These results are consistent with at least one version of the windows of opportunity hypothesis7: U.S.

investors value ADR IPOs higher than U.S. seasoned firms because they are over-optimistic about both
ADR IPOs and domestic IPOs. An alternative explanation is to attribute the higher valuation to higher
earnings growth. However, the earnings decline for ADR IPOs as indicated
in Table 3 reveals exactly the opposite. One may also attribute the higher valuation to higher profitability.
However, if we calculate the average profitability in the four years after IPO based on Table 3, ADR IPOs
have the lowest average profitability. If the markets value ADR IPOs higher simply because of the higher
earnings in IPO year, then it will be consistent with the argument
in the windows of opportunity hypothesis that the markets are over-optimistic about the prospective future
of ADR IPOs firms.
It is not clear whether the results in Table 4 are also consistent with the diversification benefit hypothesis,
the market liquidity hypothesis and the lower information risk hypothesis. To explain the P/V ratio results
with the diversification benefit hypothesis, ADR IPOs have to offer more diversification benefit relative to
U.S.
Table 4

domestic seasoned firms but not relative to U.S. domestic IPOs. To explain the P/V ratio results with the
market liquidity hypothesis or the lower information risk hypothesis, ADR IPOs should have higher market
liquidity (lower information risk) than U.S. seasoned firms but similar market liquidity (information risk)
as U.S. IPOs. Our results are generally not consistent with the higher information asymmetry hypothesis,
the foreign exchange risk hypothesis, or the investor protection hypothesis.
4.2. ADR long run stock performance
The windows of opportunity hypothesis suggests that ADR IPOs are overvalued relative to U.S. domestic
seasoned firms. In the long run the ADR IPO stocks will have lower stock return when the overvaluation is
corrected. The diversification benefit hypothesis and the lower information asymmetry hypothesis also
predict lower stock return for ADR IPO stocks in the long run, although the rationale is investors will
demand lower expected return because of the diversification benefit or the
lower information risk. To test this common prediction, we examine the long run stock performance of
ADR IPOs relative to matching U.S. firms. For each ADR IPO and its matching firms, we first use daily
stock return data to calculate market-adjusted buy and hold returns. CRSP value weighted return is used as
the return of the market portfolio. If an ADR or it matching firm is delisted from CRSP sometime within
the three-year window, then we append the market return to its return data so that every ADR and matching
firm has return data for the three years after IPO8. We calculate the buy and hold returns for each of the
three years after IPO and the whole three-year period for the market portfolio, ADR IPOs, and the matching
firms respectively. Then
we subtract the corresponding market buy and hold returns from the buy and hold returns of ADR IPOs and
matching firms to get their market adjusted buy and hold return. For ADR IPOs that go public after
December 31 of 2012, we use their returns up to December 31 of 2015 as the three-year return9. The results
are reported in Table 5. In Panel A of Table 5 we report the mean market adjusted buy and hold returns of
ADR IPO stocks relative to matching U.S. domestic IPO stocks. Over the three years after IPO the average
market adjusted return of ADRs is _6.98%, which is 16.84% lower than that of the matching U.S. domestic
IPOs. However, when we use Purnanandam and Swaminathan (2004)’s randomization procedure to
estimate empirical p-value for the difference in the three-year market adjusted return, the p-value is
insignificant at 0.195.
In Panel B we report the average market adjusted buy and hold returns of ADR IPOs relative to matching
U.S. seasoned firm. The average three-year market adjusted return of ADR IPOs is 22.72% lower than that
of U.S. seasoned firms. The pvalue of this difference is marginally significant at 0.0669. The risk
characteristics of ADR IPO firms and their matching firms can be very different from those of the market
portfolio. Thus, adjusting the buy and hold returns by the market returns is not necessarily accurate. As
shown in Fama and French (1992), size (ME) and book-to-market ratio (BE/ME) are two important
characteristics that should be controlled for. Thus, we calculate the size-and-book-to-market adjusted
returns for the ADR IPO firms and the matching firms. From Wharton Research Data Services, we collect
the daily returns of 25 benchmark portfolios formed on ME and BE/ ME as well as the size and BE/ME
breakpoints. The benchmark portfolios, which are constructed at the end of each June, are the intersections
of five portfolios formed on ME and five portfolios formed on BE/ME (Fama and French, 1993). Based
on the breakpoints, we assign each firm to one of the 25 benchmark portfolios. We have to drop all ADR
IPO firms with negative
book value of equity and their matching firms. Then we calculate the buy and hold returns of the benchmark
portfolios and subtract them from those of the corresponding ADR IPO firms and matching firms to get the
size-and-book-to-market adjusted returns. The results are reported in Table 6.
Panel A of Table 6 compares the size-and-book-to-market adjusted returns of ADR IPOs with those of U.S.
domestic IPOs. The mean size-and-book-to-market adjusted return of ADR IPO stocks over the three years
after IPO is _13.40%, which is 19.93% lower than that of the matching U.S. IPOs. Again, this difference is
not statistically significant.
Panel B compares the performance of ADR IPOs with those of U.S. domestic seasoned firms. The mean
size-and-book-tomarket adjusted return of ADR IPO stocks over the three years is _13.40%. It is 25.05%
lower than that of the matching U.S. seasoned firms. Like in Table 5, the return difference is marginally
significant with p-value of 0.0544.

