Explaining Premiums in Restricted DR Markets and Theri Implicartions: The Case of Infosys

I examine several possible explanations for why Infosys' Deposirtary Receipts (DRs) trade at significant premiums to the equivalent underlying domestic shares. I find that a limited supply of DRs and a downwoard-sloping demand curve, significant transaction costs associated with investing directly in the domestic market, and trend-chasing by smaller and potentially uninformed investors partly explain the DR premiums. I also examine the wealth effects of non-capital raising secondary depositary receipt offerings by Infosys Technologies and find significant wealth transfers from existing DR holders to selling domestic shareholders who are comprised significantly of Infosys' founders. Copyright (c) 2006 Financial Management Association International.