SHORT SELLING AND PRICE DISCOVERY: EVIDENCE FROM AMERICAN DEPOSITARY RECEIPTS

Authors


  • We thank Cheol Eun (reviewer) and Jayant Kale (editor) for their helpful comments and constructive suggestions. We thank David Stowe for providing excellent research assistance. (Grace) Qing Hao gratefully acknowledges financial support from the Robert J. Trulaske, Sr. College of Business at the University of Missouri.

Abstract

The underlying shares of some American Depositary Receipts (ADRs) can be short sold in their home markets, and others cannot. This institutional feature offers a unique opportunity to investigate the relation between short selling and price discovery. We hypothesize and confirm that ADR short selling on a U.S. exchange is more informative when the ADRs’ underlying shares cannot be short sold in the home market. These and related results suggest that short sellers make a significant contribution to price discovery. Short sellers’ trading activity, representing more than 20% of total ADR share volume, increases the benefits of cross-listing on U.S. exchanges.

Ancillary