Social trust and the liquidity of cross-listed securities

This paper examines various measures of market liquidity in American Depositary Receipts (ADRs) while conditioning on the level of trust in the ADR's home country. Multivariate tests show that as home-country levels of trust increase, ADR liquidity is dramatically improved. To draw stronger causal inferences, we use a difference-in-difference approach to examine liquidity surrounding an (arguably) exogenous reduction in trust and find that liquidity worsens in response to the event. These results support our hypothesis that trust is an important determinant in the liquidity of financial markets.