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INFLUENCE OF ADR PRICES ON UNDERLYING STOCK
PRICES A STUDY OF INDIAN MARKETA dissertation submitted in partial fulfillment of the requirement for the
award of M.B.A Degree of Bangalore University.
By
Venkatesh V
03XQCM6116
Under the guidance of
Dr. T V Narasimha Rao
Professor MPBIM
M P Birla Institute of Management
Associate Bharatiya Vidya Bhavan
#43, Race Courese road,
Bangalore-01.
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DECLARATION
I hereby declare that the research work embodied in this dissertation titled
INFLUENCE OF ADR PRICES ON UNDERLYING STOCK
PRICES A STUDY OF INDIAN MARKET has been carried outby me under the guidance and of Dr. T V Narasimha Rao, Finance
Professor, M P Birla Institute of Management, Bangalore.
I also declare that this dissertation has not been submitted to any
University/Institution for the award of any diploma or degree.
Bangalore
Date: [VENKATESH V]
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GUIDES CERTIFICATE
I hereby certify that the research work embodied in this dissertation is
entitled INFLUENCE OF ADR PRICES ON UNDERLYING
STOCK PRICES A STUDY OF INDIAN MARKET has beenundertaken and completed by Mr. VENKATESH V under my guidance.
I also certify that he has fulfilled all the requirements under the covenants
governing the submission of dissertation to the Bangalore University for theaward of M.B.A. degree.
Bangalore
Date [Dr. T V NARASIMHA RAO]
Professor M P BIM
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PRINCIPALS CERTIFICATE
I hereby certify that the research work embodied in this dissertation is
entitled INFLUENCE OF ADR PRICES ON UNDERLYING
STOCK PRICES A STUDY OF INDIAN MARKET has beenundertaken and completed by Mr. VENKATESH V under the guidance of
Dr. T V NARASIMHA RAO.
Bangalore
Date [Dr. NAGESH S MALAVALLI]
Principal M P BIM
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ACKNOWLEDGEMENT
I take this opportunity to thank Mr. Nagesh S Malavalli, Principal, M P Birla
Institute of Management for having provided me this wonderful opportunity
and support to conduct this research.
I thank Dr. T V Narasimha Rao, Professor M P BIM for guiding me through
the entire process of the research and for the moral and technical support he
extended.
I am grateful to my parents and friends for the help they extended whenever
I was in need of and for their moral support.
Last but not the least I thank the Almighty for bringing me where I am now.
Yours truly,
[VENKATESH V]
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CONTENTS
S.NO PARTICULARS PAGE
1 Research Extract 1
2 Introduction 4
2.1 What is a Depository Receipt? 5
2.2 How does Depository Receipt work? 5
2.3 Benefits of Depository Receipt 7
2.4 Sponsored and Un-sponsored ADR 9
2.5 Risks in Depository Receipts 11
2.6 Research gap, objectives, hypothesis and researchlimitations 14
3 Literature Review 17
4 Research Methodology 34
5 Analysis and Interpretation 39
6 Results 51
7 Conclusion 53
8 Bibliography and References 55
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LIST OF TABLES
S.No. Particular Page
1 ADR/GDR performance for the Year 2000 24
2 Ranking of countries which have issued ADRs 29
3 How ADR/GDRs of Indian companies faired 29
4 Performance of sponsored Receipt program by countries 32
5 Percentage of public DR offering by country 32
6 Companies taken for research 38
7 The stock symbol 38
8 Auto Correlation for Adr Prices And Nse Stock Prices 40
9 Cross Correlation Between Nifty And Adr And Cross
Correlation Between Adr And The Nse Stock 42
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EXECUTIVE SUMMARY 1
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Executive Summary
Globalization has opened the door for the investors to avail various investment
avenues across the globe. American Depository Receipt (ADR) is one suchopportunity to the investing community. The ADR is a proxy for the Indian shares
to enable them to be traded in the American stock exchanges. Various studies
conducted on Depository Receipts (DRs) have shown that the trading on the DRs
in the foreign market has its influence in the home countrys stock in terms of
price, volatility and volume. This interested me and this project is concerned
about studying Whether the price fluctuations of ADR affect the corresponding
Indian share prices?
After the liberalisation of the economy in 1991, the corporatist started sourcing
their capital from both domestic and foreign markets. The Indian shares cannot be
directly listed in the American stock exchanges. ADRs have been very helpful in
this purpose. So a custodian bank receives the shares as deposit and issues
receipt to the market. These receipts are issued in appropriate ratio to the shares
deposited with the depository. The market players in the stock exchanges trade
these receipts.
Though the shares are traded in different markets, they have the common
fundamental factors like companys performance, management of the company
and the financial structure of the company that influence the share prices. At the
same time there are few factors that are not same for two markets. These are
market forces like interest rates, inflation, and overall performance of the
economy. Due to this a difference in price is found between the ADRs and the
corresponding share in the home country.
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Therefore the main focus of the research is to study whether the price fluctuations
of ADR affect the corresponding Indian share prices and also to know if it affects
does it act as leading or lagging indicator to the corresponding share price in the
Indian market. The study has been done by finding the correlation on the returnon the ADR prices and the corresponding share prices in the Indian stock market
and also the ADR returns with the NIFTY index.
The study shows that the ADR price fluctuations has correlation to the Indian
stock market and act either as leading or lagging indicator. They provide
information, to an extent, how the prices and stock index will move in the future.
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INTRODUCTION
2
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Introduction
A depository receipt (DR) is a type of negotiable (transferable) financial security
that is traded on a local stock exchange but represents a security, usually in the
form of equity that is issued by a foreign publicly-listed company. The DR, whichis a physical certificate, allows investors to hold shares in equity of other
countries. One of the most common types of DRs is the American depository
receipt (ADR), which has been offering companies, investors and traders global
opportunities for investment since the 1920s. Since then, DRs have spread to
other parts of the globe in the form of global depository receipts (GDRs)--the
other most common type of DR--European DRs (EDRs), and International DRs
(IDRs).
How Does the DR Work?
The DR is created when a foreign company wishes to list its already publicly-
traded shares or debt securities on a foreign stock exchange. Before it can be listed
to a particular stock exchange, the company in question will first have to meet
certain requirements put forth by the exchange. Initial public offerings (IPOs),
however, can also issue a DR as well. DRs can be traded publicly or over-the-
counter. Let us look at an example of how an ADR is created and traded:ExampleSay a gas company in Russia has fulfilled the requirements for DR listing and now
wants to list its publicly-traded shares on the NYSE in the form of an ADR.
Before the gas company' s shares are traded freely on the exchange, a US broker,
through an international office or a local brokerage house in Russia, would
purchase the domestic shares from the Russian market and then have them
delivered to the local (Russian) custodian bank of the depository bank. Thedepository bank is the American institution that issues the ADRs in America. In
this example, the depository bank is Bank of New York. Once the Bank of New
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York' s local custodian bank inRussia receives the shares, this custodian bank
verifies the delivery of the shares by informing the Bank of New York that shares
can now be issued in the US. The Bank of New York then delivers the ADRs to
the broker who initially purchased them.
Based on a determined ADR ratio, each ADR may be issued as representing one
or more of the Russian local shares, and the price of each ADR would be issued in
US dollars converted from the equivalent Russian price of the shares being held by
the depository bank. The ADRs now represent the local Russian shares held by the
depository, and can now be freely traded equity on the NYSE.
After the process whereby the new ADR of the Russian gas company is issued, the
ADR can be traded freely among investors and transferred from the buyer to the
seller on the NYSE, through a procedure known as intra-market trading. All ADR
transactions of the Russian gas company will now take place in US dollars and are
settled like any other US transaction on the NYSE. The ADR investor holds
privileges like those granted to shareholders of ordinary shares, such as voting
rights, and cash dividends. The rights of the ADR holder are stated on the ADR
certificate.
