The Role of Liquidity in ADR Mispricing: Evidence from Latin America

This paper examines the role of liquidity in explaining mispricing for American Depository Receipt (ADR) issues from four Latin American countries: Argentina, Brazil, Chile, and Mexico. The results developed using panel regression with fixed effects indicate that the severe trading infrequency of some Latin American stocks can significantly influence estimates of liquidity’s impact on price deviations. When accounting for trading infrequency and controlling for holding costs and market uncertainty, the results reveal that liquidity of both the ADR and the underlying stock impact ADR mispricing. Furthermore, the evidence suggests the relationship between liquidity and price deviations is not driven by volatile conditions associated with the global financial crisis of 2008. Finally, this paper finds that the impact of liquidity on price deviations is asymmetric with decreases in liquidity exerting a stronger impact on prices than equivalent increases.