This study uses the tools of accounting research in an exploratory
examination of American Depositary Receipts (ADRs). ADRs are
registered certificates that represent specified amounts of foreign
stocks held in trust by the banks issuing the ADRs. They are used to
avoid the day-to-day problems created by international securities
transactions.
The empirical portion of this study considers three research areas
linking ADRs and accounting. The first question considers whether ADR
firms show financial accounting information that is characteristically
different from that for non-ADR firms. The major conclusion is that
corporate size is the predominant distinguishing factor. The second
question is whether the portion of the periodic returns on ADR
investments caused by foreign currency exchange effects is significant.
The major conclusion to this section is that foreign exchange effects
can significantly affect ADR returns, but not in a consistent manner.
The third area examines whether ADR returns are more closely correlated
with the American markets on which they trade or with the foreign
markets on which their underlying shares trade. This portion of the
study shows that every possible correlation combination exists among
the sample ADRs.
In addition to considering these empirical questions, this study
includes a thorough historical investigation of the origin and
evolution of the ADR as a financial instrument.
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