Investor protection and the liquidity of cross-listed securities: Evidence from the ADR market

Using 'American depository receipt' (ADR) data on various countries, this paper sets out to investigate the relationship between investor protection and firm liquidity. Since weak investor protection leads to greater expropriation by managers, and thus greater asymmetric information costs, liquidity providers will incur relatively higher costs and will therefore offer higher bid-ask spreads. The empirical results demonstrate that the liquidity costs of poor investor protection were more significant during the period of the Asian financial crisis when the expected agency costs were particularly severe. This issue is further analyzed by investigating whether there is any evidence of increases in the vulnerability of ADRs of firms operating in countries with relatively poor investor protection mechanisms during periods of financial crisis.