1. Global Equity Markets: The case of Royal Dutch Shell Describe the structure of Royal Dutch/Shell Group. Does it differ from the equity listings of other companies that you know? The Royal Dutch and Shell Companies are essentially the same company. They share the same brand name of shell for their operations, share cash flows in an unusual 60/40 split, and they are based in different countries. The 60/40 split of inflows and outflows is especially strange because it makes an overperforming Shell manager lose his “earned” profit share to the larger Royal Dutch side. The operations of both companies are fully integrated. Only the financial and administrative operations are divided entirely. The Shell side of the company trades as an ADR in the US, while the Royal Dutch side is traded in the US and Netherlands.
What are ADRs? Why might companies find it attractive to issue ADRs? Investopedia states that American Depository Receipts are stocks traded in the United States but represent a specified number of shares of a foreign company. US banks buy these foreign shares and turn them into securities tradeable on exchanges like the NYSE or OTC. These offerings are very popular because they reduce administrative, information, and currency exchange costs for American investors. There is still exchange rate risk present as dividend payments will be converted to native currency and dividend payments can lag behind issuance dates. American investors also gain the benefits of global diversification without the classic hazards of foreign direct investment.
Foreign Companies gain much by utilizing ADRs. They gain access to the largest financial trading markets in the world. This can represent a large increase in equity and capital. There are mutliple types of ADR offerings foreign businesses can utilize. The large majority are Level 1 or unsponsored ADRs which require minimal dealings with the SEC and don’t have to issue annual or quarterly GAAP accounting...
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