When any DR is traded, the broker will aim to find the best price of the share in
question. He or she will therefore compare the US dollar price of the ADR with
the US dollar equivalent price of the local share on the domestic market. If the
ADR of the Russian gas company is trading at USD 12 per share and the share
trading on the Russian market is trading at USD 11 per share (converted from
rubles to dollars), a broker would aim to buy more local shares from Russia and
issue ADRs on the US market. This action then causes the local Russian price and
the price of the ADR to reach parity. The continual buying and selling in both
markets, however, usually keeps the prices of the ADR and the security on the
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For the company
A company may opt to issue a DR to obtain greater exposure and raise capital in
the world market. Issuing DRs has the added benefit of increasing the share' s
liquidity while boosting the company' s prestige on its local market ("the company
is traded internationally"). Depository receipts encourage an international
shareholder base, and provide expatriates living abroad with an easier opportunity
to invest in their home countries. Moreover, in many countries, especially those
with emerging markets, obstacles often prevent foreign investors from entering the
local market. For more on emerging market economies (EMEs), see the article
"What Is an Emerging Market Economy?" which focuses on what EMEs are and
why they are drawing the attention of foreign investors. By issuing a DR, a
company can still encourage investment from abroad without having to worry
about barriers that a foreign investor might face.
For the investor
Buying into a DR immediately turns an investors' portfolio into a global one.
Investor' s gain the benefits of diversification, while trading in their own market
under familiar settlement and clearance conditions. More importantly, DR
investors will be able to reap the benefits of these usually higher-risk, higher-
return equities, without having to endure the added risks of going directly into
foreign markets, which may pose lack of transparency or instability resulting from
changing regulatory procedures. It is important to remember that an investor will
still bear some risk due to foreign exchange rate conversions, stemming from
uncertainties in emerging economies and societies. On the other hand, however,
the investor can also benefit from competitive rates the US dollar and euro have to
most foreign currencies. Investing in any security involves a certain amount of
risk - along with reward. However, risks specific to ADRs might include country
risk, as ADRs are backed by non-U.S. securities, and currency risk.
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Sponsored vs. Un-Sponsored ADRs
Sponsored ADRs offer the easiest method for foreign companies to issue
securities in the United States; they are tradable on the New York Stock Exchange
or the over-the-counter market. The underlying companies usually supplyfundamental information on their business, just like most American companies.
Also, exchanged listed companies must provide better financial information than
un-sponsored ADRs and non-exchange listed ADRs. To qualify for listing,
foreign companies must complete extensive filings with United States governing
bodies and provide financial reports similar to those of domestic companies.
On the other hand, un-sponsored ADRs are created without the consent of
the underlying foreign company, and at one time commanded the majority of
available ADRs. Now they are becoming less and less popular because the foreign
companies do not report their financial information to the United States, making
research more difficult for investors. These securities may be handled by more
than one bank and are not listed on American exchanges.
What is the difference between a Registered holder and a Beneficial ADR
holder?
A registered holder is one whose name appears on the books of the depositary.
The registered holder is considered the owner of record. A beneficial holder is one
whose holdings are registered in a name other than their own, such as in the name
of a broker, bank or nominee.
Introduced to the financial markets in 1927, an American Depository Receipt
(ADR) is a stock that trades in the United States but represents a specified number
of shares in a foreign corporation. ADRs are bought and sold on American
markets just like regular stocks, and are issued/sponsored in the U.S. by a bank or
brokerage.
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ADRs were introduced as a result of the complexities involved in buying shares in
foreign countries. Primarily the difficulties associated with trading at different
prices and currency values. For this reason, U.S. banks simply purchase a bulk lot
of shares from the company, bundle the shares into groups, and reissues them onthe NYSE, AMEX, or NASDAQ. The depository bank sets the ratio of U.S. ADRs
per home country share. This ratio can be anything less than or greater than 1. The
reason they do this is because they wish to price the ADR high enough as to show
substantial value, yet low enough, so that the individual investors can purchase
these shares. Most investors try to avoid investing in penny stocks, and many
would shy away from a company trading for 50 Russian Rubles per share, which
equates to $1.50 US per share. As a result, the majority of ADRs range between$10 and $100 per share. If, in the home country, the shares were worth
considerably less, then each ADR would represent several real shares. There are
three different types of ADR issues:
Level 1 - This is the most basic type of ADR where foreign companies
either don' t qualify or don' t wish to have their ADR listed on an exchange.
Level 1 ADRs are found on the OTC market and are an easy andinexpensive way to gauge interest for its securities in North America. Level
1 ADRs also have the loosest requirements from the SEC.
Level 2 - This type of ADR is listed on an exchange or quoted on
NASDAQ. Level 2 ADRs have slightly more requirements from the SEC
but they also get higher visibility trading volume.
Level 3 - The most prestigious of the three, this is when an issuer floats a
public offering of ADRs on a U.S. exchange. Level 3 ADRs are able to
raise capital and gain substantial visibility in the U.S. financial markets.
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The advantages of ADRs are twofold. For individuals, ADRs are an easy and cost
effective way to buy shares in a foreign company. They save considerable money
by reducing administration costs and avoiding foreign taxes on each transaction.
Foreign entities like ADRs because they get more U.S. exposure and allow themto tap into the wealthy North American equity markets. In return, the foreign
company must provide detailed financial information to the sponsor bank.
How ADR Prices are determined?
Now, let' s use an example to give you a better idea about how the ADR process
works. The recent boom in "Bloody Marys" has increased the prospects for the
vodka industry. Russian Vodka Inc. wants to list shares on the NYSE to gain
exposure to the U.S. citizens and to tap into the lush Bloody Mary market.
Russian Vodka already trades on the Russian Stock Exchange at 127 Russian
Rubles ($4.58 US). Let' s say that a U.S. bank purchases 30 million shares from
Russian Vodka Inc. and issues them in the U.S. at a ratio of 10:1. This means each
ADR share you purchase is worth 10 shares on the Russian Stock Exchange. A
quick calculation tells us that the new ADR should have an issue price of around
$45.80.
How is the performance determined? It floats on supply and demand just as
normal stocks do. But, if the U.S. price varies too far from the Russian price after
taking into account the currency exchange rate and the ratio of ADRs to home
country shares then an arbitrage opportunity will exist. ADRs do tend to follow the
general trend of the home country shares, but this is not always the case.
What are the risks associated with ADR prices?
There are several factors that determine the value of the ADR beyond the
performance of the company. Analyzing these foreign companies involves further
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scrutiny than merely looking at the fundamentals. Here are some other risks that
investors should consider:
Political Risk - Ask yourself if you think the government in the home
country of the ADR is stable? For example, you might be wary of Russian
Vodka Inc. because of the past history in Russian politics.
Exchange Rate Risk - Is the currency of the home country stable?
Remember the ADR shares track the shares in the home country, and if
their currency is devalued, it trickles down to your ADR. This can result in
a big loss even if the company had been performing well.
Inflationary Risk - This is an extension of the exchange rate risk. Inflation
is the rate at which the general level of prices for goods and services is
rising, and subsequently, purchasing power is falling.
Inflation can be a big blow to business, the currency of a country with high
inflation becomes less and less valuable each day.
