Depositary Receipts Research Articles

Incremental Market Behavior Classification in Presence of Recurring Concepts.

In recent years, the problem of concept drift has gained importance in the financial domain. The succession of manias, panics and crashes have stressed the non-stationary nature and the likelihood of drastic structural or concept changes in the markets. Traditional systems are unable or slow to adapt to these changes. Ensemble-based systems are widely known for their good results predicting both cyclic and non-stationary data such as stock prices. In this work, we propose RCARF (Recurring Concepts Adaptive Random Forests), an ensemble tree-based online classifier that handles recurring concepts explicitly. The algorithm extends the capabilities of a version of Random Forest for evolving data streams, adding on top a mechanism to store and handle a shared collection of inactive trees, called concept history, which holds memories of the way market operators reacted in similar circumstances. This works in conjunction with a decision strategy that reacts to drift by replacing active trees with the best available alternative: either a previously stored tree from the concept history or a newly trained background tree. Both mechanisms are designed to provide fast reaction times and are thus applicable to high-frequency data. The experimental validation of the algorithm is based on the prediction of price movement directions one second ahead in the SPDR (Standard & Poor’s Depositary Receipts) S&P 500 Exchange-Traded Fund. RCARF is benchmarked against other popular methods from the incremental online machine learning literature and is able to achieve competitive results.

Investor reaction to economic sanctions: the case of Russian Global Depositary Receipts

We examine the impact that the economic sanctions imposed by the Western community on the Russian economy in March 2014 have had on the pricing of Global Depositary Receipts (GDRs) traded in London. We document that following the first announcement of the imposition of sanctions, the returns of Russian GDRs increased in the case of both the Moscow Exchange and London listings, indicating an enhanced risk of trading with Russian securities. This effect was more pronounced in the case of London listings compared to local listings, which resulted in an overall decrease in the returns spread between the GDR and underlying home market shares. In contrast, we do not find evidence that imposition of sanctions affected turnover by volume of home or London-based GDR trades around the sanctions announcement, suggesting that investors did not pull out of Russian GDRs, but instead, reassessed investment risks associated with Russian securities. Last, our findings provide no evidence of a moderating impact on pricing of Russian GDRs by the two mechanisms that are expected to be indicative of enhanced (decreased) risks for GDRs, namely, state ownership (presence of foreign nationals on boards of directors). Our study contributes to the debate on the importance of complex assessment of outcomes of international sanctions on individual economies and firms.

Accounting Standards and Earnings Quality — Evidence from Registered ADRs

This paper examines the changes in earnings quality of registered American Depositary Receipts (ADRs) as a result of switching accounting standards. We aim to shed light on the potential impact of International Financial Reporting Standard (IFRS) adoption on US firms. A suboptimal approach to achieve this goal is through examination of US firms’ surrogates such as ADRs. Unlike previous studies, we made a distinction between registered and unregistered ADRs and affirmed that registered ADRs are the closest surrogates with which to conduct our analysis because they are exclusively required to adhere to the Securities and Exchange Commission (SEC)’s stringent disclosure requirements. When cross-listing their equity on the US exchanges, foreign issuers can file their financial reports with the SEC using IFRS, US GAAP (generally accepted accounting principles), or their domestic GAAP with reconciliation to US GAAP. An improvement in earnings quality is documented when ADRs adopt US GAAP or IFRS versus domestic GAAP. However, when the comparison is made between US GAAP and IFRS, no difference in earnings quality is documented. These results indicate that switching to high-quality accounting standards is likely to improve earnings quality. This improvement is maximized when the difference between reporting standards is high and minimized if otherwise. Our conclusion is that the adoption of IFRS in the US is unlikely to change earnings quality of local issuers. Moreover, we drew a distinction between reconciliation with and adoption of high-quality accountings standards and find that while the former can enhance earnings quality, the latter can further improve it.

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.

Ownership Concentration and Economic and Financial Performance in Latin-American Companies

The study examined the relationship of ownership concentration in the economic and financial performance of publicly traded Latin American companies possessing American Depository Receipts (ADRs). Generally, the capital structure decisions are tied directly to the results of the organizations, thus reflecting the economic and financial performance. The correlation between the set of variables within the group of ownership structure with the group of economic and financial performance showed significant correlation with the linear combinations, when analyzed in the set of all the samples of companies and taken separately by country. However, the results did not show similar correlation to Venezuela, Colombia and Peru due to the existence of few observations. The results also portrayed a significant correlation within economic and financial performance, higher to Mexican companies, when compared with the results of other countries and among the set of the two groups of variables that highlighted the analysis by ownership structure and economic and financial performance as well.

The international diversification benefits of U.S.‐traded equity products

AbstractThe benefits of international diversification for equity investors have been highlighted for decades. Despite the reduction of many previous barriers to foreign investment, investors are found to persistently overweight domestic equities. This paper examines whether the benefits of international diversification are available via U.S.‐traded equity products over a 15‐year period between 1996 and 2011. The equity products investigated are multinational corporations (MNCs), American depository receipts (ADRs), single‐country exchange‐traded funds, iShares, and closed‐end country funds. Mean‐variance spanning tests and Sharpe ratio analysis reveal that portfolios of ADRs and MNCs offer the greatest international diversification benefits to U.S. investors in a domestic setting. Whereas the benefits of international diversification vary during periods of differing market conditions, the findings for ADRs and MNCs remain robust. We conclude that it is possible to reap the benefits of international diversification via U.S.‐traded equity products but that the benefits of different equity types vary significantly.

