Multi-market trading and liquidity: Evidence from cross-listed companies

We examine the relationship between stock liquidity and the difference in domestic and foreign market prices for a sample of 650 international firms cross-listed on a U.S. stock exchange through either an American Depository Receipt (ADR) or an ordinary shares program. We exploit the 2001 change to decimalization pricing and the 2003 U.S. dividend tax cut as quasi-natural experiments and find that ADR liquidity decreases the absolute value of the ADR premium. We document a positive relationship between liquidity and price discovery as well as a liquidity effect on the price convergence between the ADRs and their underlying shares. The effect of liquidity on convergence is stronger for stocks with high holding costs and low institutional ownership. (C) 2017 Elsevier B.V. All rights reserved.