Global Depositary Receipts – Definition

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Global Depositary Receipt (GDR) Definition

A Global Depository Receipt (or GDR) is a certificate issued by a bank that purchases shares of a foreign company and creates a security on local exchanges that are backed by these shares.

A Little More on Global Depositary Receipts

A GDR is the global equivalent of an American Depositary Receipt (ADR). This certificate represents shares in a foreign company, such as a foreign branch of an international bank. The bank then holds these shares and trades the receipts as domestic shares. On a global scale, many bank branches provide these receipts for sale. GDRs are used by private markets to increase capital that is denominated in euros or dollars. When these private markets target to obtain euros, it is called GDRs or EDRs.

The GDR, as a type of negotiable certificate, is traded by investors in several markets known as capital markets. These markets, as the name suggests, are used to provide the trade of long-term debt instruments and for generating capital. In an international market, the transactions involving GDRs have lower associated costs as compared to other trade options for foreign securities.

Shares Per Global Depositary Receipt

As each GDR is indicative of a specific number of shares in a company, depending on its design, a single GDR can range from a fraction of a share to several shares. When multiple shares are involved, the receipt value is higher as compared to a single-share GDR. GDRs are managed and distributed in an international context by the depository banks.

Trading of Global Depositary Receipt Shares

To draw interest from foreign investors, GDRs are issued by companies. It is a low-cost method which allows investors to invest in these foreign shares. The trade of these shares is just like that of domestic shares but they are purchased in an international marketplace.

The purchase and the sale of GDRs is managed by the representative broker. Usually, the brokers belong to the home country, and they act as sellers in the foreign market. The purchasing of a GDR is a multistep process. It involves a local broker for the investor, a broker in the marketplace where the company issued its shares, a bank that represents buyers and the custodian bank. During the transaction, a custodian bank (escrow agent) holds possession of the shares. This ensures that both the parties are protected during the transaction.

A broker can also sell GDRs on the investor’s behalf. They can be sold as-is on the exchange or they can be converted into regular stock of the company. In addition, they can also be cancelled and sent back to the issuing company.

References for Global Depositary Receipts

https://www.investopedia.com/terms/g/gdr.asp
https://en.wikipedia.org/wiki/Global_depository_receipt
http://www.businessdictionary.com/definition/global-depository-receipt-GDR.html
https://efinancemanagement.com/sources-of-finance/global-depository-receipt

Academic Research on Global Depository Receipt (GDR)

·       Cross-listing as a Global Depository Receipt: The influence of emerging markets, regulation, and accounting regime, Chugh, S., Fargher, N., & Wright, S. (2014). Journal of Contemporary Accounting & Economics, 10(3), 262-276. This research work examines the factors responsible for the decisions of international firms to cross-list as GDRs. We concentrate on the divergences in regulatory and accounting prerequisites between exchanges. Also, the focus is on the cluster of the economy which has emerged with an increase in globalization. A pertinent economic influence on this choice is the home country, reflecting its trade ties. Firms from rising markets are influenced by higher US regulation and governance requirements to give GDRs instead of ADRs on US exchanges. Utilizing local IFRS and GAAP also has the likelihood of stopping firms from listing as ADRs. This implies that in order to list as either an ADR or GDR, the price of US GAAP reconciliation has to be considered.

·       GLOBAL DEPOSITORY RECEIPT, KOUSALYA, D. P., & NIRANJANA, M. S. (2018). GLOBAL DEPOSITORY RECEIPT. GLOBAL JOURNAL FOR RESEARCH ANALYSIS, 6(9).

·       Global Depository Receipt (GDR) Conversion and Exchange Rate in Egypt, Bassuni, A., Wagdy, M., Senger, M. F., & Almuqbaly, S. (2016).  MENA capital markets and in major emerging markets. Of recent, a problem emerged in foreign currencies being available in the Egyptian Market which made it difficult for foreign investors to repatriate their investment gains to their native country. This resulted in it becoming a common tool used recently by foreign investors to buy a stock from the Egyptian Exchange which can be changed to GDRs traded on London Exchanges. After this, they would be sold for US Dollars in the London Exchange in order to repatriate money faster as instead of queuing for long in banks as a result of foreign currency being insufficient. These stocks were in high demand in the Egyptian Stock Market because of this mechanism thereby pumping their prices. Apart from an increase in demand, GDR supply increased as well, equaling the shares on the London Stock Exchange, hence pulling down prices. This resulted in a gap between the two prices, and the resultant effect was an increase in the USD Exchange Rate.

·       Operating Performance and Stock Returns of Global Depository Receipt Issuers from Taiwan, Hwang, J. D. (2012). International Research Journal of Finance and Economics, (86). This article examines if valuation and operating performance gains exist from international cross-listing. With a sample of fifty-five Taiwanese firms which established deposit receipt (DR) programs in the UK, US, and also Luxemburg from the year 1992 up until 2009. We discover that Tobin’s q, stock returns, as well as, the operating performance of deposit receipt issuers reduce and perform below standard after the issue. Taiwan has remained an emerging or rising market that has not been accessible to foreign investors with particular reference to the large part of our sample period. DR issuers who hail from Taiwan should have the vantage position in reaping valuation gains, as well as, other benefits by listing their shares in more promising markets. Our research opines that the potential gains of international cross-listing may not be as notable as preconceived. These results are feasible, realistic, and contribute greatly to the present debate on the merits and demerits of international cross-listing.