Which sentiments do US investors follow when trading ADRs?

This study examines herding tendency in the market for American Depository Receipts (ADRs) by analyzing daily data from 343 ADRs listed on the US stock exchange. Using two different approaches, Christie & Huang (Financ Anal J 51(4), 31–37, 1995) and Chang et al. (J Bank Financ 24(10), 1651–1679, 2000) showed that US investors do not herd when trading domestic stocks. We extend these works by using the same approaches to investigate whether US investors herd when trading registered ADRs. Two types of herding are considered in our analysis: informational cascades and investigative herding. We find strong evidence that US investors follow the same signals when trading ADRs rather than following others’ trades. Specifically, they have a tendency to herd around the ADRs’ home market indexes. These results suggest that such herding is based on value-relevant information, which is consistent with the presence of investigative herding.

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.

CORRUPÇÃO GOVERNAMENTAL NO MERCADO DE CAPITAIS: UM ESTUDO ACERCA DA OPERAÇÃO LAVA JATO

RESUMO O Brasil apresentou, nos últimos anos, um cenário de crise econômica e política, resultado do funcionamento de uma elaborada rede de corrupção no governo. A literatura financeira aponta duas linhas de pensamento relacionadas ao tema corrupção, uma que defende a existência de efeitos benéficos e outra que aponta os prejuízos no sistema público. A fim de se entender a relação entre a queda no nível de investimento e a corrupção, foi realizado um estudo de eventos, com base no modelo GARCHX-in-Mean, que permitisse identificar a existência e/ou o potencial sentido do impacto da corrupção para alguns ativos selecionados. Os resultados apontam que, no Brasil, houve uma grande desvalorização nas maiores empresas estatais negociadas na bolsa de valores nacional e também em suas American Depositary Receipt (ADR), consequentemente, gerando um cenário de fuga de recursos financeiros e indicando uma queda no crescimento econômico, apoiando a teoria de prejuízo em longo prazo da corrupção.

A market-based measure for currency risk in managed exchange rate regimes

We introduce a novel currency risk measure based on American Depositary Receipts (ADRs). Using an augmented ADR pricing model, we exploit investors’ exposure to potential devaluation losses to derive an indicator of currency risk. Using weekly data for a sample of 807 ADRs located in 21 emerging markets over the 1994–2014 period, we find that a deterioration in the fiscal balance and higher inflation increase currency risk. Interaction models reveal that the fiscal balance and inflation drive the determination of currency risk for countries with poor sovereign rating, low foreign reserves, low capital account openness and managed float regimes.

Testing Second-Generation Currency Crises Models: Evidence from the Pricing of American Depositary Receipts around FOMC Meetings

I study the impact of US monetary policy on managed exchange rates by analyzing the pricing of American Depositary Receipts (ADRs) around FOMC meetings. The significant negative impact of US monetary surprises on abnormal ADR returns for currencies that are managed reflects changes in these currencies’ fundamental values due to US monetary policy shocks. In line with currency crises models of interest rate defence like Lahiri & Vegh (2007), I find that positive US monetary surprises increase the breakdown probability of currency pegs of countries characterized by low real GDP growth, high fiscal deficits and a weak domestic banking sector.

Развитие коллективного характера акционерного общества как основа изменения отношения к его миноритарным акционерам

The historically collective character of the capital of the joint-stock company developed in the direction of the growth of the number of joint-stock companies and the associated increase in the number of shareholders and the number of shares to be issued. In modern conditions, the possibilities for a quantitative increase in the size of the share capital have already exhausted themselves sufficiently. There are qualitative changes associated with the deepening of the collective character of such capital. On the one hand, there is the emergence of this type of minority shareholders, behind which in fact are hiding large funds of collective investment. On the other hand, this is expressed in the processes of internationalization of jointstock companies and their transformation into transnational companies, i.e. when the composition of shareholders becomes more and more international. The national share market of one and the same company is turning into a global market because these shares through the issue of depositary receipts are able to address the stock markets of any other countries of the world. Owners of depositary receipts, like collective investors, often fall into the category of minority shareholders due to the fact that they have small blocks of shares. The collective and international nature of minority shareholders is an objective basis for the need to protect the rights of such shareholders already at the legislative level.

An International Analysis of Director Equity Incentives and Earnings Management

Using data from 29 countries, I examine how directors’ equity incentives affect earnings management internationally. I find that firms whose directors awarded higher percentage equity-based compensation are associated with greater use of earnings management. Such positive relation between equity incentives and earnings management persists regardless whether a director serves on the audit committee, or whether a director is classified as an independent or inside director. However, this association is reversed at firms with greater board or audit committee independence. Finally, using a matched sample of American Depository Receipts (ADRs) and non-ADRs, I provide evidence that although ADRs exhibit less earnings management relative to non-ADRs, having an ADR does not deter the attempt of directors with high equity incentives to manipulate earnings.

