A common sense result but a valuable one indeed. I quote the highlights and abstracts from this paper.
ADR volatility is inversely related to the economic freedom of the home country.
- ADR volatility is decreasing in home-country, property-right protection.
- ADR volatility is decreasing in the level of home country free trade agreements.
- ADR volatility is increasing in the level of regulation in the home country.
This paper investigates the link between economic freedom and the price stability of individual securities in a unique setting. Using a sample of 327 American Depositary Receipts (ADRs), we find an inverse relation between the economic freedom of a ADRs’ home country and the price volatility of the ADR. This negative correlation is driven primarily by certain components of economic freedom, such as property right protection, the soundness of the money, and the level of free trade in the home country. Further, we find evidence that less regulation and less government control of markets in the home country leads to more stable ADR prices.
If one wants to find out what the broader public and market thinks about your country and the changes its going through, just look at the volatility of your ADRs. A simple way of judging how stable and future proof people think your country is going to be. ADR’s are a way of you and your country’s firms to raise international funds, its a positive cycle, improve your economic freedom, property rights, free trade and regulation and watch the price and risk of your international fund raising efforts improve.