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Journal of Banking & Finance Vol. 36 No. 3 2012

Short selling of ADRs and foreign market short-sale constraints

Benjamin M. Blau1,2; Robert A. Van Ness; Richard S. Warr3

1 Huntsman (United States) · 2 Utah State University · 3 North Carolina State University

Abstract

We examine the effect of home market short-sale constraints on securities that also trade in other countries that have more liberal short-sale rules. In particular, we focus on the case of ADRs traded in the US, as in some cases, the home markets of these ADRs prohibit short selling. We find that short sellers more heavily trade ADRs from countries where short selling is prohibited than from markets where short selling is allowed. Furthermore, we find that the greater levels of short selling in ADRs with binding home-market constraints is driven by stocks with greater dispersion of investors’ opinion, low fundamentals-to-price ratios, and recent price increases. Our results support the hypothesis that short sellers target ADRs with home market short-sale constraints because these ADRs are more often subject to temporary misvaluation.

DOI
10.1016/j.jbankfin.2011.10.004
Volume
36
Issue
3
Pages
886-897
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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