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Indian Companies Listed in Major Global Stock Exchanges
Indian Companies Listed in New York Stock Exchange (NYSE)
1. Dr. Reddy' s Laboratories Limited
2. HDFC Bank Limited
3. ICICI Bank Ltd.
4. ICICI Limited
5. Satyam Computer Services Ltd.
6. Silverline Technologies Ltd
7. Silverline Technologies Ltd
8. Videsh Sanchar Nigam Limited
9. Wipro Limited
Indian Companies Listed in NASDAQ
1. Infosys Technologies Limited
2. Rediff.com India Limited
3. Satyam Infoway Limited (SIFY) - Listed: 19/10/1999
Indian Companies Listed in the London Stock Exchange
1. Aptech
2. Ashok Leyland
3. Bajaj Auto
4. BSES
5. CESC
6. Crompton Greaves
7. EID-Parry (India)
8. EIH
9. Gas Authority of India
10. Himachal Futuristic Communications
11. Indian Hotel Companies
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12. J.K.Corp
13. Mahanagar Telephone Nigam
14. Raymond
15. SIEL16. SSI
17. State Bank of India
18. Steel Authority of India
19. Tata Tea - Listed: 5/06/2000
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Research gap, objectives, hypothesis and research limitations
Research gap
Since various political and macro-economic factors and companys performance
come into play, there exist a price difference in share price in the foreign market
and price in the home country. Does this price difference influence the share price
at the home stock exchanges? This is really an interesting question. If it is
answered we might get some insight into the details of how it influences, whether
it acts as a leading or lagging indicator? What are the reasons for the influences?
Research Objective
To find is there an effect on the prices of Indian securities when they are tradedoutside India.
To find whether they act as Leading or Lagging Indicator
Problem statement
The price of Indian companies shares traded both in Indian stock exchange and
foreign stock exchanges are not the same, they are different. Does the price in the
foreign stock exchange provide information indicating movement of that shares
price in India?
Research Questions
A research question is the choice hypothesis that best states the objective of the
research study. It is a more specific question, which must be answered. It may be
more than one question or just one.
Does the trading of Indian securities outside India really provide
information of movement prices of that stock in India?
If so, does it act as a leading indicator or lagging indicator?
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Hypothesis
A proposal formed for empirical testing is a hypothesis. As a declarative
statement a hypothesis is of a tentative and conjectural nature. Hypotheses have
also been described as statements in which we assign variables to cases. Thehypotheses can be a descriptive hypothesis or relational hypotheses.
The form of hypothesis in this research is correlation hypothesis.
H0: There is NO relation between ADR price fluctuations and the price
fluctuations of corresponding Indian shares in Indian stock exchanges.
HA: There is relation between ADR price fluctuations and the price
fluctuations of corresponding Indian shares in Indian stock exchanges.
Research Limitations
The research is limited to impact of ADRs on Indian shares.
The research is confined only to the study of ADR prices and its impact on
Indian shares and not on the American stock market.
The study is limited to shares of seven companies and their ADRs due to
the problem in availability of data.
The study is limited by time constraints.
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LITERATURE SURVEY3
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Literature Survey
The literature review section examines recent research studies, company data, or
industry reports that act as a bass for the proposed study. Related literature and
secondary data gives comprehensive perspective. Earlier references will be
helpful if the problem has a historical background. Always the literature survey
reference should be to the original source. The literature applies to the study you
are proposing. The literature review may also explain the need for the proposed
work to appraise the shortcomings and informational gaps in secondary data
sources.
The first step in a research is a search of the secondary literature. Studies made by
others for their own purposes represent secondary data. Within secondary data
exploration, a researcher should start first with an organisations own data
archives. Reports of prior research studies often reveal an extensive amount of
historical data or decision-making patterns. By reviewing prior studies, you can
identify methodologies that proved successful and unsuccessful. The source of
secondary data is published documents prepared by authors outside the sponsor
organisation. A search of secondary sources provides an excellent background
and will supply many good leads if one is creative.
The literature on the ADRs is scant. There have been quite few studies regarding
the effect of fluctuation of global Depository Receipts on the corresponding
domestic shares in the home country. These research works were mainly on
focused on studying the change in the volatility and volume of trade of these
shares in the domestic market, due to the fluctuations in the American market.
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,QWKLVUHJDUGWKHVWXG\FRQGXFWHGE\'U.DWH LQD+ROLFNiRI&KH]NORYDNLDLV
important.
,QKHUVWXG\.DWHLQD+ROLFNiVWXGLHG
3 Czech, 3 Hungarian and 3 Polish stocks, to which DRs have been issued
Found that the prices of depositary receipts and their underlying shares are
very closely correlated.
Found that for all Czech and Hungarian shares the correlation coefficient
was above 0.99 and
For two of the Polish shares lower values.
'U.DWH LQD+ROLF k in her research sample included 19 DR issues by Central
European companies - from Chezklovakia Republic, Poland and Hungary. The
research findings were as follows
I Liquidity effects
Cross listing may enhance liquidity of the actual shares on the local market:
increased visibility of the company
reduction in the information asymmetry (better analysts coverage)
Possibility of cross-border trading.
II Spill over effect on the local stock market
International cross-listing can alter incentives of companies and individuals
to participate in the market and can that way contribute to transformation of
a segmented local equity market with low liquidity to an integrated market
with high liquidity and capitalization.
On the other hand, concerns are frequently expressed that migration of
major share of market capitalization and value traded from small emerging
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stock exchanges to leading financial centres has adverse consequences on
the overall quality of the local market.
The whole market activity development is thus tightly connected with the
behaviour of the two shares. We can therefore not easily differentiatebetween the market wide and stock-specific influences.
Based on the above findings she concluded her study as follows
The DR and underlying shares pri ces of CE companies turned out to be
almost perfectly correlated; hence there dont seem to be many
opportunities for profitable arbitrage. Such a result supports the hypothesis
of markets integration
It is usually expected that a DR issue lowers cost of capital to the company;
lower cost of capital implies higher shareholder value, which is reflected in
the DR Price.
A range of different DR types has evolved to satisfy the needs of all
investors and issuers. The most frequently chosen approach by the CE
companies was a simultaneous offering to institutional investors in the US
and in London.
A research paper was submitted by Dr. Mahu Kalimpali and Dr. Latha Ramachand
to the National stock Exchange (NSE) of India. In their paper Dr Mahu Kalimpali
and Dr Latha Ramachand studied 49 firms equity issues. Dr Mahu Kalimpali and
Dr Latha Ramachand examined volatility of returns, volumes and price range
measures for a sample of Indian firms that raise equity capital on foreign markets.
They found that
On average there is a decline in returns, volatility of daily high/low price
range of the firmsequity on the local market subsequent to the foreign
capital raising event.
Volatility of the underlying returns is higher after the equity issue.
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Exposure to a foreign capital market via equity issue and listing does not
result in a significant improvement in liquidity on the home market
compared to firms that do not have this foreign exposure.
Given the firms that raise capital abroad are generally larger firms issuingsignificantly greater amounts of equity, the results suggest that foreign
exposure via listing or issue may not be an available option to small firms.
Based on a study of 113 ADRs from eight countries over the 1980-1994 periods,
Jiang (1998) reports three findings.1
1. The ADRs outperform their respective local market indices.
2. the ADRs are influenced by their respective market index portfolios, while,
for countries with co-integrated ADRs and market portfolios, the effect of
the ADRs on local market portfolios is significant.
3. Third, although the ADR returns are significantly correlated with US
returns, they are also affected by local market conditions and exchange
rates, indicating diversification benefits of the ADRs through two sources:
a country diversification and a currency.
They conclude that the ADRs, especially those in emerging markets, offer
significant international diversification benefits to US investors.
Mr. Khutan and Zhou find the following in their study.
1. Underlying, local, and host markets all are important predictors of the
ADRs returns.
2. In terms of the conditional volatility, we find that only underlying markets
have a significant impact on the volatility of the ADRs.
