No. of Recommendations: 2
The following link from shows that changes in foreign exchange rates can cause the ADR to underperform the local shares in times where the U.S. dollar is strengthening:

John Bethel's blog post from Aug. 24, 2006 on his website talks about the fact that some ADRs are very illiquid and the extra cost of buying foreign shares is worth getting more liquidity:

<<I've been eying an Australian stock lately. It has an ADR trading VERY illiquid on the OTC. Most days it doesn't trade at all. Even when it does, it just trades a couple of hundred ADRs or thereabouts. To establish a full position for my portfolio, I'd need purchase thousands of ADRs. It would be a pain getting the order filled – and might take multiple orders at that. This company trades daily in Australia and New Zealand. It's very liquid on those exchanges.

So if I pull the trigger, I'll gladly call Schwab's Global Investing Service and pay a higher commission. I think doing otherwise is a case of being penny wise and pound foolish.” But that's just me.

Furthermore, I do own the ADRs of Nikko Cordial that were purchased on the OTC. If I had it to do over again, I would buy the ordinary (“common”) shares in Japan. And for the same reasons I just mentioned. Nikko Cordial ADRs trade thinly but the ordinary shares are very liquid in their native country.>>

The following two papers talk about the substantial -- and prolonged -- premiums that ADRs of Indian companies trade at versus the price of the local foreign shares:

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