ADR Accounting Principles Choice And The Market Reaction To Form 20-F

Abstract

In this study, we conjecture that non-U.S. firms, choosing to be listed on the major U.S. exchanges, will incur the added costs associated with the supplemental disclosure requirements in order to get that information impounded in the home country equity share price via the ADR share price in the manner described by Fishman and Hagerty (1989).  More specifically, we evaluate the equity share response to U.S.-listed ADR Form 20-F filing in a manner similar to Chen and Sami (2009, 2008) anticipating that the incremental disclosures will prompt ADR and equity security share responses.  Unlike prior studies, we investigate whether the Form 20-F filings prompt U.S. dominant cross-market information flows from the ADR share market back to the home country equity share market proportional to the incremental Form 20-F information.  We employ bivariate and single equation models of the cross-market ADR and equity security share response to the filing, controlling for the firm-specific Form 20-F accounting principles choice.  Preliminary results indicate that both ADR and equity security share markets respond to the Form 20-F filing.  There is a strong indication that the U.S. ADR share market response dominates the cross-market information flow driving the home country equity share market response.  Furthermore, we find that the cross-market response to ADR Form 20-F filing is not equal across the three available accounting principle choices in either the ADR share market or the home country equity share market. Our results are consistent with U.S. GAAP conveying the most of new price relevant information, IFRS, and local accounting standards being informative but not to the same extent.