3. US shocks have no significant impact on the conditional volatility (risk) of
the ADRs
1Determinants of Returns and Volatility of Chinese ADRs at NYSE, Ali M. Kutan, Southern Illinois University
Edwardsville, Emerging Markets Group, London.
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To profit out of that price fluctuation one need to consider the foreign exchange
rate fluctuations too. In Germany two people conducted a study to find out where
the price discovery occurs during the overlapping trading hours of NYSE and
FRANKFURT stock exchanges.
2
In their study they found that1. The price discovery occurs largely in the domestic market to even out the
arbitrage opportunity.
2. Multinational firms would have more room for international price
discovery than that are essentially operating in the home market alone.
3. Home markets largely determining the random walk component of the
international value of the firm along with an independent role for exchange
rate shocks to affect prices in the derivatives market.
On 31-December-2000, in The Business Line newspaper the following newsprint
appeared.
During the year 2000, the price movements of American Depository Shares and
Global Depository Receipts listed in the overseas markets appear to have generally
mirrored the movements in prices of underlying securities at the local markets.
On an average, while the price decline in the case of ADRs and GDRs was 24.8
per cent, the prices of underlying securities fell by around 25.7 per cent.
However, the average masks a number of cases in which divergent price trends
were evident. On top of the list are GDRs such as Flex Industries, Ballarpur
Industries, Garden Silk, EID Parry, SI Viscose and Ispat Industries. These GDRs
out-performed the price movements in the underlying stocks. Bottom of the pile
are GDRs/ADRs such as EIH, Bombay Dyeing, Finolex Cables, ITC and Gas
Authority. In the case of these stocks, the ADRs/GDRs under-performed the price
2Internationally cross listed stock prices during overlapping trading hours: Price discovery and exchange
rate effects. By Joachim Grammig, Michael Melvin and Christian schlag.
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movement in the underlying stocks. These price movements have tended to realign
the premium/discount at which these instruments trade overseas noticeably.
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The difference in the performance of VSNL and Wipro over the other fresh offers
has a direct correlation with the timing of the offers. Wipro and VSNL made their
offers at the fag end of the year when the prices in the local markets were already
at more realistic levels and, as such, further declines in price compared to the offerprice have been averted. The other ADR/GDR offering were made in the earlier
part of the year. Their prices were linked to the domestic market price even at the
time of the offer, with the price fixed in the region of 10 per cent above or below
the domestic price. And, not surprisingly, just as their prices crashed at the
domestic markets, the prices of the ADRs and GDRs also tumbled.
Mr. Ajay Sharma in his research says the following.
We have preponderant evidence, and conceptual arguments, in favour of large-
scale ownership of local firms by foreign shareholders. For example, it makes
great sense for Indian investors to buy shares of foreign companies: doing so
would yield improved diversification and hence low risk for Indian investors. By
the same coin, Indian equity risk is uncorrelated with global portfolios, so foreign
investors require a lower rate of return from Indian equities. Thus, foreign
ownership of Indian equity reduces the cost of capital in India, and makes more
investment projects viable.
How can foreign investment into Indian equities be implemented? Broadly, there
are two strategies: either foreign investors can buy Indian shares in India, or Indian
firms can list their shares abroad in order to make these shares available to
foreigners.
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Foreign investors buying shares in India has traditionally been limited by two
problems:
1. The first problem faced is poor market design on the Indian equity market.
When foreign investors first appeared in India, in the early 1990s, they
were horrified at the equity markets that they saw. The Indian equity market
imposed extremely large transactions costs upon investors (i.e., it was
highly illiquid). This was an obvious motivation for GDRs and ADRs:
Indian firms saw these as a way to bypass the incompetent Indian equity
market mechanisms and instead jump to the well-functioning equity
markets found abroad. When Indian firms issued shares on the GDR or
ADR markets, their shares commanded a higher price owing to a liquidity
premium.
2. The second problem faced is restrictions on equity ownership by foreigners.
Only "foreign institutional investors" can buy shares in India, while anyone
can buy GDRs or ADRs. FIIs face restrictions on the fraction of a firm that
can be purchased. This imposes ceilings on foreign ownership. In contrast,
participation in the GDR or ADR market is unencumbered, and henceGDRs or ADRs generally enjoy a premium.
From 1994 onwards, with the rise of electronic trading, clearing corporation and
depository, the first order mistakes in market design in India have been addressed.
The Indian equity market has obtained a quantum leap in liquidity. We are still
inferior to international standards in a few respects, such as the rolling settlement,
the presence of leveraged trading on the spot market, and the limited access to
derivatives. However, the picture on liquidity has turned around completely. It is
easy to examine the ` market by price' on NSE, and compare it with the bid/offer
spreads seen for GDRs or ADRs: we see sharply higher liquidity on NSE. From
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1996 onwards, there has been no liquidity premium argument which favours
offshore listing.
This superiority of liquidity in India is not accidental. The liquidity of the stock
market is ultimately driven by retail investors and speculators, who are found in
the home country, in Indian standard time. Hence, no foreign market can ever
harness the liquidity which is found in India. Indeed, a firm which issues ADRs or
GDRs actually suffers an opportunity cost by listing abroad: if it had (instead)
issued shares domestically, it would have improved local liquidity and obtained a
liquidity premium. Instead, issuance abroad fragments the order flow and yields
no improvement to local liquidity.
In this conceptual framework, what is the optimal policy for a firm which operates
under existing Indian regulations and laws, and seeks to obtain the highest
possible valuation? We can propose a few ingredients:
As far as possible, it is better for a firm to issue shares in India, and obtain
good liquidity by building up market capitalisation and retail investors in
India.
Foreign investors would always be willing to pay higher prices for Indian
shares, so it is important to woo FIIs. The companies with the largest
fraction of foreign ownership would obtain the highest P/Es and the lowest
cost of capital. Towards this goal, the company should pass the special
resolution which raises the limit upon FII shareholding from 24% to 40%.
When the company hits the limit of 40% FII shareholding, it makes sense to
use ADRs or GDRs as a way of further improving foreign shareholding.
The benefits here (of greater foreign ownership giving an improved
valuation) are diminished to the extent that GDRs and ADRs are extremely
illiquid. The two--way fungibility, announced in the budget speech, will
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help improve the liquidity of ADRs or GDRs, but there is no possibility of
an ADR or GDR being as liquid as NSE.
Conversely, there is no real argument in favour of GDR or ADR issuance
for an Indian firm which has not yet hit the 40% limit.
The above recipe is appropriate for a firm in India which faces existing economic
policies. Suppose we could change these economic policies, and try to find the
economic policy strategy which would yield the lowest possible cost of capital for
the firms of India. What would we undertake?
Foreign investment brings capital into India, and reduces the cost of capital
for a firm. From the perspective of economic freedom, the shareholders of a
firm should be free to choose whom they sell shares to. The sale of a share
is a private action between one investor and another. This budget has made
a step in the right direction by allowing shareholders to increase the limit
on FII shareholding from 30% to 40%. However, this limit should be raised
to 100%. A firm should be free to sell shares to anyone it wants; the
Government of India should not have a say in this matter.
The definition of "FII" should be steadily broadened, so as to improve the
investor base that all Indian companies can access. This would eliminate
the incentive that Indian firms are given, to suffer poor liquidity in offshore
markets, in order to obtain a wider foreign investor base.
