Three Essays on the American Depositary Receipts (ADRs): Cases of Brazil, Russia, India and China (the BRICs)

Abstract

This thesis aims to provide an in-depth understanding of the nature of American Depositary Receipts (ADRs) from emerging markets as a viable investment vehicle. In this research, Brazil, Russia, India and China (the BRICs) are used as a representative sample of worldwide emerging markets. The motivation of this thesis derives from empirical evidence of large ADR price spreads which violates the law of one price (LOP). Unlike prior research which attempted to identify explanatory factors for this seemingly pricing puzzle in ADR markets, this thesis seeks to answer the research question: Are emerging market ADRs different securities from their underlying stocks? The overarching research objective is to determine whether the pricing mechanism of ADRs from emerging markets is theoretically supported by the LOP, and if investors can potentially obtain at least similar diversification benefits of ADR investments compared to directly investing in underlying stocks.