Santa Claus rally and American depository receipts: a note

This study investigates the impact of changing the listing level of American Depositary Receipts (ADRs) on the information environment of ADRs. Specifically I examine four main listing levels of ADRs and analyze whether ADRs that change (upgrade/downgrade) their listing level have greater/less analyst coverage, increased/decreased forecast accuracy, and increased/decreased forecast dispersion. In addition, since analyst forecast accuracy differs depending on ADRs’ home country legal institutions, this study also investigates whether analyst forecast accuracy differs depending on ADRs’ home country legal institutions. Specifically, I examine whether the impact on information environment is different for ADRs from countries with different legal systems and disclosure regulations. The SEC has segmented ADRs into four listing levels which have different reporting and regulatory requirements. The SEC and disclosure requirements vary across the four ADR programs. Level II and Level III are exchange listed ADRs, Level I is traded OTC, and Level IV private placement. ADRs that trade in the U.S. market (exchange listed) have more stringent requirements and must adhere to stronger enforcement of accounting standards. Thus, their regulatory and hence quality of information environment is higher. If ADRs that trade on Level II and Level III must follow a more rigorous regulatory requirement, then do analysts and investors in the U.S. markets adjust the pricing of securities to reflect this difference in ADR listing levels? The sample consists of 448 ADR firms from emerging and developed markets around the world that cross-listed on U.S. markets and eventually changed their listing level between 1999 and 2010. I classify the firms based on their listing level which symbolizes the degree of regulatory adherence. To proxy for the information environment, I examine analyst forecast. I analyze the level of significant difference in forecast accuracy, number of analyst forecast, and forecast dispersion when ADRs change their listing level. I present empirical evidence consistent with the hypotheses that an upgrade (downgrade) of ADR listing level is associated with a decrease (increase) in analysts’ forecast error, and number of analyst following. These results indicate that a change in the information environment around U.S. cross-listing is a combination of both the bonding hypothesis effect and the ADR listing level effect.

This study evaluates the appropriateness of country funds versus American Depository Receipts (ADRs) for international diversification for small domestic investors. During the past decade as more country funds have become available small domestic investors have embraced these funds as a tool for international diversification. During this same time period more and more ADRs are available but have been largely ignored by these same investors. This study shows that investors holding a diversified portfolio of ADRs would have realized a higher relative return on their investment than the same dollar investment in closed-end indexed country funds. A portfolio of all available ADRs from a specific country (i.e. ADR index) should provide similar returns to an indexed country fund. But ADRs offer distinct advantages over country funds. Because the ADRs have fewer costs associated with ownership this study proves that the advantages of ADRs over country funds make them a superior international investment for the small domestic investor. First, country funds trade at a discount to NAV and have liquidity issues that create a downward bias in absolute returns. This downward bias contributed to every individual country ADR index in our study earning higher average returns over the comparable country fund during the same investment time period. Secondly, the correlation with the S&P 500 Index is in most cases lower for the individual country ADR index versus the specific country fund. Hence the benefits of diversification are better with ADRs. Thirdly, ADRs are individual stock issues so there is no management fee. And, finally, ADRs as individual stock issues can be bought and sold as deemed appropriate by the investor hence all tax implications (capital gains and losses) are determined by the direct actions of the investor as opposed to the actions of the fund manager.

This study provides evidence that Mexican firms that choose to trade in the U.S. as exchange-listed American Depositary Receipts (ADRs) have significantly weaker ex post (subsequent to cross listing) financial performance compared with Mexican firms that are eligible to list in the U.S., but do not. The study provides evidence related to two streams of international research. First, global equity offerings studies, e.g., Foerster and Karolyi (2000), based on large, multi-country samples, show that ADR firms substantially underperform local market benchmark company returns in years following issuance. A second stream of research examines accounting characteristics of ADR firms. For example, Lang, Raedy and Yetman (2001) employ a multi-country sample and conclude that ADR firms perform better, are less risky and less aggressive in terms of earnings management. They also find that ADR firms report accounting data that are more strongly associated with share prices. The above studies have the advantage of using relatively large samples. However, such studies tend to mask individual country differences in the degree of market efficiency, legal protections for shareholders, disclosure environment and shareholder class features that make generalizations tenuous. We show for Mexican firms that, on average, ADR firms are smaller, more highly levered and less profitable than non-crosslisted (NCL) firms. Further, logistic regression models for classifying various ADR and NCL groupings of firms, using financial and other firm characteristics, are highly significant. While supplemental tests of earnings quality suggest that NCL firms exhibit nominally smoother earnings, that evidence is not sufficient to explain the stronger reported financial performance of those firms relative to ADR firms. Finally, our tests of value relevance, using book value and earnings to explain price, show significantly higher explanatory power for the ADR firms and generally non-significant explanatory power for the NCL firms. The value-relevance results may indicate that investors in Mexican ADR firms benefit from U.S. regulation and that reported market inefficiency in Mexico may result in low demand for financial statements of NCL firms. This study has the advantage of focusing on a single, emerging-market economy in contrast to most previous ADR research that used multi-country samples dominated by developed market countries. It is also one of the first ADR studies to deal with selection bias issues by comparing cross-listed and non-crosslisted firms. These advantages are obtained at the cost of having to conduct tests on and draw conclusions from relatively small samples.