Exchange rate volatility and the stability of stock prices

Using a sample of American Depositary Receipts (ADRs), we test whether the volatility of ADRs is explained by exchange-rate volatility in the ADR home country. Tests show that variability in the home-country currency leads to greater volatility in ADRs as a 1% increase in exchange-rate volatility corresponds to an approximate 2% increase in ADR volatility. To make stronger causal inferences, we show abnormal volatility in Chinese ADRs surrounding the largely unexpected 2005 unpegging of the Chinese Yuan to the U.S. dollar. These results provide an important link between currency markets and equity markets.

Reducing risk in the emerging markets: Does enhancing corporate governance work?

This study examines emerging market firms that adopt corporate governance standards similar to those in the US. The investigation highlights the impact governance standards may have on corporate risk taking, as measured by stock return volatility, under varying political and socioeconomic regimes. In a cross-sectional time-series setting, the analysis reveals that enhanced governance standards are associated with risk reductions among US domiciled firms, cross-listed American Depository Receipt companies (ADRs) and non-cross listed emerging market (EM) firms. The effect of these governance standards on risk taking, however, does not deviate considerably between cross-listed ADRs that are exposed to Securities and Exchange Commission (SEC) mandated regulations and non-cross-listed EM firms that are not subject to the same regulatory constraints. Also, in some respects, Chinese firms seem to exhibit corporate behavior that is contrary to that of the rest of the world.

Price Discovery Study of Chinese ADRs on Global Markets

This paper analyzes the price discovery mechanism between the Chinese American Depository Receipts (ADRs) listed on the New York Stock Exchange (NYSE) and their underlying H shares on the Hong Kong Stock Exchange (HKEX). It employs the Permanent-Transitory decomposition in vector autoregression (VAR) model, and finds that the New York stock market makes the principal contribution to the price discovery, and the proportion of contribution is 84.84%; while the Hong Kong market makes only subsidiary contribution of 15.16%. In addition, it confirms the existence of the long-term cointegration relationship between ADRs and H shares, which implies that portfolio diversification among Chinese ADRs is consistent with Global Center Hypothesis and efficient for international investors.

Extracting shadow exchange rates and foreign exchange premia during currency crises: an example from Egypt

ABSTRACTWe utilize high-frequency data and a novel synchronous trade-matching algorithm to show that shadow exchange rates could be estimated from price spreads between depositary receipts and their underlying local stocks using an example of the recent Egyptian currency crisis. These shadow rates reflect the local black market foreign exchange rates in addition to a foreign exchange premium, which we attribute to the cost of expatriating capital during currency and capital control periods.

The Brexit effect: the case of UK ADR performance one year later

ABSTRACTIn an unexpected outcome, UK voters decided that it was time to exit the European Union based on the results of a vote held on 23 June 2016. Studies of the affects and implication of Brexit include a study showing that the vote was met with a negative short-term wealth effect for UK American depository receipts (ADRs). This study examines the one-year anniversary holding period returns of these ADRs along with the British Pound and the FTSE 100 to discover any lingering effects from the historical vote. Results indicate that the one-year holding period returns for the ADRs averaged 5.8% for the year while the FTSE gained 4.8%, the S&P 500 gained 15.4% and the Pound lost 13.2% of its value.

The impact of funding liquidity on market quality

This study analyzes market quality during the 2007–2008 credit crunch, by examining the impact of funding liquidity on market liquidity and price discovery of S&P 500 exchange-traded funds (i.e., S&P 500 depositary receipts [SPYs]) and index futures (E-minis). The empirical results show that funding liquidity affects market liquidity, and that the impact of illiquidity contagion between SPYs and E-minis was significant during the subprime mortgage crisis. In particular, the contagion effects between the two markets mediate the impact of funding illiquidity on market liquidity during the credit crunch. Considering the influences of other market factors on price discovery, we suggest that E-mini index futures made less contributions to price discovery during the credit crunch compared to normal periods. The empirical finding emphasizes the importance of the contagion effect between ETF and E-mini futures markets, when they suffer from external shocks.

A note on the long-term performance of Korean ADRs

PurposeThe purpose of this paper is to examine how Korean firm American Depository Receipts (ADRs) performed vs a US index and an Asia Pacific regional index. ADRs have been known to help cause-emerging economies become more developed and foreign exchange markets become more stable.Design/methodology/approachThe study utilizes standard ADR/IPO excess return methodology and presents returns on a month-by-month and cumulative basis for a three-year holding period beginning with the day of listing. Excess holding period returns are also provided.FindingsThe Korean firm ADRs trading on the NASDAQ underperformed both the US index and the regional Asia Pacific index for the first three years of trading. However, the Korean ADRs listed on the NYSE outperformed both the US index and the Asia Pacific index for the three-year holding period.Originality/valueThis paper shows how including equities of Korean firms traded in US markets in a stock portfolio helps to provide international diversification benefits. Solid performance vs market indexes may make subsequent and new issues from Korea more attractive in US equity markets.