ADR mispricing: Do costly arbitrage and consumer sentiment explain the price deviation?

This study investigates the determinants of discounts and premiums on the prices of American depository receipts (ADR). The study examines 74 ADRs from nine countries and covers the time period between 1996 and 2003. Using a fixed-effects panel data approach, we find that ADRs with higher transactions costs and lower dividend payments are more likely to exhibit higher price disparity. Furthermore, we find that the price deviation is more severe in times of higher T-bill interest rates. Lastly, we find that both, the price of the ADRs, as well as, the price of the underlying assets are more driven by U.S. consumer sentiment rather than the consumer sentiment of the country of origin.