American Depositary Receipts Firms Research Articles

Do ETFs affect ADRs and U.S. domestic stocks differently?

This study examines the effect of exchange-traded funds (ETFs) on their underlying American depositary receipts (ADRs). We find that the percentage of ADR shares owned by ETFs increased dramatically in the past two decades. While ETF ownership is positively associated with stock liquidity for ADR firms, the same is not true for U.S. firms. In addition, ETF ownership improves ADR firms’ information environment by helping incorporate their earnings information. Furthermore, ETF ownership helps incorporate systematic related earnings into stock returns but not firm-specific earnings. Overall, our results show that ETFs are beneficial to ADR stocks by providing better liquidity and information efficiency. Our results are interesting to academics, investors, and policy makers.

Narrative forward-looking information disclosure, do ownership concentration, boardroom gender diversity and cultural values matter? A cross country study

PurposeThis study aims to identify the main factors that drive the differences in the levels of forward-looking information disclosure (FLID) across four countries. This study goes beyond the firm-specific characteristics to the countries-specific factors to explain the observable differences in the level of FLID among the UK, Italian, Hong Kong and Chinese American Depositary Receipts (ADRs) firms trading in US Exchanges.Design/methodology/approachTo validate the levels of FLID, corporate financial information environment (CFIE)-final reports structure extractor (FRSE) was conducted on the annual reports of a sample of 353 listed firm observations in 2020 across four different countries. Also, the ordinary least square regression model was used to examine the proposed relationships.FindingsThe empirical results indicate that the level of FLID is highest among the Chinese ADRs firms trading in US Exchanges and UK listed firms. Also, ownership concentration and gender diversity have a positive correlation with the level of FLID. Additionally, long-term orientation positively influences the level of FLID. Considering the moderation effect of power distance and masculinity dimensions, countries with larger power distance tend to have a lower impact of ownership concentration on the level of FLID, whereas countries with higher masculinity tend to have a lesser positive relationship between gender diversity and the level of FLID.Originality/valueNotwithstanding, this study provides novel and persuasive evidence regarding the effects of firm- and country-specific characteristics as possible determinants of forward-looking disclosures, drawing on evidence from international companies with free floats, boards with female quotas and cultural values including masculinity and long-term orientation. This work offers unique insights from the upper echelons lens, which implies that firms need to obtain a critical mass of gender diversity to achieve a more balanced forward-looking perspective on their annual reports.

Political Relations and Media Coverage

In this article, we find that poor bilateral political relations between the US and other countries negatively influence US media dissemination toward non-US firms with American Depositary Receipts (ADRs). We also show that US media negativity has downward pressure on ADR firms’ home market prices and such negative impact is reduced during the year when political relations are poor—an indication that investors react to real media bias. We conclude the first study by showing that negative US media coverage leads to a higher likelihood of ADR firms terminating their ADRs.

Financial Crisis and Earnings Management Under U.S. GAAP and IFRS

This paper examines the effects of the global financial crisis of 2008 on real and accrual-based earnings management activities of foreign companies listed in the United States as American Depositary Receipts (ADRs). The ADR firms are classified according to whether they report under U.S. Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Accrual-based earnings management is measured using the absolute value of performance-matched discretionary accruals. We also use the positive and negative values of performance-matched discretionary accruals to examine income-increasing and income-decreasing earnings management, respectively. Real earnings management proxies are measured using performance-matched measures of the abnormal levels of cash flow from operations, production costs, and discretionary expenses. In summary, our findings indicate no difference in accrual-based earnings management for ADRs reporting under IFRS and U.S. GAAP but suggest that ADRs reporting under IFRS are more likely to manage earnings using income-decreasing discretionary accruals and aggregate real earnings management than ADRs reporting under U.S. GAAP during the financial crisis.

Country factors in earnings management of ADR firms

This study examines the impact of investor protection, market monitoring, and stock liquidity on the degree of earnings management using a sample of 430 firms from 34 countries cross-listed as American Depository Receipts (ADRs). Our primary findings are that ADR firms from countries with strong legal system, strong outside investor rights, more institutional shareholders, and more financial analysts following are less likely to engage in earnings management. Auditor quality is not a significant factor. Further, firms with low stock liquidity tend to manipulate earnings relative to those with high liquidity. Legal factors, institutional holdings, and stock liquidity are particularly significant factors, suggesting that threats of lawsuits and monitoring by investors are effective mechanism to reduce earnings manipulation. Results also indicate that cross-listed firms exercise more earnings management in the pre-listing period than in the post-listing period and that stocks listed in the OTC market tend to have more earnings management than those in major exchanges.

ADR valuation and listing of foreign firms in U.S. Equity markets

We examine the decision to list in the U.S. markets by foreign firms through American Depository Receipts (ADRs). There is a high positive correlation between the valuation of existing ADRs and the number of new ADR listings next year. ADR listing is more likely when existing ADRs are valued higher. The subsequent operating and stock performance of ADR firms listed in hot years is significantly worse than those of ADR firms listed in cold years. These results are consistent with the hypothesis that market timing is an important motivation for foreign firms to list in the U.S. equity markets.