The removal of borders in financial markets has increased the demand for different investment instruments. American Depositary Receipts (ADRs), which are traded through depositary receipt management by accepting the stock as an underlying asset, have become a frequently used investment instrument today. Since ADRs are linked to the underlying stock, there are multiple variables in determining their price. The effects of these variables on the ADR price may lead to an arbitrage gain between the underlying stock and the ADR return. The aim of the study is to identify the indicators affecting the Turkish ADR prices and to reveal the existence of arbitrage opportunities in ADRs. In the study, economic indicators affecting the price of Turkish ADRs were identified. Exchange rate, CDS premium, various stock market indices were selected as economic indicators to be used in the analysis. Regression anaylsis was used in the study where daily data was used between 2014 and 2024. As a result of the study on eight different ADRs, it is determined that the return differences between ADRs and stocks are affected by various economic indicators. Moreover, the fact that this difference does not follow a random walk, i.e. it is predictable, provides evidence that the ADR market is inefficient within the framework of the efficient market hypothesis.

PurposeThe purpose of this study is to analyze the overnight and intraday returns of the most traded American Depositary Receipts (ADRs) of Asian companies, understand the different levels of volatilities realized in these asynchronous markets and develop trading strategies based on empirical findings.Design/methodology/approachThis study presents an empirical analysis on the overnight and intraday returns of Asian ADRs. The authors propose a measure to quantify the relative contributions of the intraday and overnight returns to the ADR's total volatility. Furthermore, the return difference between S&P500 index and each ADR is fitted to an Ornstein–Uhlenbeck model via maximum-likelihood estimation.FindingsThis study finds that ADRs' overnight returns are more volatile, whereas the intraday returns are significantly more strongly correlated with the US market returns. The return spreads between the S&P500 and ADRs are found to be a mean-reverting time series and motivate a pairs trading strategy.Research limitations/implicationsThe methodology used in this study is not limited to Asian ADRs and can be adapted to analyze the overnight and intraday returns of other non-Asian ADRs and stocks.Practical implicationsInvestors should be aware of the overnight price fluctuations while intraday traders may consider strategies that capture the mean-reverting return spread between an ADR (or an Exchange-Traded Funds [ETF] of Asian stocks) and the S&P500 index ETF (SPY).Social implicationsADRs are among the most popular securities for investing in foreign (non-US) companies. The total global investments in ADRs are estimated to be close to US$1tn. Understanding the risks of ADRs is important to not only individual/institutional investors but also regulators.Originality/valueThis study provides a new measure to quantify and compare the relative contributions of volatility by overnight and intraday returns. Optimized pairs trading strategies involving ADRs and ETFs are developed and backtested.

Purpose – Single-listed American depositary receipts (ADRs) are traded in US markets, while their underlying share is not listed in the firm’s home market. The purpose of this paper is to empirically examine the factors affecting the returns and volatility of a sample of Chinese single-listed ADRs, in comparison with traditional Chinese ADRs. Design/methodology/approach – The methods used in this paper are similar to those used in the examination of traditional or dual-listed Chinese ADRs. However, motivated by the very nature of single-listed ADRs, the authors estimate a base model which includes factors from the two presumably most important markets for single-listed Chinese ADRs (i.e. the Chinese and US markets). In all of the estimations, the authors follow a two-step procedure. First, the authors estimate a GARCH(1,1) model with the mean equation modeled as an AR(p) process and from those models estimate GARCH (conditional) variances. Findings – In line with the evidence on traditional Chinese ADRs, the authors find that both the Chinese and the US markets are important predictors of single-listed ADR returns. The results are robust to variations in the model specifications. Originality/value – Single-listed ADR return behavior is still an under-researched topic. In this paper, the authors contribute to the literature on Chinese single-listed ADRs by empirically examining the determinants of their mean return and volatility.

