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CAN INSTITUTIONAL INVESTOR SENTIMENTS EXPLAIN ADR MISPRICING?

Priti Verma

Texas A&M University, USA

 

ABSTRACT

This paper examines the role of U.S. institutional investor sentiments on ADRs from Mexico, Brazil, Chile and Columbia. We break-up the institutional sentiments into irrational components and further examine to what extent theADR premiums/ or discounts can be attributed to the irrational exuberances of U.S. institutional sentiments. We find that the irrationality of U.S. institutions are a significant determinant of ADR mispricing in Latin America. In most of these cases, the responses are immediately positive and insignificant thereafter. We argue that irrational bullish sentiments of the U.S. financial institutions might generate immediate gains but subsequently such errors could lead to a larger negative returns and cause greater volatility in the financial market.

Key Words: American Depositary Receipts (ADR), Institutional Investor sentiments

JEL: G1, G14, G15