Comparative Intl. Labor Relations
By: S. Carpenter, A. Caccamo, and K. O’Brien

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American Depositary
Receipt (ADR)
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A stock that trades in the U.S. but represents a specific number of shares in a foreign corporation
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Bought and sold on
American markets
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Issued/sponsored in the U.S. by a domestic bank or brokerage

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Introduced to the financial markets in 1927
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Result of: (1) complexities in buying shares in foreign countries and (2) difficulties with trading at different currency values
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U.S. banks purchase bulks of shares from the foreign company, bundle the shares into groups, and reissue on the NYSE, AMEX or the Nasdaq
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In return, foreign company must provide detailed financial information to the sponsor bank
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The depositary bank sets the ratio of U.S. ADRs per homecountry share; this ratio can be anything less than or greater than 1
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Majority of ADRs range between $10 and $100 per share

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Russian Vodka Inc. wants to list shares on the NYSE to gain exposure to the U.S. market and to tap into the growing demand for vodka
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Russian Vodka already trades on the Russian Stock Exchange at
127 Russian roubles (equivalent to US$4.58)
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A U.S. bank purchases 30 million shares from Russian Vodka Inc. and issues them in the U.S. at a ratio of 10:1. This means each
ADR share you purchase is worth 10 shares on the Russian Stock
Exchange
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The new ADR should have an issue price of around US$45.80 each
(10 times $4.58)

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Level 1: Foreign companies either don't qualify or don't wish to have their ADR listed on an exchange
• over-the-counter market
• loosest requirements from the SEC
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Level 2: Listed on an exchange or quoted on Nasdaq
• slightly more requirements from the SEC
• higher visibility trading volume
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Level 3: Issuer floats a public offering on U.S. exchange
• able to raise capital and gain substantial visibility in the U.S. financial markets

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For individuals, ADRs are an easy, cost-effective way to buy shares in a foreign company
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Foreign entities like ADRs because they get more U.S. exposure, allowing them to tap into the wealthy
North American equities markets

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Political Risk
• Is the government of the ADR’s home country stable?
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Exchange Rate Risk
• Is the currency of the home country stable?
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Inflationary Risk
• Extension of exchange rate risk

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Sarbanes-Oxley Act of 2002 (also: Public
Company Accounting Reform and Investor
Protection Act of 2002)
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US Federal law enacted in response to a number of major corporate and accounting scandals

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Applies new standards for all U.S. public company boards, management and public accounting firms
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Does not apply to privately held companies
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Act contains 11 Titles and requires the SEC to implement rulings on requirements to comply with the new law

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Public Company Accounting Oversight Board (PCAOB)
Auditor Independence
Corporate Responsibility
Enhanced Financial Disclosures
Analyst Conflicts of Interest
Commission Resources and Authority
Studies and Reports
Corporate and Criminal Fraud Accountability
White Collar Crime Penalty Enhancement
Corporate Tax Returns
Corporate Fraud Accountability

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Depends if country is developed/wellregulated or less developed
• i.e. poorly regulated countries – benefit from better credit ratings by complying to regulations; developed countries – incur costs
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Displaces business from NY to London
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Alternative Investment Market claims that its growth in listings almost entirely coincided with SOX legislation

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Improved investor confidence and more accurate, reliable financial statements
• "Sarbanes-Oxley helped restore trust in U.S. markets by increasing accountability, speeding up reporting, and making audits more independent.“ – SEC Chairman
Christopher Cox, 2007
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Auditor conflicts of interest have been addressed prohibits auditors from having lucrative consulting agreements with the firms they audit
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Improved investor confidence in financial reporting; improvements in board, audit committee, and senior management engagement in financial reporting; improvements in financial controls

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Reduced America's international competitive edge against foreign financial service providers, by introducing a complex and regulatory environment into U.S. financial markets
• Following the act's passage, smaller international companies were more likely to list in stock exchanges in the U.K. rather than U.S. stock exchanges (Journal of
Accounting Research, 2008)
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Overall reluctance of small businesses and foreign firms to register on US stock exchange
• “These regulations are damaging American capital markets by providing an incentive for small US firms and foreign firms to deregister from US stock exchanges” –
Ron Paul

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Level 1 ADRs do not have to have to comply with SOX
• Not registered with the SEC
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Level 2 and Level 3 ADRs must comply with SOX
• Can be costly for a company beginning a U.S.
ADR Program
• Costs include a significant intangible cost: diversion of senior management time

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Establish a full-time investor, or investor relations team, based in the U.S.
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Senior executives must visit institutional investors and securities analysts at least twice a year, if not more

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Currently, interest by foreign companies to have shares traded in the U.S. is on rise because of two new SEC rules
• Japan, Hong Kong, and Australia
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Companies are not looking to list on NYSE or
Nasdaq
• Want to set up Level 1 ADRs and trade over the counter
(OTC)
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Two Rules:
• Automatic exemption from listing on SEC
• Brokers must report trades within 90 seconds and information on each trade must be available in real time
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Will make pricing more transparent