US cross-listings and director compensation: a cross-country analysis

PurposeThe purpose of this paper is to investigate the effect of cross-listing on the size and structure of director compensation at individual director level. While much of the prior literature has focused on executive compensation, more recent literature has started to examine director compensation. Additionally, there has been extensive literature examining the impact of cross-listing on the corporate governance and equity valuation of listed firms. The literature, however, has largely ignored the effect of cross-listing on director compensation schemes. This study attempts to combine these two literature streams and examine the effect of cross-listing on director compensation.Design/methodology/approachThis study uses American Depository Receipts (ADRs) and matched non-ADRs from the same country and industry to test the relationship between cross-listing and director compensation. Regressions with country, year and industry fixed-effects are employed. The relationship is further examined using only ADR firms during pre-listing and post-listing periods.FindingsThis study finds that directors of ADR firms receive higher total compensation and greater percentage equity-based compensation relative to directors of non-ADR firms. This study also finds that such differences in director compensation are dependent on the cross-listing program a firm is registered to. Directors of ADR firms also receive higher total compensation and greater percentage equity-based compensation during post-listing periods relative to their own compensation during pre-listing periods.Originality/valueThis study extends the literature on director compensation in a global setting, and is the first to examine an unanswered question regarding the effect of cross-listing on director compensation. This study provides important information that cross-listing affects the size and structure of director compensation between ADR and non-ADR firms, as well as between pre-listing and post-listing periods for ADR firms themselves.

The Effect of Changing the Listing Level on the Information Environment of ADRs

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.

Determinants of dividend policies for ADR firms

Purpose – Cross-listed firms may face unique incentives for establishing dividend policies in comparison to US firms. This study aims to test the implications of the lifecycle and signaling theories of dividend policy in the context of non-US firms cross-listed on US stock exchanges via American depository receipts (ADRs). Design/methodology/approach – ADRs are classified according to the firms' dividend paying histories as regular payers, non-payers, former payers, new payers and switchers. Multinomial logit regressions measure the likelihood of dividend payers to pay dividends, as well as the possibility of a dividend amount increase, decrease, or no change, based upon previously identified determinants of dividend payments and a measure of economic conditions in the home country. Findings – The results indicate that firm size, growth opportunities, and the mix of earned and contributed capital partially explain observed dividend policies for ADR firms. Multinomial logit regressions reveal profitability and home-country macro-economic conditions significantly affect ADR firms' decisions to change their dividend policies. Originality/value – The findings suggest macro-economic conditions affect dividend payment changes among ADR firms. The results also imply that the lifecycle and catering theories may help explain dividend changes among ADR firms.

Information Environment, Dividend Changes, and Signaling: Evidence from ADR Firms*

We examine the effect of firm-level information environment on the signaling role of dividends for a sample of foreign firms that cross-list on U.S. stock markets in the form of American Depository Receipts (ADRs). While theory suggests a signaling role of dividends under information asymmetry (e.g., Bhattacharya 1979), empirical evidence using U.S. data has provided little support. In fact, Li and Zhao (2008) find that U.S. firms with greater information asymmetries are less likely to pay, initiate, or increase dividends. Theoretical analysis also suggests that dividend increases convey credible information about firms’ growth prospects (Miller and Modigliani 1961), but empirical research again finds little U.S. evidence that dividend changes predict abnormal increases in earnings (e.g., DeAngelo, DeAngelo, and Skinner 1996; Benartzi, Michaely, and Thaler 1997; Grullon, Michaely, Benartzi, and Thaler 2005). Moreover, survey evidence shows that U.S. corporate executives dismiss the use of dividends as a signaling device, given other established and less costly channels to convey firm-specific information to shareholders (Brav, Graham, Harvey, and Michaely 2005). We revisit this inconsistency between theory and empirical evidence regarding dividend signaling by examining a sample of cross-listed non-U.S. firms. One potential explanation for the inconclusive empirical evidence is that the variation in information asymmetry across publicly listed U.S. companies is insufficient to provide adequate test power. A similar point has been made by Leuz and Verrecchia 2000 in their examination of the economic benefits of increased disclosure, as well as by Huddart and Ke 2007 when they explain the profits of informed trading. In contrast, significant variation exists in the information environment of cross-listed non-U.S. firms (Leuz and Verrecchia 2000; Lang, Lins, and Miller 2003). We have thus chosen the ADR setting since the variation in firms’ information environment provides a better opportunity of detecting dividend signaling. An important issue for our study is whether the information environments of ADR firms can create incentives for these firms to use dividends as a credible signaling device. First, to the extent that cross-listed firms are held to different accounting standards than the typical U.S. firms, U.S. investors may not have access to information on ADR firms that is of similar quality to that presented by U.S. firms (e.g., Lang et al. 2003; Leuz 2003; Lang, Raedy, and Wilson 2006). Many ADR firms also have fewer communication

Information Environment, Dividend Changes, and Signaling: Evidence from Adr Firms

