Political Risk and ADR Returns: Diversification in the Indian Sub-Continent

Akash Dania
University of Texas-Pan American, U.S.A.
Rahul Verma
University of Houston-Downtown. U.S.A.

ABSTRACT

Terrorism, an important component of Political risk as a possible determinant of ADRs (American Depository Receipts) returns have received little attention in academic literature. To address this issue and examine whether political risk is a major determinant of ADR returns of emerging market countries, this paper empirically examines market valuation of Indian ADRs around acts of terrorism. Using a sample of 52 such events in the sample period Jan 2003 – Dec 2003 we empirically analyze returns of Indian ADRs. The results from our study indicate a marginally negative significant effect, failing to indicate that event of terrorist attacks severely affect the Indian ADRs listed on the U.S. stock market. This may be explained by a combined effect of; (a) the optimism of U.S. investors towards emerging markets, and (b) market participants becoming more resilient and making informed choices around the “general” events of terrorism.

Keywords: ADRs; Terrorism; Event Study Methodology