Ranking of countries which have issued ADRs by Mr. James M Donald, Lazard
Asset Management Company
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How the GDRs/ADRs of Indian
Companies Fared
(Sunday, October 29, 2000)Current Current RETURNSOVERGDR Premium/offer price the WeekPrice Discount $Terms $TermsCompany(Rs.) (%) (%) (%)
SBI 160 1 (51) 33Silverline ADR 375 17 (34) 31G E Shipping 35 5 (76) 25Ashok Leyland 53 11 (73) 21SPIC 14 60 (87) 20EID Parry 80 15 (79) 17
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Arvind Mills 16 74 (96) 17Ranbaxy Laboratories 859 21 94 13Grasim Industries 252 24 (58) 10L & T 164 4 (57) 8ITC 861 14 146 7United Phosphorous 69 19 (93) 7Tube Investments 73 5 (76) 7East India Hotels 218 10 (49) 6Reliance Industries 310 2 66 5SSI 2519 9 (62) 5G A I L 50 11 N.A. 5Rediff ADR 97 N.A (65) 5M T N L 137 (0) (50) 4Bajaj Auto 344 29 (56) 4Indian Hotels 202 3 (73) 4Gujarat Ambuja 149 13 118 3Bombay Dyeing 128 10 (70) 2Infosys Technologies ADR 11839 64 660 2Mahindra & Mah. 149 12 (27) 2IPCL 61 21 (71) 1Hindalco 737 (2) 1 1Tata Tea 183 6 (59) 0SIV Industries 23 484 (97) 0
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Wockhardt 893 142 36 0T E L C O 80 11 (88) 0Sanghi 5 (7) (95) 0Usha Beltron 64 38 (87) 0Raymond Woollen 103 1 (58) 0SAIL 7 37 (83) 0NEPC Micon 11 450 (92) 0Oriental Hotels 115 43 (80) 0SIEL 8 61 (95) 0Kesoram Industries 39 119 (47) 0Flex Industries 23 21 (88) 0Finolex Cables 229 5 (40) 0GNFC 23 3 (80) 0H D C 11 179 (88) 0Garden Silk Mills 10 28 (96) 0DCW 8 122 (94) 0CESC 23 24 (95) 0Ballarpur Industries 115 52 (71) 0Century Textiles 34 22 (94) 0Crompton Greaves 34 46 (90) 0Core Healthcare 23 100 (96) 0India Cements 39 11 (80) 0Indo Gulf Fertilizers 46 31 (78) 0
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Indian Rayon 69 3 (90) 0J K Corp 27 118 (93) 0ICICI ADR 179 141 99 0Jain Irrigation 23 192 (95) 0JCT 6 53 (93) 0Ispat Industries 9 154 (91) (0)Aptech 394 (9) (40) (1)ICICI 78 5 (26) (1)Dr.Reddy's 1420 1 178 (3)Himachal Futuristic 1122 (5) 954 (4)Videocon International 55 33 (85) (4)Indian Aluminium 110 20 (65) (4)VSNL 719 11 (44) (6)Tata Power 62 (9) (81) (7)BSES 183 3 (17) (8)Satyam Infoway ADR 352 N.A. 71 (14)ICICI Bank ADR 115 (0) (55) (15)Sterlite 160 2 (80) (85)
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According to Bank of NewYork the following chart has been found.
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RESEARCH METHODOLOGY4
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Research methodology
Research Design
The research design constitutes the blueprint for the collection, measurement and
analysis of data. It aids the scientist in the allocation of his limited resources by
posing crucial choices. Research design is the plan and structure of investigation
so conceived as to obtain answers to research questions. The plan is the overall
scheme or program of the research. It includes what the investigator will do from
writing hypotheses and their operational implications to the final analysis of data.
The design is a plan for selecting the sources and types of information used to
answer the research question. It is a framework for specifying the relationships
among the studys variables. It is a blueprint that outlines each procedure from the
hypotheses to the analysis of data.
Type of study
A study may be viewed as exploratory or formal. The essential distinction
between these two is the degree of structure and the immediate objective of the
study. This research is a quantitative study, since it involves analysing of numbers
to a great numbers.
Sample size
The sampling technique used to take the sample for the research is convenient
sampling technique. The companies whose stock are taken for the research
purpose are selected based on the following criteria
Should be considered in NIFTY index calculation
market capitalisation in NSE and
availability of share price in the American stock exchanges.
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Companies taken for research are given below.
Company Date of issuing ADR
Dr. Reddys Lab 11/04/2001HDFC Bank Ltd. 20/07/2001
ICICI Bank Ltd. 28/03/2000
Infosys Technologies Ltd. 11/03/1999
Satyam Computers Ltd. 15/05/2001
TATA Motors ltd. 24/10/2004
VSNL 15/08/2000
Table 6
The stock symbol of these in domestic and NSE
Company ADR Symbol NSE Symbol
Dr. Reddys Lab RDY DRREDDY
HDFC Bank Ltd. HDB HDFCBANK
ICICI Bank Ltd. IBN ICICIBANK
Infosys Technologies Ltd. INFY INFOSYSTCH
Satyam Computers Ltd. SAY SATYAMCOMP
TATA Motors ltd. TTM TATAMOTORS
VSNL VSL VSNL
Table 7
Data collection
The data collected for the research purpose are secondary data. The ADR prices
were collected through YAHOO! FINANCE and through DATASTREAM
website. The corresponding share prices were closing prices of the National stock
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Exchange (NSE), India and these share prices were collected through Bangalore
Stock Exchange Financial Ltd.
The share prices are adjusted to Bonus Issues and dividend payments. The return
is found from the share prices. The return is calculated as follows.
Return= P1/P0
The return thus found is a relative return. The natural logarithm is then found for
the return.
The correlation of the returns on ADR and the corresponding Indian shares are
found using the following formulae
Karl Pearsons coefficient of correlation
R= N;
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Cross correlation
Cross correlation is a standard method of estimating the degree to which two
series are correlated. Consider two series x(i) and y(i) where i=0,1,2...N-1. The
cross correlation r at delay d is defined as
Where mx and my are the means of the corresponding series. If the above is
computed for all delays d=0,1,2,...N-1 then it results in a cross correlation series of
twice the length as the original series.
There is the issue of what to do when the index into the series is less than 0 or
greater than or equal to the number of points. (i-d < 0 or i-d >= N) The most
common approaches are to either ignore these points or assuming the series x and
y are zero for i < 0 and i >= N. In many signal processing applications the series is
assumed to be circular in which case the out of range indexes are "wrapped" back
within range, ie: x(-1) = x(N-1), x(N+5) = x(5) etc.
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Analysis and Interpretation5
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TABLE 8
AUTO CORRELATION FOR ADR PRICES AND NSE STOCK PRICES
LAGS 1 2 3 4 5 6
COMPANY MARKET
ADR -0.061-(1.9) -0.031-(0.09) 0.001(0.03) -0.034-(1.06) -0.023-(0.71) -0.0041-(1.28)Dr. Reddy's Lab
NSE0.01
(0.31)-0.062-(1.93)
-0.028-(0.87)
0.003(0.09)
-0.009-(0.28)
-0.037-(1.16)
ADR-0.21
-(0.63)-0.063-(1.9)
-0.016-(0.48)
-0.009-(0.27)
0.017(0.51)
-0.057-(1.72)HDFC bank
NSE-0.139(4.21*)
-0.05-(1.51)
0.046(1.39)
-0.029-(0.87)
-0.008-(0.24)
0.006(0.242)
ADR-0.006-(0.18)
-0.034-(1.06)
0.069(2.15*)
0.015(1.59)
-0.014-(0.43)
0.045(1.4)ICICI bank
NSE
0.055
(1.71)
-0.025
-(0.78)
0.004
(0.12)
0.015
(0.46)
-0.017
-(0.053)
0.008
(0.25)
ADR0.061(1.9)
-0.109(3.4*)
-0.037-(1.15)
-0.016(0.5)
0.017(0.53)
-0.027-(0.84)INFOSYS TECH
NSE0.02
(0.62)-0.027-(0.84)
-0.01-(0.31)
-0.001-(0.03)
-0.04-(1.25)
-0.019-(0.59)
ADR-0.008-(0.24)
-0.082(2.48*)
0.051(1.59)
0.01(0.31)
-0.032(0.31)
-0.071-(1.)SATYAM COMP
NSE-0.009-(0.27)
-0.036-(1.09)
0.03(0.93)
0.003(0.09)
-0.049-(1.53)
-0.092(2.87*)
ADR-0.011-(0.12)
0.1(1.12)
-0.14-(1.59)
-0.41(0.46)
-0.037-(0.42)
-0.019-(0.21)
TATA MOTORS
NSE0.037
-(0.41)0.103(1.15)
-0.089-(1.01)
0.004(0.04)
-0.041-(0.46)
0.098(1.12)
ADR0.028(0.87)
-0.064-(2.)
