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Cross-Border Trading as a Mechanism for Capital Flight: ADRs and the Argentine Crisis

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Author Info
Sebastian Auguste
Kathryn M.E. Dominguez ()
Herman Kamil
Linda L. Tesar

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Abstract

This paper examines the surprising performance of the Argentine stock market in the midst of the country’s most recent financial crisis and the role played by ADRs in Argentine capital flight. Although Argentine investors were subject to capital controls, they were able to purchase stocks with associated ADRs for pesos in Argentina, convert them into ADRs, re-sell them in New York for dollars and deposit the dollar proceeds in U.S. bank accounts. In the paper we show that: (1) ADR discounts went as high as 60% (indicating that Argentine investors were willing to pay significant amounts in order to legally move their funds abroad), (2) the market anticipated (correctly) a 40% devaluation, (3) local market factors in Argentina became more important in pricing peso denominated stocks with associated ADRs, while the same stocks in New York were mainly priced based on global factors, (4) capital outflow using the ADR market was substantial (our estimate is between $835 million and $3.4 billion).

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Publisher Info
Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School in its series William Davidson Institute Working Papers Series with number 513.

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Length: 37 pages
Date of creation: 01 Nov 2002
Date of revision:
Handle: RePEc:wdi:papers:2002-513

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Related research
Keywords: Argentina; Financial Crises; Capital Controls; ADRs;

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Find related papers by JEL classification:
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Eun, Cheol S & Janakiramanan, S, 1986. " A Model of International Asset Pricing with a Constraint on the Foreign Equity Ownership," Journal of Finance, American Finance Association, vol. 41(4), pages 897-914, September. [Downloadable!] (restricted)
  2. Huang, Roger D. & Stoll, Hans R., 2001. "Exchange rates and firms' liquidity: evidence from ADRs," Journal of International Money and Finance, Elsevier, vol. 20(3), pages 297-325, June. [Downloadable!] (restricted)
  3. Kristin J. Forbes, 2002. "How Do Large Depreciations Affect Firm Performance?," NBER Working Papers 9095, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December. [Downloadable!] (restricted)
  5. Michael Melvin, . "A Stock Market Boom During a Financial Crisis? ADRs and capital outflows in Argentina," Working Papers 2133524, Department of Economics, W. P. Carey School of Business, Arizona State University. [Downloadable!]
    Other versions:
  6. Alan G. Ahearne & William L. Griever & Francis E. Warnock, 2000. "Information costs and home bias: an analysis of U.S. holdings of foreign equities," International Finance Discussion Papers 691, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  7. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2003. "Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons," NBER Working Papers 9828, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Domowitz, Ian & Glen, Jack & Madhavan, Ananth, 1997. " Market Segmentation and Stock Prices: Evidence from an Emerging Market," Journal of Finance, American Finance Association, vol. 52(3), pages 1059-85, July. [Downloadable!] (restricted)
  9. Kim, Minho & Szakmary, Andrew C. & Mathur, Ike, 2000. "Price transmission dynamics between ADRs and their underlying foreign securities," Journal of Banking & Finance, Elsevier, vol. 24(8), pages 1359-1382, August. [Downloadable!] (restricted)
  10. Stephen R. Foerster & G. Andrew Karolyi, 1999. "The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States," Journal of Finance, American Finance Association, vol. 54(3), pages 981-1013, 06. [Downloadable!] (restricted)
  11. Alexander, Gordon J & Eun, Cheol S & Janakiramanan, S, 1987. " Asset Pricing and Dual Listing on Foreign Capital Markets: A Note," Journal of Finance, American Finance Association, vol. 42(1), pages 151-58, March. [Downloadable!] (restricted)
  12. Errunza, Vihang & Losq, Etienne, 1985. " International Asset Pricing under Mild Segmentation: Theory and Test," Journal of Finance, American Finance Association, vol. 40(1), pages 105-24, March. [Downloadable!] (restricted)
  13. G. Andrew Karolyi & Rene M. Stulz, 2002. "Are Financial Assets Priced Locally or Globally?," NBER Working Papers 8994, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kathryn M.E. Dominguez & Linda L. Tesar, 2004. "International Borrowing and Macroeconomic Performance in Argentina," Working Papers 532, Research Seminar in International Economics, University of Michigan. [Downloadable!]
    Other versions:
  2. Levy Yeyati, Eduardo & Schmukler, Sergio L. & Van Horen, Neeltje, 2006. "International financial integration through the law of one price," Policy Research Working Paper Series 3897, The World Bank. [Downloadable!]
    Other versions:
  3. Kristin J. Forbes, 2005. "The Microeconomic Evidence on Capital Controls: No Free Lunch," NBER Working Papers 11372, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Jillian Faucette & Alexander Rothenberg & Francis Warnock, 2005. "Outflows--induced sudden stops," Journal of Policy Reform, Taylor and Francis Journals, vol. 8(2), pages 119-129, June. [Downloadable!] (restricted)
  5. Yeyati, Eduardo Levy & Schmukler, Sergio L. & Van Horen, Neeltje, 2008. "Crises, capital controls, and financial integration," Policy Research Working Paper Series 4770, The World Bank. [Downloadable!]
    Other versions:
  6. Sebastian Auguste & Kathryn M.E. Dominguez & Herman Kamil & Linda L. Tesar, 2005. "Cross-Border Trading as a Mechanism for Implicit Capital Flight: ADRs and the Argentine Crisis," Working Papers 533, Research Seminar in International Economics, University of Michigan. [Downloadable!]
    Other versions:
  7. Marina Halac & Sergio Schmukler, 2003. "Distributional effects of crises : the role of financial transfers," Policy Research Working Paper Series 3173, The World Bank. [Downloadable!]
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