table 5
Average Market Adjusted Buy and Hold Return of ADR IPOs and Matching Firms. The buy and hold
returns for the market are calculated using CRSP value
weighted return. They are subtracted from the buy and hold returns of ADR IPOs and matching firms to
get the market adjusted buy and hold returns. We
winsorize at upper and lower 1% level. The empirical p-value is estimated using the simulation method in
Purnanandam and Swaminathan (2004).

table 6
Average Size and BE/ME Adjusted Buy and Hold Return of ADR IPOs and Matching Firms. Each ADR
IPO firm and matching firm is assigned to one of 25 size and
BE/ME portfolios (Fama and French 1993). The buy and hold returns of the size and BE/ME portfolios are
subtracted from those of the ADR IPOs or matching
firms to get the Size and BE/ME adjusted buy and hold returns. We winsorize at upper and lower 1% level.
The empirical p-values are estimated using the
simulation method in Purnanandam and Swaminathan (2004).

Overall we feel the results suggest that ADR IPOs have similar long-run stock performance as U.S.
domestic IPOs but underperform U.S. domestic seasoned stocks in the three years after issuance. Because
Table 4 shows that ADR IPOs are valued at a similar level as U.S. IPOs but valued higher than U.S.
seasoned firms, the stock performance results seem to be consistent with the valuation results. These results
are consistent with the windows of opportunity hypothesis and, to a less extent, the diversification benefit
hypothesis and the lower information asymmetry hypothesis.
4.3. Regression analysis
Although we try to find firms that are comparable to ADR IPOs using matching procedure, the matching
procedure can only control for three characteristics. Maybe ADR IPOs are valued higher than U.S. domestic
seasoned firms because of some other characteristics that we failed to control for. So we use regressions to
control for additional factors. In the literature about firm value Tobin’s Q is usually used as the dependent
variable (see, for example, Morck et al., 1988;
La Porta et al., 2002), so we run regressions using log of Tobin’s Q as the dependent variable. We start by
using a sample of ADR IPOs and their matching U.S. domestic IPOs for regressions. For the independent
variables, we start from log of sales, research and development (R&D), EBITDA/sales, offering size, a
dummy for Nasdaq listing, firm risk (as measured by standard
deviation of daily stock return in the 60 days after IPO), a dummy for ADR IPOs from emerging markets,
a dummy for IPOs with prestigious underwriters based on Professor Jay Ritter’s website for underwriter
ranking data, and a dummy for ADR. Log of sales is included to control for any possible size effect. R&D
is included to control for growth opportunity. R&D is scaled by sales. EBITDA/sales is included to control
for profitability. Offering size, measured as (number of shares
offered)/(total shares outstanding), is included because the IPO literature documents that IPO firms with
larger proportional offering size have lower valuations (see, for example, Jansen and Perotti, 2002). The
results of this regression are reported in column (1) of Table 7. Column (1) of Table 7 shows that the
coefficients of log sales are negative and significant, suggesting that smaller IPO
firms tend to be valued higher. The coefficient of R&D is positive and significant, likely because growth
firms tend to invest more in R&D. The coefficients of EBITDA/sales and Nasdaq dummy are insignificant.
table 7
Regression on Tobin’s Q for ADR IPOs and Matching U.S. IPOs. The dependent variable is log of Tobin’s
Q. R&D is scaled by sales. Offering size is measured as
(shares offered)/(number of shares outstanding). Risk is the standard deviation of daily return in the 60 days
after IPO. Emerging market is a dummy for ADR
IPOs from emerging markets. Underwriter is a dummy for IPOs with prestigious underwriters. Correlation
is the correlation coefficient with CRSP value
weighted return. ILLIQ is estimated following the method in Amihud (2002). Exchange rate risk is
measured as the standard deviation of daily exchange rate
movement in the three years before ADR IPO. Common law and anti-director rights are collected from La
Porta et al. (2002) and Durnev and Kim (2005). tstatistics
are reported in parentheses.

