Date of Award

Spring 2002

Document Type


Degree Name

Doctor of Philosophy (PhD)


Business Administration-Finance

Committee Director

Kenneth Yung

Committee Member

Mohammad Najand

Committee Member

Vinod Agarwal


The three essays which constitute this research study the effects of institutional investors in the ADRs' market.

Essay one studies the herding and feedback trading by institutional investors in the ADRs market. The empirical results find that there is a strong positive relation between changes in the ADRs institutional ownership and returns measured over the same period—the herding year (t = month 0 to 11). The ADR portfolios experiencing the largest increase in institutional ownership outperform those experiencing the largest decrease by 15.33 percent per year over the herding year. In addition, return continuation exists for the two years following the herding year (t = month 12 to 23 and t = month 24 to 35). Further research on the post-herding year return of ADRs (t = month 12 to 23) finds that both the past year performance (t = month 0 to 11) and the change in institutional ownership (t = month 0 to 11) play a role in predicting returns of ADRs (t = month 12 to 23). It is also found that ADR institutional investors' herding is positively related to lagged returns, which indicates positive feedback trading by institutional investors of ADRs. The results also confirm that institutional investors participate in momentum strategies, but they do not always herd to past winners and herd away from past losers. The results imply that information is a very important factor in determining institutional herding in the ADRs market.

Essay two tests the hypothesis that private information of institutional investors contributes to serial correlations in ADRs daily returns. The results demonstrate that ADR individual security and portfolio daily return autocorrelations are positively related to ADRs' institutional ownership. The results show that ADR portfolios with high institutional ownerships exhibit greater daily return autocorrelations, and the returns on these portfolios lead the returns on ADR portfolios with low institutional ownerships. Thus institutional trading of ADR increases the speed with which information is reflected in prices. The empirical results show that other explanations, such as nonsynchronous trading, bid-ask spread and volatility of ADRs, cannot explain the positive relation between daily return autocorrelations and institutional ownership of ADRs.

Essay three examines the effects of noise in the ADR market. The empirical results show that ADR return is affected by investor sentiment. ADR return increases (decreases) when investors are irrationally optimistic (pessimistic). We also find that in the low-noise period, ADRs with high institutional ownership exhibit autocorrelation similar to ADRs with low institutional ownership. However, in the high-noise period. ADRs with high institutional ownership exhibit significant higher autocorrelation than ADRs with low institutional ownership. The result implies institutional investors may have engaged in stealth trading to exploit a noisy market. Through a Granger causality regression, we find that returns on ADR portfolios with high institutional ownership lead the returns of those with low institutional ownership in the low-noise period, confirming that institutional trades reflect market information that is ultimately incorporated into other securities. Finally, we find that institutional investors help reduce volatilities of European ADRs returns. However, for ADRs from Asia and South America, the magnitude of the stabilizing arbitrage positions taken by rational investors is insignificant.


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