Where Does Price Discovery Occur? An Empirical Study of Taiwan’s ADRs and Their Underlying Foreign Stocks

This study analyzes the process of price discovery for five Taiwanese American Depositary Receipts (ADRs) and their underlying foreign stocks. The empirical results reveal three previously undisclosed facts. First, ADRs provide price information during trading periods, and the closing prices of ADRs serve as guidelines for predicting the opening prices of the underlying Taiwan stocks. Second, the market index movements of ADR listing exchanges can explain the returns of ADRs and underlying stocks, but their influence cannot increase if the other index is used. Third, the explanatory power of the U.S. movements does not strengthen during the subprime mortgage financial crisis, despite large changes to the market