A Stock Market Boom During a Financial Crisis? Adrs and Capital Outflows in Argentina

Beginning in late 2001, Argentina experienced a tumultuous economic and social crisis including the end of the decade-long peso peg to the dollar, drastic foreign exchange and capital controls, violent anti-government demonstrations, social unrest, and the largest debt default in history. Yet the Argentine stock market experienced a boom during the early period of the crisis. This is in contrast to the experience of other countries undergoing financial crises, where the domestic stock market experiences sharp declines in value. This paper explains the surprising Argentine experience as a result of investors using the stock market to shift funds out of Argentina and into the United States. This was accomplished via purchases in Argentina of shares of firms listed in the United States and traded as American Depositary Receipts (ADRs). These Argentine shares were converted into ADRs and sold in the U.S. to shift out of pesos in Argentina into dollars in the United States. While ADRs and underlying share prices typically trade in a very narrow range, during the time when ADR conversions were permitted in Argentina, a large premium on share prices in Argentina relative to ADR prices existed. This premium reflected the capital loss expected on peso investments in Argentina and the value of capital control avoidance. On March 25, 2002, the conversion of Argentine shares into ADRs was prohibited and the premium of Argentine share prices over ADR prices once again returned to fluctuate about zero