"Newbies"

Humor

Themes & Topics

Glossary

Lecture Notes

Trivia & Factoids

ADRs

Definition: An American Depository Receipt (ADR) is a receipt for a security issued in the U.S. to represent shares of a foreign company. These securities are physically in a foreign country, usually in the custody of a bank.

 Why Are They Issued?

They are a means for a foreign company to raise funds. Typically these foreign countries do not have well developed and accessible domestic financial markets. Once issued, these securities are listed on U.S. equity markets, giving these relatively unknown companies exposure both in terms of their products and future financing. Obviously, each exchange has their own rules and requirements about listing these companies.

 "Bank of New York Co., the leading manager of ADR programs, said 62 non-U.S. companies and 11 governments raised about $6.7 billion through depository-receipt programs in the first half, an increase of 75% from the year earlier. According to Bank of New York, during the first six months of the year, 116 new public and privately sponsored depository programs were established from 40 countries. Russia and Hong Kong, each with 12 depository programs, started the most programs. Technology and telecommunications, reflecting the world-wide drive to improve infrastructures and communications, were represented by the most depository programs," according to the WSJ on June 28, 1996.

Why Invest In Them?

They are a source of international diversification.

What Are Their Inherent Sources of Risk?

Unlike equity issued by U.S. companies, there is an additional risk in investing in these companies. The changes in price, quoted in U.S. dollars as they trade on U.S. markets, reflect two sources of risk: the company’s performance as well as fluctuations in the exchange rates. Thus, these two effects on prices can potentially reinforce each other, or cancel each other.

By Alex Tajirian