American Depository Receipts

1
American Depository Receipts
NYFC Partners

• Sherry Chen
• Andrew Frankel
• Christina Nitz
• Jean Yu

February 27, 2002
2
Agenda

• ADR Basics
• Hypothesis
• Methodology
• Data Set
• Regression Results
• Concluding Remarks
• Future Research Topics

3
ADR Basics

• Generally represent a non-U.S. companys publicly
  traded equity
• Overcome many inherent operational and custodial
  hurtles of international investing
• Growth of the market primarily driven by
  institutional investors
• 75 of U.S. institutional investors own ADRs

4
Hypothesis

• Abnormal ADR trading volume possesses predictive
  power for associated index returns due to the
  fact that ADRs are primarily invested in by more
  sophisticated institutional investors

5
Regression MethodologyMoving Average Over Past
Twelve Months

• Dependent variable
• Country return
• Independent variable
• Monthly ADR volume minus past twelve month
  average trading volume

6
Regression MethodologyResiduals Against SP 500
Trading Volume

• First Regression
• Dependent variable
• ADR trading volume
• Independent variable
• SP 500 trading volume
• Second Regression
• Dependent variable
• Country return
• Independent variable
• Residuals of first regression

7
Data Set

• 17 countries
• 7 developing
• 10 developed
• Pulled all available data from 1970 through 2000
• 376 ADR issues selected
• Source Data Stream and Compustat

8
Regression Results
9
Abnormal TradingOver Twelve Month Moving Average
10
Abnormal Trading Over SP 500 Index
11
P-Value of ADR Trading Volume
85
90
84
79
77
80
70
70
60
57
60
50
40
40
30
27
30
23
19
17
20
14
9
10
3
2
0
Italy
India
Brazil
China
Spain
Japan
France
Ireland
Mexico
Chile
Australia
Germany
Argentina
Switzerland
Netherlands
South Africa
United Kingdom
Developing Countries
Developed Countries
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Concluding Remarks

• Abnormal ADR trading does posses predictive power
  for index returns in some markets.
• The predictive power is more predominant for
  developing countries than developed countries.
• One possible explanation of our observation is
  that developing markets are less transparent.

13
Future Research Topics

• Future research might include
• Data refinement
• Multi-variant regression
• Out of sample testing