0.046(1.43)
0.077(2.4)
-0.048(1.5)
-0.011-(0.34)VSNL
NSE0.059(1.84)
0.001(0.03)
-0.015-(0.46)
0.014(0.43)
-0.026-(0.81)
-0.017-(0.53)
Values given in brackets represent t values
* refers to t value significant at 5% level
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LAGS 7 8 9 10 11 12
COMPANY MARKET
ADR-0.019-(0.59)
0.049(1.53)
0.007(0.02)
0.01(0.31)
-0.015-(0.46)
0.053(1.65)Dr. Reddy's
LabNSE
-0.08(2.5*)
-0.0001-(0.03)
0.064(2.)
0.008(0.25)
-0.015-(0.46)
-0.009-(0.28)
ADR0.026(0.78)
-0.062-(1.87)
-0.025-(0.7)
0(0.)
0.083(2.51*)
-0.006-(0.18)HDFC bank
NSE-0.024-(0.72)
-0.018-(0.54)
-0.016-(0.48)
0.02(0.6)
-0.07(2.12*)
-0.004-(0.12)
ADR-0.043-(1.34)
-0.083(2.59*)
-0.006-(0.18)
0.025(0.78)
0.002(0.06)
-0.028-(0.87)ICICI bank
NSE0.032
-(1.)0.015(0.46)
0.009(0.28)
-0.012-(0.37)
-0.045-(1.4)
-0.046-(1.43)
ADR
0.023
(0.71)
0.02
(0.62)
-0.06
-(1.87)
0.014
(0.43)
0.062
(1.9)
-0.013
-(0.4)INFOSYSTECH
NSE-0.003-(0.09)
0.003(0.09)
-0.021-(0.65)
-0.016-(0.5)
0.015(0.46)
0.011(0.34)
ADR0.001
(2.21*)0.049(0.03)
-0.037-(1.15)
0.019(0.59)
0.063(1.96)
0.009(.28)SATYAM
COMP
NSE0.006(0.18)
0.031(0.96)
-0.047-(1.46)
0.013-(0.4)
0.01(0.31)
0.034(1.06)
ADR-0.034-(0.39)
0.184(2.17*)
-0.117-(1.36)
0.076(0.88)
0.096-(1.12)
0.063(0.74)TATA
MOTORS
NSE-0.041-(0.47)
-0.144(1.6)
-0.095-(1.1)
0.005(0.05)
-0.008-(0.09)
0.048(0.56)
ADR -0.027-(0.84) 0.024-(0.75) 0.14(0.43) -0.039-(1.21) -0.024(0.75) 0.015(0.46)VSNL
NSE0
(0.)-0.022-(0.68)
-0.069(2.15*)
-0.048-(1.5)
-0.011-(0.34)
0.01(0.31)
Values given in brackets represent t values
* refers to t value significant at 5% level
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LAGS 13 14 15 16
COMPANY MARKET
ADR0.013(0.4)
-0.016-(0.5)
-0.044-(1.37)
-0.037-(1.15)Dr. Reddy's
LabNSE
-0.014-(0.43)
0.056(1.75)
0.016(0.5)
0.023(1.)
ADR-0.034-(1.03)
-0.031-(0.93)
-0.024-(0.72)
-0.061-(1.84)HDFC bank
NSE-0.034-(1.03)
-0.045-(1.36)
0.009(0.27)
0.035(1.06)
ADR-0.041-(1.28)
0.031(0.96)
0.006-(0.18)
0.004-(0.12)ICICI bank
NSE-0.009-(0.28)
-0.032-(1.)
-0.027-(0.84)
-0.032-(1.)
ADR
-0.029
(0.9)
-0.03
-(9.37)
-0.029
-(0.9)
0
(0.)INFOSYSTECH
NSE0.008(0.25)
-0.017-(0.53)
-0.017-(0.53)
0.003(0.09)
ADR-0.04
-(1.25)-0.026-(.81)
0.021(.65)
-0.015-(.46)SATYAM
COMP
NSE-0.022-(0.68)
-0.016-(0.5)
-0.036-(1.12)
0.03-(0.93)
ADR-0.047-(0.55)
0.029-(0.34)
-0.088-(1.04)
-0.044(0.53)TATA
MOTORS
NSE-0.053-(0.62)
0.038(0.45)
-0.117-(1.39)
0.036(0.43)
ADR 0.03(0.93) -0.041-(1.28) -0.03-(0.93) -0.005-(0.15)VSNL
NSE0.041(1.28)
0.004-(0.12)
-0.53(1.65)
0.029(0.9)
Values given in brackets represent t values
refers to t value significant at 5% level
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TABLE 8
CROSS CORRELATION BETWEEN NIFTY AND ADR AND CROSS
CORRELATION BETWEEN ADR AND THE NSE STOCK
LAGS -10 -9 -8 -7 -6 -5
COMPANY MARKET
N-A0.017(0.53)
0.005(0.16)
0.01(0.31)
-0.026(0.81)
-0.004-(0.13)
0.049(1.53)Dr. Reddy's
Lab
A-S0.043(1.34)
-0.036(1.13)
0.038(1.19)
-0.029(0.91)
-0.015(0.47)
-0.026(0.81)
N-A0.024(0.71)
-0.018-(0.53)
-0.083(2.52*)
-0.011-(0.33)
-0.015-(0.45)
-0.043-(1.3)HDFC bank
A-S0.025(0.74)
-0.068-(2.)
0.008(0.24)
-0.025-(0.76)
-0.007-(0.21)
0.015(0.45)
N-A0.01
(0.31)0.004(0.13)
0.008(0.25)
0.007(0.22)
-0.018-(0.56)
0.011(0.34)ICICI bank
A-S-0.011-(0.34)
0.009(0.28)
-0.01-(0.31)
-0.013-(0.41)
0.063(1.97)
-0.025-(0.78)
N-A-0.004-(0.13)
0.001(0.03)
-0.008(2.5*)
-0.042-(1.31)
0.054(1.69)
0.052(1.63)INFOSYS
TECH
A-S0.032
(1.)-0.03
-(0.94)0.012(0.38)
-0.011-(0.34)
0.006(0.19)
-0.049-(1.53)
N-A0.047(1.47)
-0.044-(1.33)
-0.04-(1.21)
0.007(0.21)
-0.012-(0.36)
-0.011-(0.34)SATYAM
COMP
A-S0.02
(0.61)-0.049-(1.48)
0.05(1.52)
0.008(0.24)
-0.036-(1.09)
-0.053-(1.61)
N-A0.016(0.17)
0.035(0.37)
0.06(0.65)
-0.106-(1.14)
-0.112-(1.22)
-0.013-(0.14)TATA
MOTORS
A-S -0.014-(0.15) -0.096-(1.02) 0.138(1.48) -0.05-(0.54) 0.064(0.7) -0.013-(0.14)
N-A-0.031-(0.97)
-0.021-(0.66)
0.007(0.22)
0(0.)
