A depository receipt (DR), issued by depositary banks and held by custodian banks abroad, is a negotiable certificate that represents the ownership of a foreign stock, providing a more convenient way to achieve this than direct investments. For example, DRs are covered by local trading and settlement systems, and the dividends are paid to investors through depositary banks using local rather than foreign currency. However, a major disadvantage of DRs is the lack of sufficient and transparent information in comparison to that which available for domestic stocks, which may increase the risk faced by investors.
In addition, a number of high problems have been reported among the companies listed as Taiwan Depositary Receipts (TDRs). For example, BH Global Corporation Ltd.
(Stock Code: 911608) recognized a valuation loss of NT$67 million for a deception of the usage rights of 30 hectares of land that it purchased on Batam Island, Indonesia, in March, 2013.1 Another example is Oceanus Group Ltd. (Stock Code: 910579), an abalone seller. It received a disclaimer audit opinion from Deloitte & Touche because the auditors could not find supportive evidence in the substantive test for a large number of sudden deaths of abalones in 2011, which resulted in Oceanus’ delisting from Taiwan Stock Exchange (TWSE) on July, 2013.2 More recently, the Taiwan Financial Supervisory Commission found that Tingyi Holding Corporation (Stock Code: 910322), a beverages and instant food products supplier, issued TDRs to raise a total of NT$171 billion, of which NT$61 billion was used to obtain a 37% shareholding in the Taipei 101
1 See CNYES- http://news.cnyes.com/Content/20130329/KH6S5M3JI7VGI.shtml
2 See TWSE-
http://www.twse.com.tw/ch/about/press_room/tsec_news_detail.php?id=12018 Commercial Times-
http://m.md.ctee.com.tw/blogcontent.aspx?id=2759&pa=%2BRW%2FxEPpjhThX85A96gb2mZ1G NafloJiJ1dM9d8hXbU%3D
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building and purchase nine mansions in Taipei. Such investments raised investor concerns as to whether Tingyi Holding Corporation really needed such financing, or if it just intended to speculatively invest in real estate.3 These examples motivate us to study this financial instrument－TDR.
The main reason why TDRs have attracted the attention of foreign companies and Asian financial analysts is the unique nature of Taiwan’s capital market, as seen in the following four characteristics. First, Taiwan is located in the center of the Asia-Pacific area and near the Chinese capital market, both of which represent geographical strengths.
Second, Taiwan’s capital market has outperformed other major capital markets around the world during the past decade, as seen in Figures A-1, A-2, A-3, and A-4 in Appendix A.
Although the market value of the Taiwanese stock market was only USD$735 billion in 2012, the ratio of market capitalization to GDP was fourth with regard to the major global capital markets, behind only to Hong Kong, Singapore and Malaysia.4 Moreover, the Price to Earnings ratios (P/E ratio) and turnover rates of the TWSE are also very attractive. For example, the P/E ratio of the TWSE was 18.04% in 2013, almost the same as that of the New York Stock Exchange. In addition, the turnover rate was 148.43% at the end of 2013, thus indicating very frequent stock trading on the TWSE. The third attractive characteristic of the Taiwanese market, as shown in Figure A-1, is the very high proportion (46.9%) of companies belonging to electronics industry in 2012, along with the presence of strong industrial clusters on the island.5 These clusters promote specialization and stimulate coordination and communication among firms, creating economies of scale and other benefits, such as greater economic growth and a more
3 See Taiwan News- http://www.taiwannews.com.tw/etn/news_content.php?id=2350264
4 We are unable to provide the 2013 Taiwan market capitalization to GDP ratio due to a lack of updates with regard to the TWSE database.
5 Industry clusters are groups of similar and related firms in a defined geographic area that share common markets, technologies, and employee skill needs, and which are often linked by buyer-seller relationships.
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developed capital market. Finally, as shown in Figure A-2, the percentage of market value held by foreign investors has increased annually in recent years, reaching 33.14% by the end of 2013. In summary, it can be seen that Taiwan’s capital market has a number of features that make it attractive to foreign and offshore Taiwan companies, which are thus interested in listing on the TWSE.
