Search DR Directory
Symbol Lookup  

DR Publications

Market Fragmentation: Does It Really Matter?

Citi Depositary Receipt Services has published a new study which addresses how market fragmentation, driven by new generation technology and the resultant growth of multiple trading venues, has impacted trading in Depositary Receipts (DRs). The paper introduces equity market framework and analyzes trends in DR trading, spreads and volatility to gauge the impact of multiple trading venues. It also touches upon how market transparency has evolved, and provides a point of view on the implications of market fragmentation for DR issuers' investor relations strategy.

Institutional Holding in Depositary Receipts

Depositary Receipts (DRs) are a convenient way for investors to gain access to international equities. Since their inception in 1929, DRs have grown in popularity as vehicles for cross-border listings. As of December 2010, DR liquidity has increased to 147 billion shares (CAGR of 19% since 2006) representing close to 3,000 issuers. A large part of that increase was driven by one of the largest segments of investors in DRs — the institutional investor — holding approximately 57% of DRs outstanding for non-U.S. companies with a DR listing. The ensuing study analyzes trends in the behavior of institutional investors and attempts to understand their DR holding patterns.

Cross Listing and Impact on Cost of Debt

Cross-border listing of shares via a Depositary Receipt (DR) program has several advantages for both issuers and investors. The increased activity in the DR space over the last decades clearly demonstrates acceptance of DRs as an effective vehicle for cross-border listing. In the ensuing study, Citi Depositary Receipts analyzed if establishment of a DR program has benefits for issuers in reducing their cost of issuing debt. Based on our sample, we conclude that during the period of one year following the start of a DR program, the cost of debt — on average — is reduced by approximately 79 basis points (bps). This result is consistent across industries, trading venues and regions.

Depositary Receipts Listing and Cost of Equity

Citi Depositary Receipt services conducted an analysis to determine if a DR listing would have a positive impact on an issuer’s cost of capital in the home market via a reduction in cost of equity. Our analysis of empirical data suggests that after DR listing, the median cost of equity drops by ~5% (or 74 bps). This notion supports the case that cross-border listing through a DR platform provides an effective means for issuers to lower their cost of capital while enhancing brand image and increasing brand awareness globally.

Cross-Border Listing and Liquidity Enhancement in EMEA

Depositary Receipt (DR) issuance is believed to create value for issuers in several ways, including: building corporate visibility globally, providing greater access to international capital markets, facilitating M&A activity through use as acquisition currency (ADRs), and most importantly — for the purpose of this study — potentially improving liquidity. This study, conducted by Citi Depositary Receipt Services, provides an analysis of the impact of a DR listing on the underlying (ordinary) shares — focusing on EMEA-based companies — as it pertains to the trading volumes of the ordinary shares after the DR listing. The trading volumes are used to measure liquidity. The analysis indicates that, historically, most companies in EMEA have experienced an increase in liquidity of their ordinary shares. Overall, average liquidity increased by approximately 7%.

Value in Portfolio Globalization Using Depositary Receipts

Citi Depositary Receipt Services has published a new study, analyzing the risk-adjusted returns on U.S.-domestic versus non-U.S. equities (using DRs) since 2003. For the study, Citi Liquid Depositary Receipt Indices (CLDRs) and the S&P 500 were used as proxies for non-U.S. equities and U.S.-domestic equities, respectively. The study found that CLDRs had significantly outperformed the S&P 500 on a risk-adjusted basis since 2003, reinforcing the value proposition in investing in non-U.S. equities (using DRs).

Economic Prosperity and U.S. Market Competitiveness

Citi Depositary Receipt Services published this study, exploring the effects of cross-listing – including a cross-listing valuation premium – on companies from markets of different levels of economic prosperity. Our research has found that non-U.S. issuers from less prosperous economies have greater opportunities to benefit from a higher valuation premium by raising capital through a cross-listed IPO in the U.S.

The Liquidity Premium

The cross-listing valuation premium is defined as the increase in non-U.S. company valuation realized by cross listing the company’s shares on a U.S. stock exchange or on the London Stock Exchange. The findings of Citi’s “The Liquidity Premium” study show that firms with liquid cross-listed depositary receipts (DRs) can enhance their valuation premiums even further through a “liquidity premium.” Citi also found that the liquidity premium can apply to companies with liquid ADRs that are direct listed on a U.S. exchange and do not have an underlying listing in their local market.