The informational content of ADR mispricing

• ADR mispricing is due to information asymmetry associated with the underlying stocks.
• ADR mispricing is higher for underlying stocks from countries with low investment freedom.
• ADR mispricing is higher for Level I ADRs.
• ADR mispricing is higher for underlying stocks with higher idiosyncratic risk.
• Information asymmetry is priced accordingly in ADR valuations.

We propose that the persistence in ADR mispricing is due to information asymmetry associated with the underlying stocks. We employ three alternative proxies for the information asymmetry including the investment freedom score of the underlying stock country, the listing level of the ADR, and the idiosyncratic risks of the underlying stock. We find that mispricing is higher for underlying stocks from countries with low investment freedom, for level I ADRs, and for underlying stocks with higher idiosyncratic risk. Information asymmetry is priced accordingly in ADR valuations.