After-Market Performance of ADR IPOs: The Role of Inter-Tranche Allocation, Use of Proceeds and Corporate Control

AbstractAmerican Depositary Receipts (ADRs) represent foreign company shares that trade in US stock exchanges. There are thousands of ADRs listed on US stock exchanges. Some of them represent shares of seasoned companies while others are initial public offerings (IPOs). The purpose of this study is to analyze the after-market performance of these ADR IPOs. The main emphasis is on the impact of the volume of shares allocated to the US markets, the use of the IPO proceeds and the corporate governance structure of the ADR issuer on the performance over several years after the IPO. The results show that while allocation, use of proceeds and corporate control have minimal impact on performance, other fundamental factors such as country of origin, industry and risk play more prominent role.Keywords: Initial Public offering IPO, Proceeds, Corporate Controls, American Depository Receipt ADR.IntroductionAmerican Depositary Receipts (ADRs) are negotiable instruments representing foreign company shares and trading on US stock exchanges. Companies issue ADR for several purposes including capital raising, liquidity enhancement, increasing investor base etc. Some of these companies are seasoned with shares trading in the home country capital market while some are going public for the first time. Many of these companies issue their shares in several countries (domestic market, US market and elsewhere).The US markets are the most liquid, the largest and provide the most investor protection. Because of this stock performance improves following listing on US exchanges1, °. Although listing on US exchanges costs money in terms of listing fees and compliance with US GAAP, listing by itself signals good about the company's prospects. ADR IPOs that issue on US exchanges do not have to underprice to signal quality. In fact Ejara and Ghosh3 show that ADR IPOs are significantly less underpriced than local US IPOs.A closer examination of ADR IPOs allows testing for such signaling impact of listing on stricter and more liquid exchanges. The implication of such signaling is that ADR IPOs that list a greater proportion of their share issues on US exchanges should be less underpriced and their aftermarket performance should be superior. Related issues that can be tested are the use of the IPO proceeds, stage of development of home country's economy, ownership and corporate governance issues and participation of original owners in the IPO. Firms that invest in R and D, long-term productive investments and acquisitions are found to perform better than firms that invest in short-term working capital or use the proceeds for general operating expenses13.The objective of this study is to analyze the cross-sectional differences in the aftermarket performance of ADR IPOs. Aftermarket performances of ADR IPOs are related to the corporate governance and ownership structures. Companies that achieve greater dispersion of share ownership and allocate a greater percentage of their shares to the US market, are expected to benefit more from the liquidity and market monitoring of the US markets.Companies that invest the capital raised in longer term capital expenditures such as R and D, project investment, acquisitions, capital structure improvement etc. are expected to perform better than those that spend the IPO proceeds on short term uses such as working capital, general operating expenses or dividend payments. This is important especially for companies from emerging markets where there is scarcity of capital. However, the home country's investor protection, rule of law, transparency and stability are expected to affect the company's performance. Such home country corporate governance environment is taken into account in the analysis of ADR IPO performance.This paper focuses on the cross-sectional variations in the after-market performance of ADR IPOs. Explanation is sought for cross-sectional variations in the corporate governance and ownership structures, allocation of shares to the US tranche and the use of proceeds. …