ABSTRACTWe contribute to the literature by identifying and accurately measuring the drivers of American depositary receipt (ADR) returns contemporaneously across various global time zones. We consider ADRs as two inherently distinct asset classes – stocks and currencies – bundled into one. Throughout, we use a relatively refined, focused, and synchronized minute-by-minute data set on ADRs and all other variables. ADRs from all countries with regular trading hours that overlap with those of the US are considered individually and in clusters. We analyze the interplay of several factors that influence ADRs pricing patterns. Further, we investigate whether such patterns vary by currency, ADR, industry, and emerging/developed market classifications. Our findings indicate that synchronized returns on underlying shares comprise 68.5–74% of the explained returns in ADRs. The remaining 31.5–26% of returns are generated by movements in currency rates. These results are robust across the several models and estimation methods employed. Our findings also show persistent small price discrepancies between ADRs and dollar-adjusted underlying shares on a minute-by-minute basis, implying possible arbitrage opportunities. However, we conclude that trading and ADR conversion costs render such opportunities unattractive.

The controversy over Chinese reverse mergers, which are directly listed on U.S. stock exchanges, has led to concerns about the audit quality of all U.S. listed Chinese companies. Because a sizeable number of foreign firms cross list their shares as American Depositary Receipts (ADRs) issued by U.S. depositary banks (as opposed to directly listed), we study how auditors have managed Chinese ADRs. Our motivation for examining Chinese ADRs is based on the findings that cross-listing via the ADR process is beneficial for U.S. shareholders, generally results in higher valuations, and is less likely to be associated with misreporting. We find that relative to other ADRs, Chinese ADRs are: (1) more likely to be associated with a Big 4 auditor, (2) expected to pay more for their external audits, (3) are likely to have longer audit report lag (proxy for audit investments), and (4) less likely to restate prior period financial statements. When we include Chinese reverse mergers, which are non-ADR companies, we find that the audit quality problems are only confined to Chinese reverse mergers. Our results do not suggest that Chinese ADRs have lower audit quality than other ADRs or Chinese reverse mergers. A key conclusion is that the audit quality concerns of Chinese reverse mergers, or other directly U.S. listed Chinese companies, may not extend to Chinese ADRs.

PurposeThis study examines the initial two‐week excess performance relative to the S&P 500 Index of American Depository Receipts (ADRs) listed on the New York Stock Exchange from January 1987 to September 2001 to determine whether short‐term wealth effects exist.Design/methodology/approachStandard intial public offering methodology is used to test for significant excess performance.FindingsResults for the entire sample of 281 ADRs suggest the initial excess performance was not significant. However, after segmenting the sample, emerging market ADRs significantly outperformed the S&P 500 by over three per cent while developed market ADRs underperformed by 0.92 per cent. Also, Latin American ADRs outperformed the market index by nearly five per cent during the first two weeks after issue while European ADRs underperformed the market by nearly one per cent. Asia Pacific ADRs underperformed the S&P 500, but not significantly in the early trading.Research limitations/implicationsThe findings suggest emerging market ADRs, particularly those from the Latin American region, perform well in the early trading while developed market ADRs do not. Future research may identify variables that affect or explain ADR excess returns.Originality/valueThe paper provides insights into the types of ADRs that accumulate wealth in the short term investment horizon.

Purpose – A number of Chinese firms have dual-listed in USA and China. The US listing takes the form of American Depositary Receipts (ADRs) whereas the China listing in the form of A-shares. Though ADRs and their underlying A-shares lack full fungibility due to regulatory constraints, they nevertheless represent the same claiming rights and hence should be affected by the same fundamentals or news. The purpose of this paper is to examine the mutual return influences between ADRs and A-shares of dual-listed Chinese firms, and whether and how the recent global financial crisis has altered the mutual feedback dynamics. Design/methodology/approach – The paper uses the bivariate VAR approach to model the returns of ADRs and A-shares. The model is jointly estimated with the three-stage least squares (3SLS) method. It also accounts for the non-synchronous trading problem caused by the fact that the Chinese and US markets are located in different time zones and that the two market observe different national and religious holidays. Findings – The authors find significant mutual return transmissions between ADRs and their A-share counterparts. In the absence of local market sentiments, the return transmission is more prevalent going from USA to China than it is the other way around. After the market factors are included in the models, the information flows between A-shares and ADRs become stronger and bidirectional. Additionally, both ADR and A-share returns are strongly affected by the market sentiment of the marketplace where they are traded. Lastly, the authors find evidence showing that the recent global financial crisis has enhanced the linkage between ADRs and their underlying A-shares. Originality/value – This paper adopts a more rigorous approach to overcome the potential issue caused by non-synchronous trading. It investigates how the global financial crisis has altered the ADR and A-share return feedback dynamics.

