Economic policy uncertainty and ADR mispricing

Abstract

This paper studies the impact of economic policy uncertainty (EPU) on ADR mispricing. Investigating 605 ADRs from 13 countries and their underlying assets over the period from 2000 to 2018, we find consistent evidence that EPU in the U.S. impacts ADR mispricing differently as compared to EPU of the country of the underlying asset. Specifically, we find evidence for a statistically significant positive relationship between U.S. EPU and ADR mispricing, while the impact of domestic EPU on ADR mispricing is not statistically significant. We explain the findings for U.S. EPU with a potential flight away from policy uncertainty and toward foreign stocks listed in the U.S. (ADRs) and a simultaneously negative impact on the underlying stock’s return potentially related to the product market spillover hypothesis. The main findings are robust to dropping ADRs from developing countries from our sample and distinguishing between Level I and Levels II and III ADRs.