The International Attributes and Return Performance of Newly-Listed American Depositary Receipts

American Depositary Receipts (ADRs) have recently experienced a notable increase in significance in terms of their visibility in U.S. financial markets and their overall role in international finance. This study investigates the investment return performance of newly created ADRs listed on U.S. markets in the period immediately following their introduction. Variation in return performance between different categories of listed ADRs is marked. Those associated with worldwide IPOs have impressive first day Abnormal Returns, and an average Cumulative Abnormal Return (CAR) of 25.62% over the first 100 trading days. This pattern is particularly notable for ADRs associated with privatizations, which have first day Abnormal Returns of 21.93% and an average CAR over the first 100 days of 43.43%. Some ADR listings are IPOs for U.S. markets, but have previously traded abroad and thus have elements of being Seasoned Equity Offerings. These post smaller first day gains, but have a 100-day average CAR of 12.81%. In contrast to the above categories, ADR listings not associated with the raising of new capital have minimal Abnormal Returns. I. INTRODUCTION American Depositary Receipts (ADRs) have become an important class of securities traded in the U.S. In 1997, ADRs represented 5% of trading volume on the exchanges (over $500 billion in transactions), and were used to raise $13 billion through 75 offerings. At the end of 1997, of the 1358 ADRs traded in the U.S., 457 were listed on NYSE, AMEX or NASDAQ. In the same year 165 new sponsored ADR programs were established, compared to 52 in 19881. Table 1 profiles the growth of ADRs from 1990 to 1997. The total number of ADRs grew 62% from 836 to 1,358; while listed (on the NYSE, AMEX, and NASDAQ) programs have increased 160% from 176 to 457. Since 1990 an increasing percentage of ADR offerings have been from emerging markets. This is related to the opening of these markets to international investors. Although the number of emerging market offerings dropped immediately after the Mexican Peso crisis in late 1994, the number increased again starting later in 1995. ADRs are negotiable certificates representing ownership in a foreign company's stock. There are two ways to create new ADRs. The shares can be purchased in the home market and delivered to the depository's local custodian bank, which instructs the depositary in the U.S. to issue ADRs. Alternatively, additional shares can be sold and incremental capital raised at the time the ADR is created. These shares can be offered in the U.S. and/or foreign markets simultaneously. ADRs allow U.S. based investors to invest in a foreign company without converting currency and trading in a foreign market. Other benefits include institutional arrangements that resolve potential concerns regarding the authenticity of share certificates delivered after a purchase. Dividends are paid in U.S. dollars and converted at favorable commercial exchange rates. Although the price of the ADR is quoted in dollars, the return is influenced by changes in exchange rates. Investors may benefit by saving the extra expenses of trading in a market outside the U.S. For instance, the Bank of New York estimates that elimination of custodian safekeeping charges saves 30 to 60 basis points annually. Surveys of institutional investors indicate that in terms of value of foreign securities held in portfolios, more than half consisted of ADRs as compared to shares in the home market. The primary motivations for foreign firms in establishing a Depositary Receipt program can be divided into two broad considerations: capital and commercial. Under capital considerations, one perceived benefit is to enlarge the market for its shares, through a broadened (more liquid) and more diversified investor exposure which may increase or stabilize the share price and have positive cost of capital implications (2). Firms also cite commercial goals, such as the enhancement of the image of the company's products, services or financial instruments in a marketplace outside its home country. …