American Depository Receipts: A Case Study Of The Performance Of Foreign Manufacturing Firm Equities Listed On The New York Stock Exchange

Abstract

With the growth of free-trade agreements and the development of a global economy, foreign equities may seem to provide a lucrative and diversified alternative for portfolio managers and individual investors.  During the study period, all 35 newly issued foreign manufacturing firm equities from 18 countries listed on the New York Stock Exchange traded as American Depository Receipts (ADRs) are examined to determine short term investment performance relative to the market.  The Standard & Poor’s 500 Index serves as a proxy for the performance of the market. Data are tested for significant differences in returns during the period of January 1, 1990 to December 31, 2002 during the first 21 days of trading after their initial listing.  In addition, the equities are examined to determine whether differences exist in those from emerging and developed countries and whether the timing of issue (in the U.S. bull and bear market) affects returns.  Findings suggest no significant difference in the overall short-term performance of the manufacturing firm ADRs relative to the S&P500 Index during the first 21 days of trading.  Further examination indicates that initial public offerings significantly out-perform the market by 5.0 percent and seasoned equity offerings performance is not significantly different from the S&P 500.  Manufacturing firm ADR returns from developed markets and their counterparts from emerging markets show no significant difference from the performance of the market index.  However, timing of the issue shows the most dramatic contrast in performance.  ADRs issued before 1/1/98, primarily in a bull market, significantly underperformed the market by 26.51 percent.  Those issued in the bear market after 1/1/98 show 9 months of returns that are positive and significant during the 36-month holding period.  Evidence suggests that initial public offerings and timing of issue may affect manufacturing firm ADR portfolio performance to achieve returns greater than the market.