ADRs: Why the “Law of One Price” does not hold for US equity issuing ADRs from restricted countries. The example of Latin America.

Abstract: In this paper we study the market anomaly of price divergence between the ADRs issued from Latin America on the US market and their corresponding domestic securities. Our sample comprises from 107 listed ADRs having one of the Latin American countries as home country. We have found the mean price divergence for different countries ranging from -1 to 1500 basis points. We try to explain this price anomaly with several factors including Abnormal Excess Demand of the ADR, the domestic market’s restrictions to Foreign Investment, the stock exchange that the ADR is listed on, the correlation of the ADR with the US market, the liquidity of the ADR and the liquidity of the domestic security. Our analysis shows that the correlation of the ADRs with the US market and the liquidity of the ADRs in the US market are the most powerful explanatory variables for this price divergence.