This investigation utilized the event study methodology to examine the information effect of announcements on depositary receipt listing and stock reward fluctuation behavior during 1990 to 2006. Empirical evidence demonstrates that listing depositary receipts leads to negative abnormal returns around the recommendation date. Furthermore, the stock market exhibits negative abnormal returns near the recommendation date when listed depositary receipts in the electronics industries, but the stock prices in the non-electronics industries are not immediately influenced by the announcement of DRs

Chin-Tsai Lin

Jung-Dan Lin

Yi-Hsien Wang

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Zagreb International Review of Economics & Business, Vol. 11, No. 2, pp. 139-146, 2008© 2008 Economics Faculty ZagrebAll rights reserved. Printed in CroatiaISSN 1331-5609; UDC: 33+65SHORT PAPERThe Relationship between Stock Market Reaction and IssuingDRs in Taiwan Listed CompaniesChin-Tsai Lin*Yi-Hsien Wang**Jung-Dan Lin*Abstract: This investigation utilized the event study methodology to examine the information effect ofannouncements on depositary receipt listing and stock reward fluctuation behavior during1990 to 2006. Empirical evidence demonstrates that listing depositary receipts leads tonegative abnormal returns around the recommendation date. Furthermore, the stock marketexhibits negative abnormal returns near the recommendation date when listed depositaryreceipts in the electronics industries, but the stock prices in the non-electronics industries arenot immediately influenced by the announcement of DRs.Keywords: Depositary Receipts, Event Study, Abnormal Return, Information EffectJEL Classification: C80, G14IntroductionInternational capital markets have become extremely globalized since the 1990s.Marketable securities are important tools for fundraising and investment forenterprises and investors respectively. If enterprises wish to raise funds on overseascapital markets, they must use a form of DR owing to discrepancies in policies amongvarious countries. Therefore, DRs play an important and special role (Mathur et al.,1998; Miller, 1999; Patro, 2000; Szakmary and Mathur, 2000). In recent years,Taiwan government actively promoted financial liberalization andinternationalization, the Taiwan Securities & Futures Information Center (SFI) begana domestic enterprise to publish Depositary Receipts (DRs) and Euro-Convertible139* Chin-Tsai Lin and Jung-Dan Lin are at the Graduate Institute of Business and Management,Yuanpei University, Taiwan.** Yi-Hsien Wang are at the Department of Finance, Yuanpei University, Taiwan.Bonds (ECBs) in 1989, it was advantageous to directly fundraise from foreign capitalmarket. Furthermore, the SFI not only announced its main purpose to issueDepositary Receipts (DRs) for the listed firm in 1992, but also amend the relevantlaws hereafter. This evolution has encouraged sustainable enterprise development.In a previous study examining motivations of firms listing abroad. Saudagaran(1988) demonstrated that these motivations can be divided into financial motives andmotivations related to public relations. With regard to financial motivations, thedomestic market remains small is easily saturated, thus affecting the stock price.Furthermore, marketing motivations promote firm reputation and marketingcapacity. Michael and Wibricht (1989) applied questionnaire survey to analyzemotivations of American Enterprise issuing Eurobond, and according to the researchshowed that the main motivation is reducing the interest burden to decrease the costof funds. Choi and Levich (1990) interviewed executives of multinationalcorporations to explore the motivation of industries choosing overseas financing andthe result reveal that motivation includes the degrees of financial informationdisclosure and trading relationship with that country.For announcement effect of DRs listing. Jayarnman et al. (1993) found that theDR listing date shows a clear positive effect on the underlying stock, and moreoversignificantly increases volatility, representing that DR issue creates clear positiverewards for the underlying stock, and the volatility of the underlying stock is greateron the listing date. Miller (1999) noted that the announcement effect undoubtedlyincreases shareholder wealth. Szakmary and Mature (2000) discovered that The DRsand underlying stock price move in unison. Furthermore, the influence of exchangerate on DRs has gradually been increasing. Patro (2000) indicated that the returns onADRs have notable risk exposures to the returns on the international