This paper investigates the liquidity effect in asset pricing by studying the liquiditypremium relationship of an American Depositary Receipt (ADR) and its underlying share. Using the Amihud (2002) measure, the turnover ratio and trading infrequency as proxies for liquidity, we show that a higher ADR premium is associated with higher ADR liquidity and lower home share liquidity, in terms of changes in these variables. We find that the liquidity effects remain strong after we control for firm

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... e and a number of country characteristics, such as the expected change in the foreign exchange rate, the stock market performance, as well as several variables measuring the openness and transparency of the home market. JEL Classification: G10, G12, G15