0.125(3.91*)
0.084(2.63*)VSNL
A-S-0.035-(1.09)
-0.108(3.38*)
-0.022-(0.69)
0.042(1.31)
-0.032-(1.)
0.013(0.41)
Values given in brackets represent t values
* refers to t value significant at 5% level
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LAGS -4 -3 -2 -1 0
COMPANY MARKET
N-A-0.002-(0.06)
0.032(1.)
0.024(0.75)
0.031(0.99)
-0.024-(0.75)Dr. Reddy's
LabA-S
-0.032-(1.)
0.017(0.53)
-0.018-(0.56)
-0.001-(0.03)
0.274(8.56*)
N-A0.062(1.88)
0.072(2.18*)
-0.081-(2.45*)
0.088(2.67*)
0.338(10.24*)HDFC bank
A-S-0.006-(0.18)
0.042(1.27)
0.045(1.36)
0.017(0.52)
0.317(9.61*)
N-A0.088
(2.75*)0.052(1.63)
-0.062-(1.94)
0.1(3.13*)
0.336(10.5*)ICICI bank
A-S0.021(0.66)
0.056(1.75)
0.037(1.16)
0.001(0.03)
0.069(2.16*)
N-A0.052(1.63)
-0.043-(1.34)
-0.064-(2.)
0.188(5.88*)
0.317(9.91*)INFOSYS
TECHA-S
0.002(0.06)
0.028(0.88)
0.007(0.22)
-0.017-(0.53)
0.317(9.91)
N-A2
(2.)0.099
(3.)0.022(0.67)
0.13(3.94*)
0.466(14.12*)SATYAM
COMP
A-S-0.02
-(0.61)0.055(1.67)
-0.019-(0.58)
0.015(0.45)
0.622(18.85*)
N-A0.203
(2.21*)-0.142-(0.14)
0.049(0.54)
0.196(2.15*)
0.616(6.84*)TATA
MOTORS
A-S-0.025-(0.27)
-0.042-(0.46)
0.071(0.78)
0.088(0.97)
0.796(8.84*)
N-A
-0.029
-(.91)
0.106
(3.31
*)
0.336
(10.5
*)
-0.015
-(.47)
-0.062
-(1.94)VSNL
A-S0.117
(3.66*)-0.009-(0.28)
-0.018-(0.56)
0.043(1.34)
0.5(15.63*)
Values given in brackets represent t values
* refers to t value significant at 5% level
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LAGS 1 2 3 4 5
COMPANY MARKET
N-A0.033(1.03)
-0.002-(0.06)
-0.65(20.31*)
0.044(1.38)
0.06(1.88)Dr. Reddy's
LabA-S
0.234(0.73)
-0.023-(0.72)
-0.042-(1.31)
0.039(1.22)
0.016(0.5)
N-A0.041(1.24)
-0.038-(1.15)
0.047(1.42)
0.065(1.97)
-0.006-(0.18)HDFC bank
A-S0.146
(4.42*)-0.089-(2.7*)
0.023(0.7)
-0.009-(0.27)
0.038(1.15)
N-A0.037(1.16)
0.003(0.09)
0.046(1.44)
0.015(0.47)
0.001(0.03)ICICI bank
A-S0.517
(16.16*)0.151
(4.72*)-0.001-(0.03)
1(1.)
0.056(1.75)
N-A0.01
(0.31)-0.015-(0.47)
0.014(0.44)
-0.015-(0.47)
-0.051-(1.59)INFOSYS
TECHA-S
0.167(5.22*)
-0.051-(1.59)
-0.026-(0.81)
1.25(1.25)
0.002(0.06)
N-A-0.016-(0.48)
-0.034-(1.03)
0.024(0.73)
0.024(0.73)
-0.04-(1.21)SATYAM
COMP
A-S0.125
(3.79*)-0.023-(0.7)
0.077(2.33*)
0.01(0.3)
-0.057-(1.73)
N-A0.066(0.73)
0.066(0.73)
-0.05-(0.55)
0.12(0.13)
-0.106-(1.15)TATA
MOTORS
A-S0.083(0.91)
0.0991(1.09)
-0.144-(1.58)
0.025(0.27)
-0.543-(0.54)
N-A0.065
(2.03*)0.053
(2.53*)-2.125
-(2.13*)-0.032-(0.03)
0.036(1.13)VSNL
A-S0.24
(7.5*)0.001(0.03)
0.049(1.53)
0.026(0.81)
-0.02-(0.63)
Values given in brackets represent t values
* refers to t value significant at 5% level
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LAGS 6 7 8 9 10
COMPANY MARKET
N-A-0.055-(1.72)
0.038(1.19)
0(0.)
0.071(2.22*)
-0.018-(0.56)Dr. Reddy's
LabA-S
-0.03-(0.94)
-0.016-(0.5)
0.045(1.41)
0.019(0.59)
0.027(0.84)
N-A-0.084
-(2.55*)0.059(1.79)
0.026(0.79)
-0.02-(0.59)
0.002(0.06)HDFC bank
A-S-0.012-(0.36)
0.007(0.21)
-0.0833-(2.52*)
0.006(0.18)
0.017(0.5)
N-A-0.011-(0.34)
0.015(0.47)
-0.001-(0.03)
0.006(0.19)
0.053(1.66)ICICI bank
A-S0.047(1.47)
0.02(0.06)
0.001(0.03)
-0.021-(0.66)
0.001(0.03)
N-A-0.029-(0.91)
0.027(0.84)
0.036(1.13)
0.029(0.91)
0.22(6.88)INFOSYS
TECHA-S
-0.03-(0.94)
-0.005-(0.16)
0.038(1.19)
-0.011-(0.34)
0.016(0.5)
N-A-0.047-(1.42)
-0.008-(0.24)
0.077(2.33*)
-0.01-(0.3)
0.019(0.58)SATYAM
COMP
A-S-0.08
-(2.42*)-0.012-(0.36)
0.052(1.58)
-0.034-(1.03)
0.016(0.48)
N-A-0.021-(0.23)
-0.028-(0.3)
0.046(0.49)
0.003(0.03)
-0.137-(1.46)TATA
MOTORS
A-S0.042(0.46)
0.024(0.26)
0.155(1.67)
-0.101-(1.07)
0.027(0.29)
N-A0.017(0.53)
0.023(0.72)
0.029(0.91)
-0.028-(0.88)
0.039(1.22)VSNL
A-S0.125
(0.125)-0.009
-(0.281)-0.017
-(0.531)-0.039
-(1.219)-0.005
-(0.156)
Values given in brackets represent t values
* refers to t value significant at 5% level
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Analysis and Interpretations
Cross correlation
Cross correlation is run for seven companies in the following ways.
1. Between S&P CNX NIFTY returns and the ADR returns for eachcompany (this shows how much the NIFTY and ADR prices are
correlated. This is mainly due to the industry, economic and political
factors.),
2. Between ADR returns and the returns of the corresponding shares in the
domestic market (this shows how much the ADR and the NSE quote are
correlated and how well they move in tandem. This is mainly due to the
factors that are specific to the company and the industry.) and
3. The cross correlation is run at lag of 10 days.
T-value is computed for the correlation values at various lags by dividing the
correlation value with the standard error.
The significance in positive lag of the NIFTY-ADR will imply that ADR price
fluctuation is a LEADING indicator and of the ADR-NSE quote will imply that
ADR price fluctuation is a LAGGING indicator. The significance in negative lag
of the NIFTY-ADR will imply that ADR price fluctuation is a LAGGING
indicator and of the ADR-NSE quote will imply that ADR price fluctuation is a
LEADING indicator. This can be summarised as follows.