market portfolioand their respective domestic market portfolios. Jaiswal-Dale and Jithendranathan(2001) discovered a positive correlation among the DR, market index and underlyingshare. Ely and Salehizadeh (2001) applied a cointegration approach and anestimation of error-correction models to examine the degree of integration betweenthe US with United Kingdom, Japan, and Germany. Their research showed that theunderlying stocks market and the market impacted DRs, and furthermore, thatunderlying stocks market strongly influences DRs pricing. Karolyi (2004) evaluatesthe dynamics of the development and extension of international cross-listings byADRs in emerging markets around the world and estimates the impact on theirgrowth and integration with world markets. They claimed that the raising volume ofnew ADR programs, their trading quantity and market capitalization in those nationsare positively related to the pace of international capital flows and increased marketintegration. Conversely, impact the liquidity and size of the internal markets. Fromthe previous study, most of these studies demonstrated that DRs issues yield positivereturns.140 Chin-Tsai Lin, Yi-Hsien Wang and Jung-Dan LinRecently, Aggarwal et al. (2007) indicated that ADRs are the preferred manner ofholdings if the local market lacks investor safeguards, or has low liquidity and hightransaction costs. Grossmann et al. (2007) confirmed that ADRs have hightransactions costs and low dividend payments, and thus are more likely to displayhigh price disparities. Moreover, the price deviation is greater during periods ofhigher T-bill interest rates. Finally, ADRs prices are driven not only by the price ofthe underlying asset, but more by U.S. consumer sentiment and consumer sentimentin the source country.The international financial environment is constantly changing and developing.Particularly, practice of collecting operating funds on overseas capital market isgrowing. This study thus applies event study methodology to investigate theinformation effect of announcements on depositary receipt listing and stock rewardfluctuation. Furthermore, this investigation compares the announcement effect in theelectronics and non-electronics industries.Database and MethodologyDescription of the SampleThe data used in this research was from the Market Observation Post System ofTaiwan Stock Exchange Corporation (TSEC). The main data comes from publishedtrading information and historical information. The data period from July 17, 1990 toAugust 30, 2006 and the investigation includes a total of 61 companies, including 43electronics companies and 18 non-electronics companies.Estimating Period and Event PeriodTo determine whether there exists announcement effect on the stock market aroundthe DR listing, an event study methodology described is performed. This studyobtained the time point of the listed companies issuing DRs by the public informationand defined the time point as Day 0 (event day). Therefore, the estimation period isfrom Days -105 to -16. The event window of interest begins from Day -15 and endson Day +15, and total observational period covers 121 trading days. The each periodrelated show to Fig. 1.The Relationship between Stock Market Reaction and Issuing DRs in Taiwan Listed Companies 141Figure 1: The each period related diagram of event studyEvent Study and MethodologyThis research applied market model to inquire into Taiwanese listed companiesissuing DRs which impact on stock price. Therefore, it produces the abnormal returns(AR). The method had already applied extensively in the finance and accounting. Sofar, the research approach of the evidence is still important. The market model of theevent study is as follows:The expected return was derived using the market model where the modelparameters  and  were obtained from the estimation period. The market modelhypothesis is the linear relations between the individual stock return and the marketreturn, namelyR Rit i i mt it     (1)where Rit is the return rate on stock i on day t and Rmt is the return rate in theTAIEX on day t. iis the intercept term,iis the Beta modulus, that is system risk ofindividual stock, itis the residual error term.The standardized average abnormal return and the standardized averagecumulative abnormal returns will be able to improve ability of test the abnormalreturn especially to the stock price have weaker reaction to some events (Zibart,1985). The SARt is the some of period t in event period, and the standardizedabnormal return isSARNSARt i tiN11,(2)The standardized average cumulative abnormal returns is