American Depositary Receipts

Definition

American Depositary Receipts (ADRs) are a form of security that represents shares in foreign companies and are traded on U.S. stock markets. ADRs allow investors to trade foreign company stocks in the U.S., while also enabling foreign companies to raise capital and increase their visibility in the U.S. market.

Origin

The concept of ADRs originated in 1927, introduced by JPMorgan Chase. The aim was to facilitate U.S. investors in investing in foreign company stocks more easily and to provide foreign companies with a pathway to access the U.S. capital markets.

Categories and Features

ADRs are mainly categorized into three types: Level I, Level II, and Level III. Level I ADRs are traded over-the-counter with lower disclosure requirements. Level II ADRs are listed on U.S. stock exchanges and must meet stricter disclosure standards. Level III ADRs involve public offerings, allowing foreign companies to raise capital in the U.S. market. Each type of ADR has specific application scenarios and advantages, such as Level I ADRs being suitable for companies not intending to raise capital in the U.S., while Level III ADRs are ideal for companies looking to finance through the U.S. market.

Case Studies

A typical case is Alibaba Group's listing on the New York Stock Exchange in 2014 through ADR issuance, which became one of the largest IPOs globally at the time. This allowed U.S. investors to directly invest in Alibaba's stock. Another example is BP (British Petroleum), whose ADRs are traded on the New York Stock Exchange, enabling U.S. investors to invest in this British energy giant.

Common Issues

Investors using ADRs may encounter issues such as exchange rate risk and tax implications. Since ADRs represent foreign company stocks, investors need to be aware of how currency fluctuations might affect their investment returns. Additionally, different countries' tax policies can impact the earnings from ADRs.