While theory suggests that dividends can be an important signal for firm performance, prior studies have been unable to provide strong evidence of dividend signaling among publicly listed U.S. companies. One potential explanation for this inconsistency between theory and empirical evidence is that the cross-sectional variation in information asymmetry across U.S. firms is insufficient to provide adequate test power. In this study, we revisit the link between dividend signaling and firms’ information environment by examining the dividend behavior of foreign firms that cross-list on the U.S. stock market in the form of American Depository Receipts (ADRs). Our evidence suggests that ADR firms with poorer information environments have stronger incentives to adopt dividend increases as a signaling device. We also find that such firms experience an increase in one-year-ahead earnings and a decline in systematic risk following a dividend increase. Additional analysis shows that ADR firms have fewer other information channels compared to similar U.S. firms. Overall, we provide evidence consistent with the importance of dividend signaling, especially for firms with poorer information environments.

The financial performance, capital constraints and information environment of cross-listed firms: Evidence from Mexico

This study provides evidence that Mexican firms that choose to trade in the United States as exchange-listed American Depositary Receipts (ADRs) have significantly weaker ex-post (subsequent to cross-listing) financial performances than Mexican firms that are eligible to list in the United States but choose not to do so. Our study is related to the generalizabililty of two streams of international research: global equity offerings studies (e.g., ( Errunza & Miller 2003; Foerster & Karolyi 2000) [Errunza, V. & Miller, D. 2003 Valuation effects of seasoned global equity offerings. Journal of Banking and Finance (September), 1611–1631; Foerster, S. & Karolyi, G., 2000. The Long-run performance of global equity offerings. Journal of Financial and Quantitative Analysis (December), 499–527]), based on large, multi-country samples, which show that ADR firms substantially underperform local-market benchmark company returns in years following issuance and accounting characteristics of ADR firms research (e.g., ( Lang, Raedy, & Yetman, 2003) [Lang, M., Raedy, J. Smith, & Yetman, M. (2003). How representative are firms that are cross-listed in the United States? An analysis of accounting quality. Journal of Accounting Research]), which employ a multi-country sample and conclude that ADR firms are less aggressive in terms of earnings management and that they report accounting data that are more strongly associated with share prices. The cited studies above use relatively large samples, which are usually considered to be advantageous, but such studies tend to mask individual country differences in market efficiency, legal protections for shareholders, disclosure environment, and shareholder-class features that make generalizations tenuous. We show that cross-listed (ADR) Mexican firms, on average, are smaller, more highly levered, and less profitable than non-cross-listed (NCL) firms. Further, logistic regression models for classifying various ADR and NCL groupings of firms, using financial variables 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 financial performance reported for 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 (Mexico, the United State's second-largest trade partner) in contrast to most previous ADR research that uses 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 ADR and NCL firms. To gain these advantages, however, we must conduct tests on and draw conclusions from a relatively small sample.

The Information Content of Stock Prices and Earnings of Non‐U.S. Firms: A Simultaneous Equations Approach

This study uses a simultaneous equations approach to examine the price‐earnings relationship of non‐U.S. firms that directly list their securities in U.S. capital markets or trade as American Depository Receipts (ADRs). The Hausman test shows that price changes and earnings changes are endogenously determined, thus the simultaneous equations approach is used to estimate the earnings response coefficient (ERC) and the returns response coefficient (RRC). Under the ordinary least squares (OLS) estimation, the parameter estimates are biased downward because the OLS fails to correct for endogeneity. In general, our results show that the joint estimation procedure mitigates some of the single‐equation bias. The estimated ERC and the RRC are higher under the three stage least regression (3SLS) than under the OLS regression. In addition, the product of the ERC and the RRC coefficients approaches its theoretical value of one when using the 3SLS estimation. The evidence also shows that institutional factors affect the way the market value information for these firms. We find that the ERC and RRC are insignificant for the common law non‐ADR firms and significantly positive for common law ADR firms.

Which Firms Choose to List as American Depositary Receipts (ADRs)?: Evidence from Mexican Cross Listings

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.

Inflation Accounting and 20-F Disclosures: Evidence from Mexico

This paper analyzes features of the Mexican accounting model and describes the effect of the accounting differences between Mexico and the U.S. on the relation between equity prices and accounting information reported in the two countries. The influence of U.S. accounting in Mexico is evident in several areas, partly due to the presence of numerous affiliates of U.S. multinational corporations, and also due to the prominence of local representatives of the Big 5 international accounting firms. Still, the Mexican accounting and reporting model addresses special issues—such as inflation accounting—in a manner different from that of the U.S. Using the population of Mexican firms listed on U.S. exchanges as American Depositary Receipts (ADRs), we assess the relationship between Mexican ADR prices and Mexican vs. U.S. GAAP earnings and equity. We find that although Mexican ADR firms are not required to reconcile their inflation accounting to U.S. GAAP, ADR prices are significantly related to Mexican GAAP net income. However, we find no significant relation between the ADR price and net income and equity reconciliations from Mexican to U.S. GAAP. Our results call into question once again the validity and usefulness of the SEC's required reconciliations to U.S. GAAP.