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

Sebastian Auguste (), Kathryn Dominguez, Herman Kamil and Linda Tesar ()

No 513, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

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).

Keywords: Argentina; Financial Crises; Capital Controls; ADRs (search for similar items in EconPapers)
JEL-codes: F32 F36 G12 G15 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2002-11-01
New Economics Papers: this item is included in nep-fin and nep-ifn
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