Explaining Premiums in Restricted DR Markets and Their Implications: The Case of Infosys

John Puthenpurackal

Financial Management, 2006, vol. 35, issue 2

Abstract: I examine several possible explanations for why Infosys’ Depositary Receipts (DRs) trade at significant premiums to the equivalent underlying domestic shares. I find that a limited supply of DRs and a downward-sloping demand curve, significant transaction costs associated with investing directly in the domestic market, and trend-chasing by smaller and potentially uninformed investors partly explain the DR premiums. I also examine the wealth effects of non-capital raising secondary depositary receipt offerings by Infosys Technologies and find significant wealth transfers from existing DR holders to selling domestic shareholders who are comprised significantly of Infosys’ founders.

Date: 2006
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