Consistent with the IPO literature, the coefficient of offering size is negative and highly significant,
suggesting that ADR IPO companies and their matching U.S. IPO companies will have lower valuation if
they sell more shares in the IPO. The coefficients of risk and underwriter are positive and significant. Most
importantly, the coefficient of ADR dummy is insignificant, suggesting that ADR IPOs are valued at a
similar level as U.S. domestic IPOs after we control for firm size, growth opportunity, profitability, offering
size, Nasdaq listing, risk, emerging market, and underwriter prestige. This result is consistent with the P/V
ratio results in Table 4.
Table 4 also shows that ADR IPOs are valued higher than matching U.S. seasoned firms. Will this valuation
difference disappear after we control for additional factors? We repeat the regression in column (1) of Table
7 using a sample that combines ADR IPOs with their matching U.S. seasoned firms. We drop the variables
of offering size and underwriter because they do not apply to the seasoned firms. The results are reported
in column (1) of Table 8. Similar to Table 7, column (1) of Table 8 shows that valuation is negatively
related to sales and positively related to R&D
and risk. The coefficients of EBITDA/sales, Nasdaq and emerging market are insignificant. Our focus is
the coefficient of ADR dummy. It is positive and significant, consistent with the valuation results presented
in Table 3. Based on the coefficient value of 0.2093, the ADR IPOs are valued 20.93% higher than matching
U.S. domestic seasoned firms. And this higher valuation is not explained by firm size, growth opportunity,
profitability, or the listing exchange.
4.3.1. The Effect of diversification benefit on ADR IPO valuation
As mentioned earlier, the diversification benefit hypothesis suggests that ADR IPOs may be valued higher
because they offer more diversification benefit relative to domestic stocks. If this is the main driver for the
valuation results we get, ADR IPOs should have more diversification benefit relative to U.S. domestic
seasoned stocks and similar diversification benefit as U.S. domestic IPOs. To test this prediction, we
calculate the correlation between daily market return (measured by
table 8
Regression on Tobin’s Q for ADR IPOs and Matching U.S. Seasoned Firms. The dependent variable is log
of Tobin’s Q. R&D is scaled by sales. Correlation is the
correlation coefficient with CRSP value weighted return. ILLIQ is estimated following the method in
Amihud (2002). Exchange rate risk is measured as the
standard deviation of daily exchange rate movement in the three years before ADR IPO. Common law and
anti-director rights are collected from La Porta et al.
(2002) and Durnev and Kim (2005). t-statistics are reported in parentheses.

CRSP valued weighted return) and the daily return of each ADR IPO stock as well as its matching stocks.
We find that the means of the correlation coefficients are 0.2829 for ADR IPOs, 0.3407 for U.S. IPOs, and
0.3757 for U.S. seasoned stocks respectively. If the correlation coefficients are used as proxy for
diversification benefit, then they provide limited support to this prediction.
However, if diversification benefit really affects ADR IPO valuation, the coefficient of the correlation
should be significant when it is included in our regressions. As a result, we add the correlation and an
interaction variable of correlation⁄ADR to our regressions and re-estimate them. The results are reported in
column (2) of Tables 7 and 8. Column (2) of Table 7 shows that the coefficient of the correlation is positive
and significant, suggesting that IPOs with higher correlation with the market portfolio actually are valued
higher. This is contrary to what the diversification benefits hypothesis predicts. Both the coefficient of the
correlation⁄ADR interaction variable and the coefficient of the ADR dummy are insignificant. In column
(2) of Table 8 the coefficient of the correlation is also positive and significant while the coefficient of the
correlation⁄
ADR interaction variable is insignificant. In addition, the coefficient of the ADR dummy increases slightly
and remains significant. These results suggest that diversification benefit, at least when measured by
correlation with the U.S. market, does not explain ADR IPO valuation.

4.3.2. The effect of market liquidity and information risk on ADR IPO valuation
To test the effects of information risk and market liquidity on the valuation of ADR IPOs, we use the
formula in Amihud
(2002) to measure illiquidity as follows:

