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...these variables that would imply predictability. One cointegrating relation is found allowing the use of vector error correction model to examine the transmission of shocks to the underlying prices, the exchange rate, and the US market index. The main finding of this paper is that in the short run, the underlying share price seems to adjust after changes in the ADR price, pointing to the fact that the NYSE (trading market for the ADR) leads the Colombian market. However, in the long run, both, the underlying share price and the ADR price, adjust to changes in one another.
KEYWORDS
American Depositary Receipts, stationarity (unit root) tests, cointegration, vector error correction model, impulse response functions, forecast error variance decomposition
Classification: JEL: C32, G15-COL: A.
I. INTRODUCTION
I.A. Bancolombia S.A.
Bancolombia (hereinafter 'BC') is domiciled in Colombia and operates under Colombian laws and regulations as a >.
The Bank provides general banking products and services to companies and individuals. It has two main segments: retail and corporate. The products and services include depositary services, personal and corporate loans, credit and debit cards, electronic banking, cash management, warehousing services, fiduciary and custodial services, and dollar-denominated products. In addition, BC's customers have access to a large network of branches and ATMs in Colombia. BC believes that it has the largest service network of any private financial institution in Colombia, with 377 branch offices operating in 127 cities as of December 31, 2004. (1)
Since 1995, BC is a New York Stock Exchange, Inc. ( >) listed company and its American Depositary Shares 2 ( >) are traded under the symbol >.
I.B. The ADSs
BC Is a New York Stock Exchange, Inc. ("NYSE") listed company, where its ADSs are listed under the symbol "CIB". This ADS is a Level III ADS (the highest level), meaning that these Receipts are sold in a Public Offering. The issuers register the offering under the 1933 Securities Act and report under the 1934 Exchange Act. Sponsored Level-III Depositary Receipts (like BC's) are listed on U.S. Exchange. Furthermore, BC must reconcile to U.S. GAAP and meet listing requirements of the U.S. Exchange on which it chose to list ("NYSE"). The Depositary shares are registered on Form F-6, the deposited shares are registered on Form F-1 and the company registers on Form 20-F.
ADRs (3) evidencing ADSs are issuable by The Bank of New York, as Depositary, pursuant to the Deposit Agreement, dated as of July 25, 1995.
BC's ADRs, each of which represents the right to receive four Preferred Shares deposited in Colombia with the Custodian under the Deposit Agreement, have been listed on the NYSE since July 1995. The Preferred Shares have been listed on the Colombian Stock Exchange since July 1995. Through the ADRs, the NYSE Is the principal U.S. trading market for the Preferred Shares.
Finally, to gain a clearer perspective of the ADR, a monthly trading summary and a graph of the prices (in US dollars) of the ADR (listed in New York) and the conversion value in US dollars of the Preferred Shares listed in the Colombian Stock Exchange are presented in Table 1 and Figure 1 respectively.
[FIGURE 1 OMITTED]
Looking at Figure 1 which compares the conversion value (in US dollars) of the Preferred Shares listed in the Colombian Stock Exchange versus the value of the ADR (in US dollars), one can fairly say that the Law of One Price holds, and that both series may share a long term relation. Moreover, this positive evolution of the prices of both, the preferred shares trading in Colombia and the ADRs in New York, has coincided with a significant advance in Colombia's stock exchange index.
Taking into account these issues, mainly the positive evolution of both price and volume of the ADRs and their close relation with the preferred shares in Colombia, the aim of this paper is to analyze the dynamics of the ADR and its pricing factors identified in the literature (preferred shares price, exchange rate and the US market index), to see if there is a cointegrating relationship among these variables that would indicate predictability. This would allow the use of multivariate models to examine through impulse response functions and variance decomposition techniques, how three different shocks (in the underlying prices, the exchange rate, and the US index) are transmitted to the price of the ADR.
This paper has been organized as follows: Section II is devoted initially to the description of the data and the methodology; the tests, models and analytic tools (e.g. Impulse response functions, forecast error variance decomposition) used to analyze price transmission dynamics between ADRs and their underlying (preferred) shares in Colombia. Section III attempts to analyze the outcomes, by explaining in depth the output of the tests and models, supported on existing literature on the area. Finally, section IV provides concluding...
NOTE: All illustrations and photos
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