LEADING LAGGING
LAGGING LEADING
NIFTY-ADR
ADR-NSE
+ VE LAG -VE LAG
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From the results we find the following in each company.
Dr. Reddys Lab : The T-values at the 0th
lag, 3rd
lag and 9th
lag are greater than
two, i.e., the correlation is significant at 9th
lag. This means that the price change
of NIFTY index, of National Stock Exchange of India, on Day 1 will be reflectedon the 9
thday in the Dr. Reddys Lab ADR price. So in this case ADR price is a
LEADING indicator to NIFTY. At the same time the T-value at lag zero is 8.23 in
the case of ADR-NSE quote and therefore highly significant in case of the ADR-
NSE share price relationship. This means that any fluctuation in the prices of Dr.
Reddys Lab ADR is reflected on the NSE quote on the same day. Its influence is
immediate.
HDFC Bank : The T-values of lags -8, -3, -2, -1 and 0 are greater than two and
therefore they are significant. Since the significance is found in the minus lags, it
is to be understood that the influence of NIFTY index is more on the price of
HDFC Bank ADR. The fluctuation on NIFTY index today will influence the
HDFC Bank ADR within the next three days. Therefore the ADR is LAGGING
indicator to NIFTY. At the same it is found that at lag zero, lags 1 of the ADR-
NSE relationship the T-value is highly significant. This means that any price
fluctuation in the NSE will immediately influence the HDFC Banks ADR price
for the next two days. Here too the ADR is LAGGING indicator to ADR-NSE
quote for HDFC Banks stock.
ICICI Bank : The T-value is significant in -4,-1 and 0 lags in ADR-Nifty cross
correlation. The significance in the negative lags show that the NIFTY index
fluctuation today will influence the ICICI Banks ADR price four days later.
Since the significance in the zero lag is more, there are more chances that ADR
price fluctuation will immediately influence the NIFTY index. In this case the
ADR is a LAGGING indicator to NIFTY index. In case of ADR-NSE quote of
ICICI bank, the significance is high on 0, 1st
and 2nd
lags. This means that
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influence of fluctuation of NIFTY index is immediate on prices of ICICI Banks
ADR and is found for continuous two days. Here too ADR is a LAGGING
indicator to ADR-NSE quote to ICICI Banks stock.
INFOSYS Technology: The T-value is significant in -1 and 0 lags. The
significance in the negative lag and the zero lag points out that the ADR price
fluctuation of INFOSYS Technologys ADR influences the NIFTY index
immediately. The NIFTY index is very sensitive to the movement of price
fluctuations of INFOSYS ADR. In this case ADR is a LEADING indicator to
NIFTY index. The T-value for lag 0 and lag 1 is very high and is highly
significant, in the case ADR-NSE quote. This shows that the INFOSYS ADR
price movement influences the NSE quote for INFOSYS Technologys share on
the day of price fluctuation itself. Here too ADR is a LEADING indicator to
ADR-NSE quote for Infosys technologys stock.
SATYAM Computers: The T-value for the lags -4, -3, -1 and 0 are highly
significant since they are more than two. ADR is a LAGGING indicator to
NIFTY index. The significance in the negative lags implies that the NIFTY index
is being influences the SATYAM Computers ADR price. This influence will
occur in 3rd and 4th days after the fluctuation. The T-value for the lags 0 and 1
are very high, in the case of ADR-NSE quote. They are significant and ADR is a
LAGGING indicator here.
TATA Motors: The T-value for the lags -1 and 0 are significant. They are
LAGGING indicator to NIFTY index. The NIFTY fluctuation today will
influence the TATA MOTORS ADR tomorrow. The T-value for lag zero is
greater than 2 and significant, in the case of ADR-NSE quote. This means than
the price fluctuations of Tata motors is immediately reflected on the ADR price of
TATA motors.
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VSNL : The T-value for the lags -6, -5 -3 and 0 is greater than two. They are
highly significant. The ADR acts as LAGGING indicator to NIFTY index. The
price of VSNLs ADR is affected by the NIFTY index fluctuation. The T-valuefor ADR-NSE quote is greater than two and hence significant. This shows that
ADR is LAGGING indicator to the NSE quote of VSNLs stock.
Auto correlation
The T-value is significant, if T >=2. This means that the returns have got a pattern
within themselves and its not a random walk. It violates the rules of random
walk. If it is a random walk it means that the prices of the shares are determined
by the information available to the participants in the market.
In our result we find that the ADR returns of Dr.Reddys Lab, HDFC Bank,
Infosys Technology, Satyam computers and VSNL do not have any significant
value, i.e., all T-value are lesser than two. This means that the price fluctuations
of these ADRs are not auto correlated.
The T>2 in the 3rd
lag of ICICI BANK ADR and T>2 in the 8th
lag of TATA
Motors ADR, in their respective autocorrelation. These two ADRs have a pattern
in their price fluctuations and they are correlated to a significant level.
The T = 2 in the 9th lag of the Dr.Reddys Labs stock, which is traded in the
domestic market. The price movements in the domestic market trading of Dr.
Reddys Labs share are auto -correlated. The domestic shares of ICICI Bank do
not have auto correlation in their fluctuations.
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RESULTS6
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Findings
The following important points have been found
1. The null hypothesis, that, there is NO relation between ADR price
fluctuations and the price fluctuations of the underlying Indian shares inIndian stock exchanges, is rejected and the alternate hypothesis, that, there
is relation between ADR price fluctuations and the price fluctuations of
underlying Indian shares in Indian stock exchanges, is accepted.
2. The ADR being the leading and lagging indicator mainly depends on the
economy, industry and the stock in question.
3. ADR is LEADING indicator to NIFTY index most of the time.
4. The influence of ADR price fluctuations on the corresponding share in the
domestic market is immediate, in many cases. This is because of
development in the information technology. This can be observed from the
table that almost all zero lags T -value is significant.
5. The influence of ADR price fluctuations on the NIFTY index is relatively
to slow. This can be observed from the table that T-value being significant
at higher lags on the positive side or at lower lags at negative side.
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Conclusion7
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Conclusions
Any commodity which is traded in two different market trades in different prices.
This gives rise to arbitration and price discovery. In absence of arbitration
opportunities, it helps in understanding the movement of prices. The trading inADR in U.S. stock exchanges does this function very well. The ADR provides as
information about the movement of the share prices in India based on the economy
and other factors.
The ADR price fluctuations act either as LEADING or as LAGGING indicator.
This depends upon the industry and other political factors that are involved. The
investor community can use this to their best.
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Bibliography and References 9
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Bibliography.
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2. Chowdhry, B and V. Nanda, 1991, Multi-market Trading and MarketLiquidity, Review of Financial Studies, 3, 483-5111
3. Karolyi, A., 1998, what happens to stocks that list shares abroad? A survey
of evidence and its managerial implications, NYU Salomon Brothers
Center Monograph series, Volume 7, #1.
4. .DWHLQD+ROLFNi$'5DQG*'5LQ&HQWUDO Europe.
5. Dr. Mahu Kalimpali and Dr. Latha Ramachand, Changes in Liquidity
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6. Determinants of Returns and Volatility of Chinese ADRs at NYSE, Ali M.
Kutan, Southern Illinois University Edwards ville, Emerging Markets
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Price discovery and exchange rate effects. By Joachim Grammig, Michael
Melvin and Christian schlag.
8. Mr. Ajay Sharma, ADR and GDR price fluctuation.
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Lazard Asset Management Company.
10. Research methodology, Donald Cooper and Schindler.
Reference:
1. www.investopedia.com
2. www.blonnet.com
3. www.nseindia.com
4. www.bseindia.com
5. www.nyse.com
6. www.citicorp.com
7. www.bankofny.com