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

Cross-listed shares may confound government efforts to control capital outflows by providing a legal means through which investors can transfer their wealth outside the country. We study the recent experience of investors in Argentina and Venezuela who while subject to capital controls, were able to purchase cross-listed shares using local currency, convert the shares into dollardenominated shares, re-sell them in New York and deposit the dollar proceeds in U.S. bank accounts. We show that capital controls drive a wedge between the price of local shares and their corresponding cross-listed shares. This anomalous wedge provides a measure of the market’s implicit devaluation forecast and the value of capital control circumvention. We also find that the imposition of controls in Argentina led to changes in the underlying pricing structure of crosslisted shares in Buenos Aires and New York.