Academic journal article Academy of Accounting and Financial Studies Journal

The Performance of American Depository Receipts Listed on the New York Stock Exchange: The Case of Utilities

Academic journal article Academy of Accounting and Financial Studies Journal

The Performance of American Depository Receipts Listed on the New York Stock Exchange: The Case of Utilities

Article excerpt


In this study, we test the early and aftermarket returns of utility company American Depository Receipts (ADRs) issued from January 1987 through September 2000 and traded on the New York Stock Exchange. The results are broken down to compare IPOs versus SEOs and emerging market firms versus developed market firms. Findings indicate that utility industry ADRs significantly underperform the S&P 500 in the early trading, with the entire sample returning 5.35 percentage points less than the market index in the first month of trading. IPOs perform worse than SEOs and developed market issues perform worse than emerging market utility industry ADRs in the short-run.

Over the three-year holding period from date of issue, developed market utility ADRs tend to underperform those issued in emerging markets and utility SEOs underperform IPOs. The entire utility ADR sample underperformed the S&P 500 index by 23 percentage points in the three-year trading horizon. Essentially, our study shows foreign utility-firm ADRs initially listed on the NYSE from 1987 through mid-2000 underperformed the S&P 500 at the time of listing and for the three-year period following.


The utilities industry consists of mostly large firms with strong, non-volatile earnings. Often regulated and in many cases with monopoly power (at least locally), utilities firms are unique in the United States, providing a safe stream of income to investors. But how do foreign utilities firms compare? The purpose of this study is to answer this question by reporting and statistically testing the early and long-term performance of foreign utility industry equities traded in the US as American Depository Receipts relative to the performance of the S&P 500 market index.

We examine daily returns for the first month, and monthly returns for three years after the issue date of non-US utility equities listed on the New York Stock Exchange (NYSE). These returns are adjusted based on the corresponding returns of the S&P 500 index to determine the excess return of foreign utility stocks relative to the market return. The excess return results are segmented to compare foreign utility IPO issues to those that are seasoned equity offerings (SEOs) and equities that were issued by firms headquartered in emerging countries to those from developed countries.


ADR Studies

American Depository Receipts (ADRs) represent ownership of foreign equities held on deposit by large custodian banks in the United States. Each receipt is backed by various share quantities of foreign stock bundled to reflect average common share prices in US equity markets. The primary purpose of ADR creation is to enable U.S. investors to participate in foreign equities without dealing directly with the foreign exchange and currency markets.

Several ADR studies examine ADR returns relative to a market benchmark using standard IPO methodology. Callaghan, Kleiman and Sahu (1999) reported positive market-adjusted returns for ADRs in the early and long-term investment horizons and found emerging market ADR returns to be higher than those for firms from developed countries. Specifically, they report one-day abnormal returns of 5.29% and one-month cumulative daily returns of 2.35% for a sample of 66 ADRs issued from 18 different countries and traded on the NYSE, the AMEX and the NASDAQ from 1986 to 1993. Annually, they found the cumulative abnormal returns for NYSE-traded ADRs were 19.6% for the first year; with the 12-month cumulative abnormal return for ADRs issued by firms in countries considered emerging markets at 34.37%.

Foerster and Karolyi (2000) found ADRs underperform comparable firms by 8% to 15% during the three-year period following the date of issuance, in contrast to the Callaghan et al. (1999) study. They examined ADR returns for a full three years from the issue date for a sample of 333 global equity offerings listed from 1982 through 1996 and including ADRs from 35 countries in Asia, Latin America and Europe. …

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