TDRs, also known as secondary listings, are negotiable certificates issued by depositary banks in Taiwan, which represents a foreign stock’s ownership held in in custody by the bank abroad. TDRs offer several advantages for both issuers and investors.
For the issuers, the procedure of issuing TDRs is quick and easy, and the companies’
financial flexibility and visibility can be improved through issuance of these. Moreover, if a price difference exists between TDRs and their underlying stocks after the TDRs have been listed, shareholders may then revalue those companies, making their market value closer to their intrinsic value. For investors, TDRs provide a convenient and low cost way to invest in foreign stocks, with TDRs having the same rights as the underlying stocks.
Furthermore, cross-listed companies always have better corporate governance, due to dual supervision from the TWSE and their local stock exchanges, result in better investor protection. The first TDR (ASE Test Ltd., Stock Code: 9101) was listed on January 8, 1998. However, because there were many trade bans between Taiwan and Mainland China before 2008, hundreds of offshore Taiwan companies chose to list on the Hong Kong Stock Exchange (HKSE) rather than TWSE during 1998 and 2008.
Since 2008, many related policies have been gradually deregulated by the Taiwanese government, include the cancellation of investment ceilings in China, deregulation on the use of funds raised, more collaboration with foreign stock exchanges, and so on. Such moves gradually attracted more offshore Taiwan companies and foreign companies to list
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as TDRs, with 57 companies having filed for the issuance of TDRs as of March 2014.6 Currently, there are 28 TDRs in the market, as shown in Table 1 (15 companies from Hong Kong, 10 from Singapore; two from Thailand, and one company from Malaysia).
Although many companies listed on the TWSE as TDRs from 2009 to 2011, in recent years there has been a rise in the number of delistings, and as of March 31, 2014, eight TDRs had left this market.7 Among the delisted firms, Want Want China Holdings Ltd., a beverages and instant food products supplier, delisted on October 15, 2013 astonished the market, since it was the TDR with the highest stock price and the best future prospects. This event led observers to note some potential problems that exist in the current TDR system. For issuers, the maintenance cost of the TDRs is high, as the TWSE imposes a 7% price ceiling and floor on the market, which is much stricter than that seen in many of the home markets of the TDR firms, with a limit of 30% in Malaysia and in Thailand, while there is no limit at all in Hong Kong and Singapore. This policy means that if the company releases good news then the TDR’s stock price will increase in a smaller range than its underlying stock, and thus the TDR presents at a discount. When such a discount exists, investors will have strong incentives to convert the TDR into its underlying stock in order to gain from the difference in prices. Such conversions make TDRs always have insufficient outstanding shares, and to maintain the status of being listed the issuers have to issue additional TDRs, which increases costs significantly. For investors, one problem with TDRs is the deferred information disclosure, as important information may be released later on the TWSE compared to the companies’ home markets, thus hurting the interests of investors.
6 See TWSE- http://www.twse.com.tw/ch/listed/listed_company/apply_listing_tdr.php?page=1
7 The delisted TDRs include ASE Test Ltd., Eastern Asia Technology Ltd., Mustek Ltd., Oceanus Group Ltd., Hwa Fong Rubber Public Company, Super Group Ltd., Want China Holdings Ltd., and ELPIDA Memory, Inc.
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The purpose of this study is to investigate TDRs’ stock performance from 1998 to 2012 and to provide the related information to investors, the government, and the related authorities in order to help with their decision-making. We also examine the changes in operating performance before and after the listing year of TDRs, and whether these are related to earnings management via discretionary accruals. The results show that TDRs have lower stock performance compared to both the individual matched firms and the market, which supports the decision of the Taiwanese government to stop promoting TDRs on November 11, 2013. Moreover, the performance indicators obtained in this work can provide investors, the government, and related authorities with a more objective basis to make their decisions. We also find that TDRs’ operating performance (ROA and ROE) outperforms that of the individual matched firms before listings, but decreases significantly after listing on the TWSE. Finally, we fail to find supporting evidences for accruals earnings management surrounding the year of listing.