·       Examiniation of Regulatory and Accounting Factors that influence the appeal to foreign firms of listing as a Global Depository Receipt, Chugh, S., Fargher, N., & Wright, S. (2010).

·       An Empirical Study of Exchange-Traded Adrs from India Market Reaction, Chakrabarti, R. (2003). Depositary Receipts have become the favored vehicle used in accessing developed stock markets for tons of emerging market companies. India has also been among. While some Indian companies issued ADRs in the 1990s, only a few of the securities have been listed on US exchanges. We research the return, as well as, volume dynamics of these ADRs listed on exchanges that are of Indian origin. We discover that the underlying market indices, exchange rate, and stock returns in India and the US combined most times explain lower than half of the ADR returns movement. Low cross-border correlations are shown by returns and volume. Often, Indian ADRs benefit from large premiums, signifying a market segmentation that is effective between both countries. Finally, most times, ADR issuance has a transient positive effect on the price of the underlying stock but generally doesn’t materially change the existing relationship of the stock and the US and Indian markets.

·       ADRs and underlying stock returns: empirical evidence from India, Patel, S. A. (2015). Ai & Society, 30(2), 299-310. The ongoing study seeks to look into the impact of cross-listing of ADRs on the Indian stock market for the period between June 2004 and July 2009. Average abnormal returns, as well as, cumulative average abnormal returns, are computed for the (-25, +25) event window, with the ADR listing date being the event date. The outcome indicates a significant negative abnormal local market return on the ADR listing day. Of a total of nine companies, six shows increased fluctuation of local returns after the cross-listing. In conclusion, we can say that ADR listings have no substantial benefit impact to the local shareholders.

·       Financial Engineering and Innovation as Risk Management Tools: The Case of Indian Companies During Global Financial Crisis., Shah, V., & Srinivasan, P. (2010). IUP Journal of Risk & Insurance, 7.

·       Indian stock market reaction to international cross-listing: Evidence from Depository Receipts, Tripathy, N., & Jha, M. K. (2010). China Business Review, 9, 1-16. The current empirical study examines the dynamic links between ADRs and their corresponding underlying stock returns of the Indian stock market. This study examines daily data from the issuance date of the ADR up until the 30th of April, 2013. Johansen co-integration, vector error correction model, variance decomposition, impulse response function, the Granger causality test, and Dickey-Fuller unit root test were all applied. The result reflects that the underlying stocks, as well as, ADRs are level stationery and a long run balanced relationship exists between the two. Furthermore, Granger causality test decodes that underlying stocks are led by ADRs. Also, the impulse response function shows that ADRs and underlying stocks have a positive effect on each other. Similarly, variance decomposition shows proof that underlying stocks analyze around half of the variance of ADRs. In conclusion of this study, it was seen that price discovery is a major entity that occurs in the ADR market, suggesting that the influx of new information circulates faster in the ADR market.

·       The Impact of Cross-listing on the Cost of Equity Capital: The Case of American Depository Receipts (ADRs) and Global Depository Receipts (GDRs), Kim, O. (2011). (Doctoral dissertation, University of Melbourne, Department of Accounting and Business Information Systems). The study contributes to the cross-listing literature and looks into the effect of cross-listing via American Depository Receipts (ADRs) or Global Depository Receipts (GDRs) on the cost of equity capital through an exploration of two research questions. The first question seeks to know if cross-listing leads to differential changes in the cost of capital for ADRs against GDRs and if so, the potential clarification for the differential effect of the two cross-listing mechanisms on the cost of capital. The Second question seeks to find the sources of changes in information risk – public (accounting) disclosure and analysts forecasts—and the level to which changes in these sources, individually or jointly, impact the cost of equity capital in the post-listing period. The study encompasses a global sample of firms that were cross-listed as ADRs on the NYSE, NASDAQ, and AMEX or as GDRs on the London Stock Exchange. Using the suggested cost of capital models that are based on the realized accounting earnings (O‘Hanlon and Steele 2000) and [2] analysts‘ predictions (Easton et al. 2002) and realized returns asset-pricing models (Fama and French 1993), the study proves the cost of the capital decline of ADRs and GDRs. This outcome holds across methodological techniques for estimating the cost of capital. There is no proof that the height of changes in the cost of capital varies as a function of the quality of disclosed information, despite differential disclosure prerequisite for ADRs against GDRs. The study takes into cognizance improvement in the information environment around cross-listing, as proxied by analysts’ following which is more noticeable for GDRs. The results in respect to the effect of the alterations in both elements of the information environment—public (accounting) disclosure and analysts’ predictions (following and accuracy)—on the cost of equity capital are sensitive to the choice of techniques and are mixed. The final conclusion is that for cross-listed firms, there is no overlap in the information content of both elements of the information environment and that they complement each other. The study broadens our knowledge of why firms opt to cross-list as ADRs or GDRs, provides perception into the effect of information risk on the cost of capital and has practical consequences for exchanges that put into consideration the accommodation of depository receipts such as Dubai, Singapore, and Hong Kong.

·       The Performance of Russian Global Depository Receipts on the London Stock Exchange., Khindanova, I., & Khindanov, I. (2014). Journal of Applied Business & Economics, 16(6).

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