More firms are raising capital internationally by way of global equity offerings (GEOs). In the U.S., the primary vehicle through which non-U.S. companies raise equity capital is the issuance of American depositary receipts (ADRs). ADRs are negotiable certificates sponsored by U.S. depositary banks, such as the Bank of New York, that represent the company's publicly traded shares in their local market.

This study investigates the long-run return performance of non-U.S. firms that raise equity capital in U.S. markets. Our sample includes over 300 GEOs with ADR tranches in the U.S. for companies from 35 countries in Asia, Latin America and Europe and ranges from 1982 to 1996. While previous studies uncover long-run underperformance of domestic equity offerings in the U.S. and in other countries, our study of equity offerings with ADRs has one common target investor market - the U.S. Our study also focuses on the choice global companies have in terms of issuing equity in the U.S. by means of either an exchange-listed program (such as the NYSE or Nasdaq) or a SEC Rule 144A private placement. While exchange-listed programs require full registration and disclosure of financial statement information like U.S. companies, Rule 144A private placements require only nominal registration and limited disclosure, but are available only to qualified institutional buyers (QIBs) and can only trade over-the-counter, among QIBs, using the PORTAL system. This allows us to assess how investment barriers such as taxes, legal and regulatory restrictions, and informational differences affect how securities are priced in different markets. A third motivation for our study is to investigate the relationship between liquidity and post-issuance share price performance, since the firm's stock is now traded in at least two markets--the home market and the U.S. market. We examine whether the returns performance will be different for GEOs which achieve a proportionately greater fraction of trading in the ADR market compared to those for which the trading volume and order flow migrates back to the home market.

Overall, we find that the buy-and-hold abnormal returns to investors of GEOs underperform local market benchmarks (as well as U.S. benchmarks) of comparable firms in the three years following issuance. However, the long-run returns to investors in firms that issue equity by way of Rule 144A private placements or that issue equity on public exchanges is measurably related to investment barriers across markets. Specifically, we show that, on average, private placement ADR issues underperform their benchmarks, but especially those that come to the U.S. from countries with lower home-market accounting standards. By contrast, those firms that come from emerging markets with low accounting standards that list in the U.S. on major public exchanges tend to outperform their benchmarks. We conjecture this is because these firms are quite willing to provide more information to the market by way of more disclosure. We also find post-issuance abnormal return performance is significantly and positively related to the ability of the firm to capture a proportionately larger share of U.S. trading volume.

Steve Foerster, Ph.D, is an Associate Professor of Finance at the Richard Ivey School of Business at the University of Western Ontario in London, Ontario.

Andrew Karolyi, Ph.D, is Associate Professor of Finance at the Fisher College of Business, Ohio State University in Columbus, Ohio.