Oxford Metrica: Depositary Receipt Launch Improves Performance

Performance however depends on the DR program established.   If a company initially established an over-the-counter (OTC) or Level-I, DR program, the value of its domestic share price increased by just under 10% during the year and over 10% for a listed or Level-II/III, program, according to an Oxford Metrica study of 767 DR programs from 1980 to 2003.

Further, if a company adopted a two-step approach by first establishing an OTC DR and subsequently upgrading from the OTC market to a listed status, the share price increased by a further 15% upon upgrading.  The reaction to the upgrade reflects the value US investors put on the additional financial disclosure required by the US Securities and Exchange Commission (SEC), reconciliation with US GAAP (Generally Accepted Accounting Principles) and annual reporting that are required for listed programs, the study found.

Liquidity stands to improve as well.   Listed DRs improved liquidity by 32% on average, due to greater access to and from investors, and greater exposure to and wider coverage from financial analysts for the company.  Even OTC DRs improved liquidity by 23%.

Conversely, terminating a DR has the opposite effect, dropping a company’s share price by up to 25% over a year, as the US capital markets reacted adversely to the decision that corporate management had decided to withdraw from the disclosure requirements necessary for listed programs.  Terminating the program completely generated a similar negative reaction as the share price dropped 20%.

DRs, which include American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs), are negotiable US  securities that represent a non-US company’s publicly traded equity.  Although typically denominated in US  dollars, DRs can also be denominated in Euros.  DRs can be eligible to trade on all US stock exchanges as well as on many European stock exchanges.