American Depositary Receipt (ADR)

Overview

An American Depositary Receipt (ADR) is a negotiable certificate issued by a U.S. depository bank representing a specified number of shares—usually one share—of a foreign company’s stock. ADRs are traded on U.S. stock exchanges and over-the-counter (OTC) markets just like the stocks of domestic companies. ADRs allow U.S. investors to buy shares in foreign companies without the complexities of international transactions and currency conversions. The underlying stocks of ADRs are held in a foreign trust by the U.S. bank to ensure transparency and control.

Examples

Alibaba Group Holding Limited (BABA): A Chinese multinational conglomerate holding company specializing in e-commerce, retail, Internet, and technology. Listed as an ADR on the NYSE.
Samsung Electronics Co., Ltd. (SSNLF): A South Korean multinational electronics company. Its ADRs are traded OTC in the U.S.
Nestlé S.A. (NSRGY): A Swiss multinational food and drink processing conglomerate corporation. Its ADRs are traded OTC in the U.S.

FAQ Section

1. What is the purpose of ADRs?

ADRs allow U.S. investors to diversify their portfolios globally by investing in foreign companies without engaging in complex international transactions and dealing with different currencies.

2. How are ADRs traded?

ADRs are traded on U.S. stock exchanges like the NYSE and NASDAQ, as well as in over-the-counter (OTC) markets.

An underlying share is the actual share of a foreign company that an ADR represents. These shares are held in custody by a U.S. bank or a foreign branch of a U.S. bank.

4. Are ADR holders entitled to dividends?

Yes, ADR holders are entitled to dividends and other distributions on the underlying shares, although they are paid in U.S. dollars by the depository bank.

5. How does currency exchange impact ADRs?

The value of ADRs can be affected by fluctuations in the exchange rate between the U.S. dollar and the currency in which the underlying foreign shares are denominated.

American Depositary Shares (ADS): The shares that represent the foreign company’s stock, which are held on deposit by the U.S. bank.
Global Depositary Receipt (GDR): Similar to an ADR, but can be offered for sale globally through multiple markets including those outside the U.S.
International Financial Reporting Standards (IFRS): Accounting standards that have been globally recognized and are used by many companies listed as ADRs.

Online Resources

Suggested Books for Further Studies

“International Financial Statement Analysis” by Thomas R. Robinson, Elaine Henry, Wendy L. Pirate, Michael A. Broihahn - Focuses on the techniques used to analyze financial statements from an international perspective.
“ADR’s Regulation and the U.S. Securities Markets” by Allan Sloan - Detailed exploration of the regulations and markets for ADRs.
“The Financial Times Guide to Understanding Finance” by Javier Estrada - Covers international finance principles and includes sections discussing instruments like ADRs.

Fundamentals of American Depositary Receipts: International Business Basics Quiz

### What is an American Depositary Receipt (ADR)? - [ ] A receipt for domestic company stocks. - [x] A certificate issued by a U.S. bank representing shares in a foreign company. - [ ] A type of foreign government bond. - [ ] A U.S. treasury note. > **Explanation:** An ADR is a certificate issued by a U.S. bank that represents shares in a foreign company, which allows U.S. investors to invest without engaging in foreign transactions directly. ### What underlying assets do ADRs represent? - [x] Shares of foreign companies. - [ ] U.S. treasury bonds. - [ ] Cryptocurrency assets. - [ ] Domestic real estate properties. > **Explanation:** ADRs represent shares of foreign companies held in trust by a U.S. or a designated foreign bank. ### How are ADRs typically traded in the United States? - [ ] Exclusively through private brokers. - [ ] Only during market holidays. - [x] On U.S. stock exchanges and over-the-counter markets. - [ ] Through real estate agents. > **Explanation:** ADRs are traded on U.S. stock exchanges and over-the-counter markets, making them accessible to U.S. investors. ### Can ADRs be listed on multiple U.S. stock exchanges? - [ ] No, they can only be listed on one. - [x] Yes, they can be listed on multiple U.S. stock exchanges. - [ ] Only if they are government-backed securities. - [ ] Only during initial public offerings (IPO). > **Explanation:** ADRs can be listed on multiple U.S. stock exchanges, such as the NYSE and NASDAQ. ### Who ensures the custody of the underlying shares of ADRs? - [ ] The foreign company itself. - [x] A U.S. bank or a foreign branch of a U.S. bank. - [ ] The Federal Reserve. - [ ] The U.S. government. > **Explanation:** The underlying shares of ADRs are held in custody by a U.S. bank or a foreign branch of a U.S. bank. ### Do ADR holders receive dividends from the underlying foreign stocks? - [x] Yes, but in U.S. dollars. - [ ] No, they are not entitled to dividends. - [ ] Only if there is a profit. - [ ] Only during a stock market rally. > **Explanation:** ADR holders are entitled to dividends from the underlying foreign stocks, but these are paid in U.S. dollars by the depository bank. ### How can currency exchange rates affect the value of ADRs? - [ ] They have no impact. - [ ] They only affect domestic stocks. - [x] Fluctuations in exchange rates can increase or decrease ADR value. - [ ] Currency exchange rates solely determine the value of ADRs. > **Explanation:** Fluctuations in the exchange rate between the U.S. dollar and the foreign currency can impact the value of the ADR. ### What kind of market mechanism can ADRs be traded in, other than stock exchanges? - [ ] Through e-commerce websites. - [ ] In local farmer’s markets. - [x] Over-the-counter (OTC) markets. - [ ] Through government auctions. > **Explanation:** ADRs can be traded over-the-counter (OTC) markets in addition to stock exchanges. ### What is another global counterpart to the ADR? - [x] Global Depositary Receipt (GDR). - [ ] Local Company Deposit (LCD). - [ ] Domestic Market Receipt (DMR). - [ ] National Exchange Ticket (NET). > **Explanation:** A Global Depositary Receipt (GDR) is similar to an ADR but is offered globally, including markets outside the U.S. ### Which accounting standards are often relevant to companies issuing ADRs? - [ ] U.S. GAAP. - [x] International Financial Reporting Standards (IFRS). - [ ] U.S. State-specific standards. - [ ] Local business ethics rules. > **Explanation:** International Financial Reporting Standards (IFRS) are often relevant to companies issuing ADRs due to their global applicability and recognition.

Thank you for exploring our detailed guide on American Depositary Receipts (ADRs), coupled with insightful quiz questions to test your understanding. Continue to enhance your global investment knowledge!