تاثیر ارزیابی بحران ارز: شواهدی از بازار ADR

This study analyzes American depository receipts (ADR) performance surrounding the outbreak of major currency crises during the past decade. By employing event–study methodologies and multifactor pricing models, we find that the outbreak of a currency crisis is accompanied by a negatively significant abnormal return for the corresponding ADRs, even after controlling for variations in exchange rates. We also find significant upward shifts in the exchange rate exposure of ADRs when the home currency is switched from a “pegging” to a “floating” exchange rate regime. In addition, ADR-originating firms with larger sizes, greater proportions of U.S. market activities, and greater market liquidity have relatively less negative abnormal returns (ARs) and less significant upward shifts in currency exposure, implying that such firms are relatively better hedged against currency crises.

American depository receipts (ADRs) are U.S. dollar-denominated negotiable receipts for non-U.S. shares, thus allowing foreign companies to be listed and traded in U.S. equity markets. The Bank of New York estimates that over the past decade, the compound annual growth rate for ADR trading volume reached 22%. During 2000, the trading of ADRs in NYSE, AMEX, and NASDAQ reached a record high of 30 billion shares valued at US$1.185 trillion.1 The study of the ADR market has increasingly drawn the attention of investors and academicians, as a result of the increasing globalization of today's capital markets, intensifying the privatization of enterprises around the world, and of the U.S. investors' growing need for international portfolio diversification. One of the extensively investigated topics regarding ADR investments is their currency risk, that is, the sensitivity of ADR values to foreign exchange rate fluctuations. Currency exposure can emanate from translation, transactions, and economic sources. Theoretically, the unexpected changes in currency rates are supposed to affect a firm's translated share price, its operating cash flows, and/or its cost of capital, therefore causing a valuation impact on the firm's equity returns. However, firms can minimize their foreign exchange exposure by operational hedges (i.e., shifting operations abroad to match foreign currency revenue with foreign currency cost streams) and/or by financial hedges (i.e., trading currency derivatives to offset adverse impact of exchange rate fluctuations and matching funding sources with revenue streams). Empirically, existing evidence concerning the significance of currency exposure to a firm's value is mixed. Although the majority of stock markets worldwide are found to be exchange rate sensitive, U.S. firms have consistently been found to have weak foreign exchange exposure. ADRs, on the other hand, are neither purely foreign nor purely American, as they are commonly cross listed, traded, and even raise capital both on the U.S. stock markets and in their own home countries. Should their exchange rate exposure, then, more resemble that of U.S. stocks or that of foreign equities? How much should U.S. investors in ADRs be concerned about the exchange rate pricing factor? We hence investigate how effectively U.S. investors in ADRs are shielded from currency risk, particularly in the case of a collapse in the foreign currency. If ADR-originating foreign firms have effectively hedged their asset values from fluctuations in exchange rates, U.S. investors are protected. Otherwise, U.S. ADR investors would have to hedge the currency exposure largely on their own. The currency exposure of ADRs hence remains a topic of significant interest to both foreign firms and U.S. investors, in the light of historical and potential currency turmoil around the world, particularly in emerging markets. Yet, so far, except for Bailey, Chan, and Chung (2000) and Huang and Stoll (2001), there are few published studies that investigate the valuation impact of currency crises on the ADR market. This study examines the price performance of ADRs when a currency crisis breaks out in the ADR-originating country/region. We utilize the event–study paradigm to investigate the ADR market reaction to the occurrence of major currency devaluation events during the 1990s. Specifically, we analyze the U.K. pound sterling withdrawal from the European Exchange Rate Mechanism (ERM) in September 1992, the Mexican peso crisis starting in December 1994, the Asian financial flu starting in July 1997, the Russian ruble devaluation starting in August 1998, and the Brazilian real devaluation starting in January 1999. We observe that (1) the event date of a currency crisis was consistently accompanied by a negatively significant abnormal return for ADRs originating in the crisis zone; (2) following a currency crash, there was a significant upward shift in the sensitivity of ADR returns to exchange rate movements, especially when a country is forced to switch its currency from a “pegging” to a “floating” exchange rate regime; and (3) on average, greater abnormal returns (ARs) and greater shifts in exchange rate exposure were found for those ADR-originating firms with relatively smaller market capitalization, with lesser market trading liquidity, and with smaller proportions of financing and operating activities in the U.S. market. The evidence presented in this study, supporting a significant valuation effect of currency exposure on ADR-originating firms, is inconsistent with many previous findings, such as Huang and Stoll (2001). However, Huang and Stoll examined the impact of exchange rate volatility on market liquidity as a channel by which stock values are affected. Their evidence indicated that exchange rate volatility is not the channel through which stock values are affected. Doukas, Hall, and Lang (1999), in a study that uses multifactor asset pricing models, present supporting evidence for some of our findings. The rest of this paper is organized into the following sections. Section 2 reviews relevant literature and introduces test hypotheses. Section 3 describes the econometric methodology, sample selection procedures, and the data used. Empirical results are presented in Sections 4, and Section 5 concludes the paper.

