Financial investment via ADRs in Mexico and South America

International Journal of Public Administration

Volumn 23, Issue 5-8, 2000, Pages 1229-1252

  Peterson, Craig A ^a   O'Shaughnessy, K C ^a  

^a WESTERN MICHIGAN UNIVERSITY   (United States)

Author keywords

American depository receipts (ADRs); Investment; Latin America; Mexico

Indexed keywords

EID: 84937330331     PISSN: 01900692     EISSN: 15324265     Source Type: Journal    
DOI: 10.1080/01900690008525499     Document Type: Article

References (26)

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2. Several alternative approaches to foreign financial investment include direct purchase of foreign stocks or mutual funds in their home market; direct purchase of the shares of U.S. mutual funds or the common stock of a closed-end investment company with a specific country or regional focus; and indirect investment through the purchase of the common stock of a multinational corporation.
3. Grubel, Herbert G., 1968. Internationally Diversified Portfolios: Welfare Gains and Capital Flows. The American Economic Review, December: 1299–1314. Lessard, Donald R. “International Portfolio Diversification: A Multivariate Analysis for a Group of Latin American Countries.” The Journal of Finance vo1.28-3, (June 1973): 619-633. Solnik, Bruno. “Why Not DiversifL Internationally Rather than Domestically?” Financial Analysts Journal vol.30-4, (July-August 1974): 48-54
4. Bergstrom, Gary L., 1975. A New Route to Higher Returns and Lower Risks. The Journal of Portfolio Management, 2: 30–38. Fall Leibowitz, Martin L. and Kogelman, Stanley. “Return Enhancement from ‘Foreign’ Assets: A New Approach to the Risk/Return Trade-off.” The Journal of Portfolio Management 17 (Fall 1991): 5-13
5. Logue, Dennis E., and Rogalski, Richard J., 1979. Offshore Alphas: Should Diversification Begin at Home?. The Journal of Portfolio Management, 5: 5–10. Winter
6. Several alternative approaches to foreign financial investment include direct purchase of foreign stocks or mutual funds in their home market; direct purchase of the shares of U.S. mutual funds or the common stock of a closed-end investment company with a specific country or regional focus; and indirect investment through the purchase of the common stock of a multinational corporation.
7. The exception is the Telefonos de Mexico, Class A shares, that trade on the NASDAQ. Bankers Trust Co. reports that in 1994 at least 57 other Latin American ADRs traded over-the-counter (1994 Bankers Trust Co.).
8. The filing of Form 20-F is required for non-U.S. companies by the SEC to reconcile material differences in financial statements between the home country's accounting principles and United States GAAP.
9. The U.S. Tax Code allows individuals, estates, and trusts to claim the foreign withholding tax as a credit by filing Form 1116 Foreign Tax Credit.
10. Peterson, Craig A., 1996. Risk & Return Characteristics of American Depository Receipts. The Journal of Investing, Fall
11. Thomas, Lee R., 1988. Currency Risk in International Equity Portfolios. Financial Analysts Journal, 44 March-April: 68–71. Solnik, Bruno and Noetzlin, Bernard. “Optimal International Asset Allocation.” The Journal of Portfolio Management 9 (Fall 1982): 11-21
12. Maldonado, Rita, and Saunders, Anthony. 1983. Foreign Exchange Futures and the Law of One Price. Financial Management, 12: 19–23. Spring
13. Hicks, John R., 1946. Value and Capital, 2nd, London: Oxford University Press.
14. Using a data base whose time frame precedes the sample assumes that measures of the mean absolute and mean relative spread are stationary. For any particular security this assumption is too strong. However, assuming that the average values for these liquidity measures remains the same for a population of 1143 U.S. common stocks seems reasonable given that competitive forces limit the specialist's ability to exploit his quasi-monopolistic trading advantage.
15. Copeland, Thomas E., and Galai, Dan. 1983. Information Effects on the Bid-Ask Spread. The Journal of Finance, 38 December: 1457–1469. It has been shown (for example, Stoll, Hans. “The Supply of Dealer Services in Securities Markets.” The Journal of Finance 33 (September 1978): 1133-1151.) that the dealer's spread is primarily a function of inventory holding costs and the probability that informed traders can profit at the specialist's expense by trading on private information. Trading activity as proxied by volume is negatively related to measures of the spread. Thus, computing spreads for ADRs which do not trade regularly biases measures of the mean absolute spread upwards. It reduces the sample to only 34 of the 67 foreign stocks. We are also unable to examine the tequila effect on measures of the spread
16. Officer, Dennis, and Hoffineister, J. Ronald. 1987. ADRS: A Substitute for the Real Thing. The Journal of Portfolio Management, 13: 61–65. Winter
17. Gruber, Elton, Edwin and Martin. 1977. Risk Reduction and Portfolio Size: An Analytical Solution. Journal of Business, 50 October: 415–437.
18. Portfolio risk in the Markowitz model is specified in terms of the covariance. The correlation coefficient measures the degree of association between security returns and is related to the covariance as follows: ρij = δij/(δi, δj) where ρij is the correlation coefficient between the returns for securities i and j, δij, the covariance, and δi (δj) the standard deviation of returns for security i(j).
19. Maldonado-Bear, Rita, and Saunders, Anthony. 1981. International Portfolio Diversification and the Inter-Temporal Stability of International Stock Market Relationships, 1957-1978. Financial Management, 10: 54–63. Autumn
20. Drummen, Martin, and Zimmerman, Heinz. 1992. The Structure of European Stock Returns. Financial Analysts Journal, July-August: 15–26.
21. We compute the product of domestic return and currency return and include the value in foreign return. Because the average value for this product is small (-0.0009) we do not report its value in Table 4.
22. Table 1 reports that two companies from Brazil list ADRs in the U.S. financial markets. Telecommunicacoes Brasilerias (TELEBRAS) did not list its ADRs until November 6, 1995. Hence it is not included in computing average weekly returns. Banco de A. Edwards (Chile) also listed its ADR on November 6, 1995.
23. In July 1993, Brazil's new cruzeiro replaced the cruzeiro at a ratio of 1 to 1,000. The real replaced the new cruzeiro in July 1994
24. We compute the correlation between domestic risk and currency risk. The average value for this term is trivial (-0.0004). Hence, we do not report its value in Table 3.
25. Amihud, Yakov, and Mendelson, Haim. 1986. Asset Pricing and the Bid-Ask Spread. Journal of Financial Economics, l7 (2) December: 223–249.
26. We are currently investigating reasons for explaining differences in the absolute liquidity premium, but that is the subject for another paper.