Rumus
Where Diy is the number of days for which data are available for stock i in year y. Riyd is the return on
stock i on day d of year y; VOIDiyd is the respective daily volume in dollars. Higher ILLIQ means a stock
has lower liquidity. Because liquidity is also affected by information risk, we also consider higher ILLIQ
as indicative of higher information risk. We calculate this ILLIQ
measure for both the ADR IPO stocks and the matching U.S. domestic IPO stocks. Consistent with the
market liquidity hypothesis and the higher information risk hypothesis, the mean of ILLIQ for ADR IPOs
is 7.83, which is significantly higher than the mean for matching U.S. IPOs (1.07). Interestingly, ADR IPOs
actually have higher market liquidity than matching U.S. seasoned stocks because the mean ILLIQ for the
matching seasoned stocks is 17.9. If the higher liquidity is related to lower information asymmetry, as
suggested by Bacidore and Sofianos (2002), then ADR IPOs may also have lower information risk relative
to U.S. domestic seasoned firms. We add ILLIQ and an interaction variable ILLIQ⁄ADR to the independent
variables of the Tobin’s Q regressions and report the regression results in column (3) of Tables 7 and 8. In
column (3) of Table 7, the coefficients of ILLIQ and ILLIQ⁄ADR are insignificant, suggesting that market
liquidity and information risk are not important factors affecting the valuation of ADR IPOs relative to U.S.
domestic IPOs. In column (3) of Table 8, the coefficients of ILLIQ and ILLIQ⁄ADR are also insignificant.
This result suggests that the higher market liquidity of ADR IPOs does not explain their higher valuation
relative to U.S. domestic seasoned firms. It is not consistent with the market liquidity hypothesis and the
lower information risk hypothesis. However, the coefficient of ADR remains positive and significant,
suggesting that ADR IPOs are still valued higher after controlling for market liquidity (information risk).
4.3.3. The effect of foreign exchange risk and investor protection on ADR IPO valuation
The foreign exchange risk hypothesis and the investor protection hypothesis suggest that ADR IPOs should
have lower valuation than domestic firms. Although the P/V ratio results in Table 4 are not consistent with
this prediction, foreign exchange risk and the level of investor protection may still affect the valuation of
ADR IPOs and we should control for the two factors. To control for foreign exchange risk, we find the
historical exchange rates between U.S. dollar and the currency of the home country for each ADR IPO firm
and use the standard deviation of daily exchange rate movement in the three years before ADR IPO to
measured exchange rate risk10. For the matching U.S. domestic firms, we set the value of exchange rate
risk to zero. Then we add this exchange rate risk measure as an independent variable to the Tobin’s Q
regressions. To control
for the level of investor protection, following La Porta et al. (2002), we define two measures of investor
protection: Common Law and Anti-director Rights. Common Law is a dummy variable that equals one if
the legal origin of the Company Law or Commercial Code of the country in which the firm is incorporated
is Common Law and zero otherwise. Common law countries are
generally believed to have better investor protection. Anti-director Rights is the index of anti-director rights
of the country in which the firm is incorporated. Higher value of Anti-director rights is associated with
better investor protection. The values of the two measures for the ADR IPO and matching U.S. firm
observations are collected from La Porta et al. (2002) and Durnev
and Kim (2005). We calculate the averages of the two measures for ADR IPOs and confirm that they are
significantly lower than the average for the matching U.S. firms. We add the two measures to the
independent variables of the Tobin’s Q regressions. The new regression results are reported in column (4)
of Table 7 and Table 8. Column (4) of Table 7 shows that the coefficient of exchange rate risk is
insignificant. This is not consistent with the foreign exchange risk hypothesis. The coefficients of common
law and anti-director rights are also insignificant, suggesting that the level of investor protection does not
have significant effects on the valuation of IPO ADRs. Consistent with the P/V ratio results in Table 4, the
coefficient of the ADR dummy remains insignificant. These results suggest that ADR IPOs are valued at a
similar level as U.S. domestic IPOs.
Similar to results in Table 7, column (4) of Table 8 also report insignificant coefficients for exchange rate
risk and investor protection variables, again not supporting the foreign exchange risk hypothesis and the
investor protection hypothesis11. The coefficient of the ADR dummy remains positive and significant,
suggesting that ADR IPOs are valued higher than U.S. domestic
seasoned firms after controlling for firm size, growth potential, profitability, exchange listing,
diversification benefit, market liquidity
(information risk), foreign exchange risk, and investor protection. Overall the results are consistent with
the windows of opportunity hypothesis.
5. Conclusion
In this paper we examine the valuation of ADR IPO companies relative to U.S. domestic companies. We
find that ADR IPOs are valued at a similar level as U.S. domestic IPOs but are valued significantly higher
than U.S. domestic seasoned companies. We explore different explanations for this phenomenon and
overall our test results are consistent with the windows of
opportunity hypothesis. We do not find evidence to support the diversification benefit hypothesis, the
liquidity hypothesis, the lower information asymmetry hypothesis, the higher information asymmetry
hypothesis, the foreign exchange riskhypothesis, or the investor protection hypothesis.