Question

Which of the following is NOT true about American Depository Receipts (ADRs)?

• A. ADRs are claims issued by U.S. financial intermediaries (FIs) against shares in foreign companies, with the shares held in custody by financial intermediaries for investors.
• B. ADRs are issued in the U.S. and are denominated in U.S. dollars. All cash flows to the investor are in dollars.
• C. An ADR enhances a companys visibility, status and profile in the U.S. and internationally among investors.
• D. An ADR decreases the foreign firms U.S. liquidity (and potentially total global issuer liquidity).
• E. All of the above are true.

Answer 1

Sol:

Which of the following is NOT true about American Depository Receipts (ADRs)?

Answer is D. An ADR decreases the foreign firms U.S. liquidity (and potentially total global issuer liquidity).

An American depositary receipt (ADR) is a certificate issued by a U.S. bank that represents shares in foreign stock. They are stocks that trade on U.S. exchanges but represent shares in a foreign corporation. They give American investors a simple liquid way to invest in potentially international companies. Foreign Corporation also benefit from ADRs, as they make it easier to attract American investors and capital without the hassle and expense of listing themselves on U.S. stock exchanges. The ADR trades on U.S. markets. ADR are priced in U.S dollars and clears through U.S. settlement systems. ADR provide access to foreign listed companies in U.S that would not be open to U.S. investment otherwise, hence an ADR increases the foreign firms U.S. liquidity.