The Role of the Region and Country of Origin on the Initial and Aftermarket Performance of ADR IPOs

Abstract

The issuance of ADR IPOs has decision making implications for both foreign firms and U.S. investors. Foreign companies interested in financing internal growth or acquisitions are faced with a decision of whether to issue their securities in the host country or in the U.S. equity markets. For investors, ADR IPOs represent an alternative to investing in foreign stocks and domestic IPOs. In this paper we examine the initial and aftermarket performance of a sample of ADR IPOs for the period 1986 to 2001. Similar to prior research on domestic IPOs, we find underpricing in initial trading and long run underperformance for the entire sample. Disaggregating the sample by the region and country of the issuing firm, however, we find significant differences in initial and aftermarket performance. ADR IPOs issued by firms in the Americas earn significantly smaller positive excess returns on the first day of trading than ADR IPOs issued by firms in Europe and the Pacific Rim. ADR IPOs issued by firms in the Pacific Rim earn significantly larger negative excess returns than ADR IPOs issued by firms in the Americas and Europe after one year of trading. ADR IPOs issued by firms in Chile earn significantly higher excess returns than ADR IPOs by firms in Mexico in early trading after one year and higher excess returns than ADR IPOs by firms in the United Kingdom after one year.