Return Transmissions between ADRs and A-Shares of Dual-Listed Chinese Firms

Abstract

This study examines the mutual return transmissions between ADRs and A-shares for a sample of Chinese companies that are dual-listed in New York and Shanghai. The U.S. listing takes the form of American Depositary Receipts (ADRs) while the Shanghai listing takes the form of A-shares. Though ADRs and their underlying A-shares lack full fungibility due to regulatory constraints, they nevertheless represent the same claiming rights and hence should be affected by the same fundamentals. We investigate this issue by using the bivariate VAR model while at the same time accounting for the non-synchronous trading problem caused by the fact that the two markets are located in different time zones and that the two market observe different national and religious holidays. We find that the two types of securities affect each other strongly. The mutual influence is stronger and more prevalent going from China to U.S. than it is the other way around. We also find that the returns of ADRs and A-shares are strongly affected by the market sentiments of the marketplace where they are listed. Finally, the global financial crisis has strengthened the mutual influences between ADRs and A-shares.