By examining the daily price performance pattern of ADRs that originated from six countries that experienced a currency crisis during the 1990s, we observe that the outbreak of a crisis is consistently accompanied by a negatively significant abnormal return for ADRs originating in the crisis zone. The result is robust to controlling for the variations in foreign exchange market rates. In addition, subsequent to a currency crash, there is a significant upward shift in the sensitivity of ADR returns to the exchange rate movements, especially for ADRs originating from a country whose currency is forced to switch from a pegging to a floating-rate regime. On average, ARs are less negative, and currency exposure upward shifts are less significant for those ADR-originating firms with relatively larger market capitalization, with greater proportion of financing/operating activities within the Unite States, and with greater market liquidity, supporting the hypothesis that such foreign firms are relatively better (though not fully) hedged from the risk associated with their home currency devaluation. Our results suggest that a foreign currency crisis can materially affect an ADR-originating firm's value through both short- and long-term channels. The short-term valuation effect leads to abnormal performance surrounding the outbreak of a currency crisis, and the long-term effect causes structural shift in the exchange rate exposure of a firm's equity value. In the multiindex pricing model (Eq. (7)), the outbreak of a currency crisis is likely to affect a firm's Rj by impacting the slope coefficient (such as β3j) and/or the disturbance (εj). By either path, country-specific (e.g., emerging markets vs. developed countries), firm-specific (e.g., firm size, proportion of operating/financing activities inside the United States), and market liquidity factors play important roles in determining a firm's ability and propensity to hedge its currency risk. These results, suggesting that there should exist a significant valuation impact of currency exposure on an ADR originating firm's stock returns, are inconsistent with many previous findings, in which little or no significant association is documented between a multinational firm's equity and its home currency values. Our explanation is that a multinational firm from a developed country has sufficient propensity and access to operational and/or financial hedges, plus, its shares usually have greater liquidity in the U.S. security market. As a result, its value is less exposed to exchange rate risk, especially when the home currency is not experiencing a crisis. On the contrary, if an ADR-originating firm is from an emerging market, or has a small capitalization, or has a small proportion of financing/operating activities in foreign markets, or has a low level of trading liquidity, it may merely have limited access or propensity to employ hedges against currency exposure. Consequently, such firms are more likely to be exposed to exchange rate risk, and their values are more vulnerable to a currency crisis (particularly when it develops into a nationwide credit crisis, i.e., the currency risk grows into a country risk). As this study so far focuses on Levels II and III ADRs, which are traded in the NYSE, AMEX, or NASDAQ, and their firms have relatively large sizes and great market liquidity, we may find further promising evidence on those ADR-originating firms which are relatively smaller, less globalized, and/or more thinly traded, such as those numerous ADR issues under the Levels I or 144A category. In addition, this study can be extended further to investigate other currency crises and their possible valuation impact on the affected country/region's firm values, such as the Turkish lira crisis beginning in February 2001 and the Argentina peso crisis in December 2001–January 2002. In conclusion, based on this study of the ADR market and the major currency crises that occurred in the past decade, our findings suggest that how sensitive a firm's equity value is to its currency exposure depends on the firm's specific characteristics, size, liquidity of its shares, its operating environment, and the degree of internationalization of its operations. There is some evidence that returns on ADRs from the developed country, in our sample, adjusts faster to bad news than do the returns of ADRs from emerging markets.