Profit Warnings and the Pricing Behavior of ADRs

We assess the pricing behavior of American Depositary Receipts (ADRs) in response to information about their profitability. Specifically, we test for leakage effects and lagged effects, and we assess the cross-sectional variation in market inefficiencies related to profit warnings by foreign firms listed on U.S. stock exchanges as ADRs. Foreign firms experience strong negative valuation effects at the time of the profit warning. Furthermore, there are pronounced leakage effects, which suggests that some market participants were able to capitalize on inside information before the profit warnings were issued. We also find statistically significant evidence of a three-day lag effect following the profit warning, which suggests that investors who did not have inside information could profit from a warning. When using the leakage as a proxy, the degree of market inefficiency is more pronounced for firms in the technology sector, but the extent of government ownership or countries of origin are not significant ...