An extension of price improvement debate: The case of American Depository Receipts (ADRs)

We empirically test whether the change in minimum stock price variation (shifting from the eighth to sixteenth) in the late 90s in NYSE, followed by a system of full decimalization had any significant price improvement on the American Depository Receipts (ADRs). The trade data for August 1996 and August 1997 were included in the sample. Twenty-one trading days were selected in each year. Trades for each day in 1996 were matched with trades for each day in 1997. Price improvements were calculated before the change in minimum variation and after. The data was processed through a multi-stage filtering process: retrieve and filter raw data, match trades with quotes, calculate price improvements, perform paired t-tests, analyze the data and distribution graphs. The results did not reveal any consistent pattern of price improvement in the case of ADRs. Changing the minimum variation of stock pricing from 1/8 to 1/16 of a US dollar appears to have affected price improvement in almost 50% of the ADRs under analysis. No statistically significant connection is determined between the minimum price variation of ADRs and price improvement.