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Previous research indicates that market timing appears to occur in security issuance. This is partially consistent with theories such as Myers and Majulf (1984) in which managers care about existing shareholders more than new investors. As a result they have incentives to sell equity at market upswings.

This study attempts to extend timing studies in two ways. First, we examine whether timing ability exists in the issuance of American Depository Receipts (ADRs). While there is

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abundance of literature on security offers, few examine whether timing effects are present in the ADR issuances. Investigating timing effects of ADRs has the potential to further explore the importance of information asymmetry in security issuance. If the world market is integrated in terms of information accessibility, then we would expect timing effects of ADRs to be similar to those of the U.S. If information is incomplete or costly, then timing ability would be weakened. Moreover, an ADR issuer should be concerned with three markets when choosing an appropriate issuance time, namely the home equity market, the U.S. equity market, and the currency market. Under information asymmetry and assuming that firms have more information about their home environment, they are more likely to have the ability to time home equity and/or currency

markets, but not the U.S. market. That is, the results here should have implications for the role of information accessibility in selling stocks. The literature on the timing of ADRs is sparse; to our knowledge only Pasquariello, Yuan and Zhu (2006) directly look into this issue. However, their analysis utilizes only country-level data, specifically the number of ADR issues from a country. This number seems to be a crude measure of timing effects and it is plausible that this number can be influenced by factors other than information availability. These factors would include regulations, market liquidity, tax, and others. In contrast, this study utilizes firm-level data, thus allows a richer set of testing. Additionally, since their focus is on the currency market, they exclude countries that have relatively fixed currency value. One country excluded in their study is China, which has high representation in the ADR market in recent years. The analysis here includes these countries.

A secondary purpose of this study is to examine the relevance of regulation in market timing. If regulatory restrictions do not allow firms to fully utilize their information, they are less likely to be able to time the market(s). To assess the role of regulations, we compare results

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between tightly-regulated and loosely-regulated countries, and before and after the passage of the Sarbanes-Oxley Act (SOX) of 2002. The SOX requires, among other things, that an independent board oversees auditors of public companies, and that CEOs and CFOs be personally responsible for the accuracy of their firm’s financial reports. We expect that the tighter the regulation(s) faced by the ADR issuers, the more difficulty they might have in their market timing activities. With this reasoning, weaker market timing activities by ADR issuers are expected in tightly- regulated countries and also after the passage of SOX.

Previous research indicates that the major reasons for ADR issuance include lower cost of capital, higher liquidity, obtaining medium of exchange in merger and acquisition transactions, and acquisition of needed foreign currency5. It should be pointed out that this study does not

attempt to provide more insights on the motivations of ADR issuance; rather, we take as given that ADR issuance has some benefits. Our focus is that, given the benefits and the decisions of selling ADRs, do issuers demonstrate timing ability and, if so, in which market do they tend to process timing ability.6

Because the focus here is on issue timing, the sample firms here include all ADRs that involve capital-raising, regardless of whether an issue has been previously sold in the U.S. However, there are a non-trivial number of firms, particularly from China, that sell ADRs without any prior trading history, not even in their home countries; that is, these firms are truly conducting “initial” public offers. Because these companies are selling stocks to the public for the first time, pricing uncertainty is likely high and a large part of this uncertainty is likely

5 _{Comprehensive surveys of why firms list their stocks abroad can be found in Karolyi (1998), Pagano, Roell and}

Zechner (2002), Doidge, Karolyi and Stulz (2004), Doige, Karolyi, Lins, Miller and Stulz (2005) and Karolyi (2006).

6 _{Other studies relate these ADR performances to the market segmentation hypothesis. They include Kadlec and}

Mcconnell (1994), Sundaram and Logue (1996), Miller (1999), Levine and Schmukler (2006), Forester and Karolyi (1993,1998, 1999, 2000). Theoretical models on how firms in segmented markets can lower their costs of capital and thus increase their market values can be found in Stapleton and Subrahmanyam (1977), Errunza and Losq (1985), and Alexander, Eun and Janakiramanan (1988).

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idiosyncratic in nature. One would suspect that market timing ability of these set of firms would be limited, and therefore the analysis of these firms is performed separately. For convenience, we refer the sample firms without listing history in their home countries as initial public offerings (IPO) sample while all others as seasoned equity offers (SEO) sample. Because the SEO sample is larger and timing effect is more likely to be present, our focus will be on the SEO sample.

Our primary findings are that, for the SEO sample, there is some evidence supporting timing ability of these firms, particularly in the U.S. equity market and some in the currency market. However, the evidence of timing effects is far from overwhelming. Regarding the role of regulations, the results are somewhat consistent with SOX having an effect on market timing ability; however, the evidence here is also weak. As for the IPO sample, the results are generally inconclusive. Taken together, the overall results suggest that the timing ability of foreign firms selling ADRs is very limited. Assuming that a strong timing effect is present in the U.S. market, as some studies show, our results here indirectly suggest that foreign firms as a whole are not well-informed about market conditions.

The rest of this essay is organized as follows: Section 2.3 gives a review of the related studies. Section 2.4 presents the hypotheses and the methodology. Section 2.5 specifies the data sources and sample construction. Section 2.6 provides the empirical results and discussions. Section 2.7 concludes the findings of this paper.