standardization theindividual stock’s abnormal return rate, then calculates the event period to the period142 Chin-Tsai Lin, Yi-Hsien Wang and Jung-Dan Lin-105 -15 0 +15Observation periodEvent dayEvent windowEstimation periodt. The variance of abnormal return on the standardized residual cross-sectional as thedenominator, namelytSCARVar SCARSROCSMSCAR( , )( ( , ))  1 11 2(3)where SCAR SARi tt( , ) 1 212The ordinary cross-sectional method ignores estimation period estimates ofvariance, thus, this paper uses the standardized residual cross-sectional for its t-test(Boehmer et al., 1991). The resulting t-test statistic for ARitistSARN NSARSARNSROCSMAR EiEiEiNiN11211( )( )(4)where SARSARNEi EiN,1.The t-test statistic for the CARt for standardized residual cross-sectional iscalculated astSAR r rN NSCAR r rSCAR rSROCSMSCARii( , )( )( , )(1 21 2111, )rNjNjN2112	(5)Results and DiscussionThe Announcement Effect for TSE Listed Non-Electronics Industries Issuing DRsTable 1 and 2 present the empirical evidence results by the event study. T-teststatistics are used to examine the standardized average abnormal returns (SAR) andstandardized average cumulative abnormal returns (SCAR) for listed non-electronicindustries in the event window around the announcement effect of issuing DRs.Table 1 shows the SAR for the DRs issue announcement effect. For issued events,the table reveals significantly negative SAR of -0.2083 for day -6 using a t-test at 0.05level. The positive SAR around the announcement date are 0.2070, 0.2352, 0.2404,and 0.2754, for days -2, 9, 11, and 15 are statistically significantly at 0.05 level byThe Relationship between Stock Market Reaction and Issuing DRs in Taiwan Listed Companies 143t-test. The phenomenon indicates that the negative announcement effect turn intopositive gradually.Table 1: SAR around announcement date for non-electronics industries issuing DRsEvent window SAR t value Event window SAR t value-15 -0.0525 -0.5075 0 0.0829 0.6725-14 -0.1031 -0.9723 1 0.0725 0.6636-13 -0.0255 -0.2264 2 -0.0379 -0.3111-12 -0.0620 -0.5021 3 0.0618 0.5518-11 0.1236 1.0039 4 -0.0535 -0.4365-10 0.0153 0.1242 5 -0.1495 -1.3776-9 0.0307 0.2879 6 0.1085 0.9682-8 -0.1580 -1.4160 7 0.0019 0.0203-7 -0.0167 -0.1642 8 -0.1087 -1.0414-6 -0.2083 -1.9945* 9 0.2352 1.9818*-5 -0.0295 -0.2754 10 -0.1033 -0.8473-4 0.0334 0.3564 11 0.2404 1.9800*-3 -0.0112 -0.1143 12 -0.0572 -0.5847-2 0.2070 2.1464* 13 0.1828 1.2660-1 0.0070 0.0828 14 0.1690 1.315115 0.2754 2.0273*Note: 1. The * (**) denotes statistical significance at the 0.05 (0.01) level.2. The t value is computed by Standardized-Residual Cross-Sectional Method.Table 2 reveals SCAR associated with DR announcement for non-electronicsindustries. For issued events, the empirical evidence found that the negative SCARfrom days -15 to 10, while from days 11 to 15, they are positive, but the returns arenot statistically significantly at the 0.05 level. Thus, the stock prices innon-electronics industries are not significantly influenced by the announcementeffect of issuing DRs.144 Chin-Tsai Lin, Yi-Hsien Wang and Jung-Dan LinTable 2: SCAR around announcement date of the non-electronics industries issuingDRsEvent window SCAR t value Event window SCAR t value-15 -0.0525 -0.5075 0 -0.1668 -0.3664-14 -0.1556 -1.1144 1 -0.0943 -0.1949-13 -0.1811 -1.0621 2 -0.1321 -0.2688-12 -0.2431 -1.1123 3 -0.0703 -0.1416-11 -0.1194 -0.5034 4 -0.1237 -0.2392-10 -0.1042 -0.3933 5 -0.2732 -0.5170-9 -0.0735 -0.2397 6 -0.1647 -0.3040-8 -0.2315 -0.7276 7 -0.1628 -0.2907-7 -0.2482 -0.7284 8 -0.2715 -0.4585-6 -0.4565 -1.3156 9 -0.0363 -0.0594-5 -0.4860 -1.3032 10 -0.1396 -0.2275-4 -0.4525 -1.1315 11 0.1009 0.1528-3 -0.4638 -1.1284 12 0.0437 0.0645-2 -0.2567 -0.5954 13 0.2265 0.3194-1 -0.2497 -0.5671 14 0.3955 0.5275slmult1 15 0.6709 0.8539Note: 1. The * (**) denotes statistical significance at the 0.05 (0.01) level.2. The t value is computed by Standardized-Residual Cross-Sectional Method.ConclusionThis study demonstrates of this investigation show that, for non-electronics industryindustries, issue of DRs typically first causes the firm stock price to decline, followedby a gradual rise. This good outcome may result from the good performance and italso reflects in stock prices, meaning that investors have a positive view of thenon-electronics industry. However, around the announcement date, the SCAR arepositive and negative, exhibiting a stochastic change. 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The Relationship between Stock Market Reaction and Issuing DRs in Taiwan Listed Companies

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