The rest of the paper is organized as follows: Section 2-1 gives an introduction of Depositary Receipts, Section 2-2 overviews the profile of TDRs, and Section 2-3 reviews prior research on TDRs. Section 3 discusses our predictions. Section 4 outlines our research design, defines the performance measurements, describes the matching procedure, and gives detail of the data. Section 5 then provides the empirical results of our research. Section 6 summarizes our findings and conclusions, and also present this study’s limitations and suggestions for future research. Figure 1 shows the framework used in this study.
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Figure 1
The Framework of this Study
Research Background, Motivation, and Purpose
Institution and Literature Review 1. Introduction of Depositary Receipts 2. Overviews the profile of TDRs
Research Design and Measure Indices
Empirical Results
Conclusion
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Table 1
Listed TDRs on March 31, 2014
Stock Code Company Name Home Market
MV of TDRs ($ NT million)
MV of Underlying Shares ($ NT million)
Trading Volume of TDRs (1000 shares)
Trading Volume of Underlying Shares
(1000 shares)
910069 Serial System Ltd. Singapore 115 2,944 0 320,000
9103 Medtecs International Corp. Ltd. Singapore 518 683 501 657,000
910322 Tingyi (Cayman Islands) Holding Corp. Hong Kong 2,064 489,750 325 8,943,000
910482 Sandmartin International Holdings Ltd. Hong Kong 499 1,373 396 90,000
9105 Cal-Comp Electronics (Thailand) Public Corp. Thailand 2,458 10,543 855 1,886,100
9106 New Focus Auto Tech Holdings Ltd. Hong Kong 255 7,546 101 5,808,000
910708 New Media Group Holdings Ltd. Hong Kong 88 881 3 215,000
910801 Golden Meditech Holdings Ltd. Hong Kong 954 0 5,659 10,384,000
910861 Digital China Holdings Ltd. Hong Kong 528 33,600 50 3,144,000
910948 Z-Obee Holdings Ltd. Singapore 118 1,800 47 30,000
9110 Vietnam Manufacturing and Export Process Holdings
Ltd. Hong Kong 234 1,770 95 175,000
911201 Kith Holdings Ltd. Hong Kong 115 722 0 NA8
911608 BH Global Corporation Ltd. Singapore 71 1,406 5 40,000
911609 Yangzijiang Shipbuilding (Holdings) Ltd. Singapore 588 100,378 71 11,637,000
8 Trading volume of underlying shares on March 31, 2014 is unavailable for Kith Holdings Ltd. in TEJ database.
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Table 1
Listed TDRs on March 31, 2014
Stock Code Company Name Home Market
MV of TDRs ($ NT million)
MV of Underlying Shares ($ NT million)
Trading Volume of TDRs (1000 shares)
Trading Volume of Underlying Shares
(1000 shares)
911611 China Taisan Technology Group Holdings Ltd. Singapore 259 1,115 1,734 2,713,000
911612 Hu An Cable Holdings Ltd. Singapore 523 2,478 199 200,000
911613 Technics Oil & Gas Ltd. Singapore 139 3,970 17 240,000
911616 Dukang Distillers Holdings Ltd. Singapore 745 4,351 539 465,000
911619 HISAKA Holdings Ltd. Singapore 139 849 15 298,000
911622 Tycoons Worldwide Group (Thailand) Public Corp. Thailand 375 1,593 0 158,900
911626 Multi Sports Holdings Ltd. Malaysia 81 900 2 24,000
911868 Neo-Neon Holdings Ltd. Hong Kong 360 6,284 382 1,843,000
912000 SIM Technology Group Ltd. Hong Kong 163 3,785 56 3,290,000
912398 Good Friend International Holdings Inc. Hong Kong 456 3,871 53 10,000
9136 Ju Teng International Holdings Ltd. Hong Kong 2,948 25,238 3,195 4,539,000
913889 Global Sweeteners Holdings Ltd. Hong Kong 223 2,643 113 156,000
9157 Solargiga Energy Holdings Ltd. Hong Kong 331 4,689 172 8,530,000
9188 Yorkey Optical International (Cayman) Ltd. Hong Kong 227 2,740 55 940,000
Source: Taiwan Economic Journal Note: MV represents market value.
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