"For a foreign "issuer," the benefits of cross-listing in the United States are extensively documented in the literature. However it is not clear what motivates "investors" to hold American Depositary Receipts (ADRs) rather than the underlying stock of these issuers. The authors address the investors' choice to purchase local shares versus investing in ADRs. Specifically, they analyze the investment allocation decision of mutual fund managers to invest in emerging market firms that are listed in their domestic markets and have also issued ADRs in the United States. Although legal provisions (governance/investor protection) are typically assumed to affect ADRs and their underlying domestic shares equally, investors holding ADRs may have a higher level of legal protection as these securities are issued and traded in the United States. The authors' results are consistent with this "better legal protection" hypothesis as they find that funds prefer to hold ADRs rather than the underlying shares if the issuer is from a country with weak investor protection laws. Also, theoretical models of multiple trading exchanges predict that trading should tend to aggregate in the market with the lowest transaction costs. Similarly, the relative liquidity of an ADR compared to that of its underlying stock should also affect the funds' relative holding of the ADR versus the underlying stock. Consistent with this "ease of transaction" hypothesis the authors find that if an issuer is based in a country with a relatively small stock market, low level of trading volume, and high transaction costs, funds tend to hold a larger proportion of their investments in the ADR. Furthermore, funds hold a larger fraction of their investment in the ADR if the ADR trading volume is high relative to its domestic security trading volume. The results also suggest that ADR listings of local firms might not negatively affect local markets if the investment climate is good. "--World Bank web site

Linkages between the ADR market and home country macroeconomic fundamentals: Evidence in the context of the BRICs

The present study empirically investigates the dynamic linkages between American Depository Receipts (ADRs) and their respective underlying stock returns of Indian stock market. Study analyzes daily data from the respective date of issue of that ADR to April 30, 2013 by applying augmented Dickey---Fuller unit root test, Johansen cointegration test, Granger causality test, vector error correction model, impulse response function and variance decomposition. The empirical result shows that both underlying stocks and ADRs are level stationary and long-run equilibrium relationship exists between them. Further, Granger causality test uncovers that ADRs lead underlying stocks. Additionally, impulse response function reveals that both underlying stocks and ADRs positively affect each other. Likewise, variance decomposition provides evidence that underlying stocks explain around half of the variance of ADRs. Major conclusion of this study is that price discovery takes place in ADR market, proposing that arrival of new information disseminates faster in ADR market.

PurposeThough stock portfolio return autocorrelation is well documented in the literature, its cause is still not clearly understood. Presently, evidence of private information induced stock return autocorrelation is still very limited. The difficulty in obtaining foreign country information by small investors makes the private information of institutional investors in the ADR (American Depository Receipt) market more significant and influential. As such, the ADR market provides a favorable environment for testing the effect of private information on return autocorrelation. The purpose of this paper is to address this issue.Design/methodology/approachIn this paper, ADRs are sorted annually into three groups based on market equity capitalization. Within each capitalization group, ADRs are further sorted into three groups based on the fraction of shares held by institutional investors. Each ADR is assigned to one of the nine groups and group membership is rebalanced each year. The return autocorrelation of individual ADR securities and ADR portfolios for each group are then calculated.FindingsThe results demonstrate that ADR individual stock and portfolio daily return autocorrelations are positively related to institutional ownership. It is also found that other explanations, such as non‐synchronous trading, bid‐ask spread and volatility of ADR, cannot explain the positive relation between daily return autocorrelations and institutional ownership of ADR.Originality/valueSince ADR market is more suitable than other markets for testing the role of private information, stronger and clearer results are got accordingly. This paper suggests that trading strategy based on private information of institutional investors can lead to stock return autocorrelation in ADR daily returns.

The purposes of this article are to reinvestigate how returns of major American depository receipts (ADRs) from different countries are related to the underlying stock returns and to identify the determinants of ADR risk premiums. We use different types of error-correcting terms in vector error correction models to examine information flows between ADRs and the underlying foreign stocks. General method of moments estimation of conditional international asset pricing model of Dumas and Solnik (1995) is applied to investigate ADR return premiums. We find that stock returns are more affected by disequilibrium between ADR and stock prices in an inefficient way. For US investors, foreign exchange rate risk premiums and world market risk premium (beyond US index) are priced in ADRs returns ex ante. Surprisingly, it is shown that the exchange rate of New Taiwan dollar and the interest rates of Brazil and Taiwan play important roles in determining ADR risk premiums across countries.