverage from media and analysts. If these firms are effectively
426 A.D. Hales, A.V. Mollick / The Quarterly Review of Economics and Finance 54 (2014) 417–427
“bonding” to the U.S. regulatory environment, then by subjecting
themselves to the scrutiny of investors, analysts, the SEC, and the
exchanges themselves, they improve the information environment.
The results here indicate that these improvements also accrue to
the domestic market improving its overall liquidity.
6. Concluding remarks
This paper examines the impact of ADR activity on the liquidity
of four Latin American stock markets. We take into account three
elements not present in the literature for emerging markets: mea-
surement of ADR activity using U.S. trading data, a re-examination
of different levels of exchange-listed ADRs under these measures,
and reverse causation since home market liquidity may affect eco-
nomic growth at home and (very likely) the extent of liquidity of
ADRs in the U.S. market. Our analysis shows that in these four Latin
American countries the ADR segment represents approximately
50% of the home stock markets. Our analysis updates the quantifica-
tion of ADR activity by examining the turnover of the ADR segments
in U.S. markets. We find for these Latin American countries that
the value of shares traded in the U.S. typically exceeds the value
of shares traded at home. In some cases, the value of ADR shares
traded in the U.S. even exceeds the total value of shares traded in
the domestic market.
By accounting for U.S. activity, we find that increases in ADR
turnover boost turnover in the domestic market. These effects are
not driven by effects of the global financial crisis as the positive rela-
tionship exists even in the tranquil period before the crisis (January
2003–April 2008). Furthermore, we document that the positive
effects of ADR turnover on domestic market liquidity exist only for
large, exchange-listed ADRs. This suggests that the potential bene-
fits of ADR issuance in Latin American markets stems on their ability
to enhance the visibility of other domestic stocks and their ability
to ease capital constraints. Ultimately, our results do not indicate
that internationalization has inhibited development, as shown by
the low levels of liquidity in these four major Latin American mar-
kets. Instead, our results suggest that activity in the foreign market
is a complement to domestic activity. If this is the case, even when
domestic activity is stagnant, improvements in the international
activity of these countries’ firms can bring the liquidity, risk diver-
sification and information necessary for the stock market to fulfill
its role in the efficient allocation of funds. Important questions
left for future research include: What is the impact of interna-
tionalization on economic growth? and, provided such an impact
exists, is it driven by Latin American firms issuing exchange-listed
ADRs?
Acknowledgments
The authors wish to thank an anonymous Referee for comments
that helped improve the paper and Hadi S. Esfahani for editorial
comments. The usual disclaimer applies.
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