Barriers to international investing and market segmentation: evidence from Indian GDR market

Abstract

In this paper we look at the market segmentation and its effect on pricing of cross-listed securities using the Indian Global Depository Receipts (GDRs). Where the capital markets are segmented, cross-listed securities can trade at different prices. We test this segmentation hypothesis using an empirical model which looks into a specific type of market segmentation where the domestic investors are allowed to invest in only the domestic securities, while the foreign investors can invest in both domestic (in the form of GDRs) and other foreign securities. Results indicate that the foreign investors who hold the GDRs estimate the expected returns at a lower level than the domestic investors. This leads to a pricing premium for the GDRs. Tests of Indian GDRs between 1995 and 1998 indicate that GDRs were priced at a premium over the exchange rate adjusted price of underlying Indian securities. GDR returns were affected by both domestic and international factors, while Indian securities were affected only by the Indian factors.