THE IMPACT OF TAX CHANGES ON TRADING OF AMERICAN DEPOSITORY RECEIPTS

Upinder S. Dhillon and Gabriel G. Ramírez

This study examines the effects of tax changes on price and volume of American Depository Receipts. Using multi-factor models, we constructed portfolios of British and non-British ADRs. We found that prices increased significantly around the announcement of a 1986 British tax increase. This was accompanied by a marginal decrease in volume. The volume decrease further around the tax rollback. These results are consistent with the hypothesis that transaction costs have a significant influence on prices and trading activity of British ADRs. The further decline in volume on the tax rollback date suggests that marginal investors move to other ADR substitutes when there is government intervention in the marketplace.