Local price unchanged, ADR down 10%
Most foreign companies' shares trade in the U.S. market as American depositary receipts, or ADRs. Yet on days when the home-market share price is flat, an ADR can still move sharply. That is because its price embeds the exchange rate as well as the underlying share price.
This guide shows with hypothetical calculations how an ADR's price is set by the underlying share price, the ADR ratio, and the exchange rate. It compares what happens when the currency and the local price move separately or together, and covers depositary fees and withholding tax on dividends and what to check in the filings.
How ADRs are structured
Investor.gov explains that ADRs are issued by U.S. depositary banks and that each ADR represents one or more shares of foreign stock, or a fraction of a share. ADR holders have the right to obtain the foreign stock, but most U.S. investors find it more convenient to own the ADR.
Investor.gov also notes that an ADR's price corresponds to the foreign stock's home-market price adjusted for the ratio of ADRs to shares. The exchange rate converting won or yen into dollars comes on top, so an ADR's theoretical price is the local price times shares per ADR, divided by the exchange rate.
A hypothetical price calculation
The table assumes a Korean company whose ADR represents two local shares. In the base case, the local price is 50,000 won and the exchange rate is 1,250 won per dollar.
| Situation | Local price | Won per dollar | ADR theoretical price | Change from base |
|---|---|---|---|---|
| Base | 50,000 won | 1,250 | $80.00 | — |
| Won weakens | 50,000 won | 1,400 | ≈ $71.43 | ≈ −10.7% |
| Local price up 10% | 55,000 won | 1,250 | $88.00 | +10.0% |
| Price up and won weaker | 55,000 won | 1,400 | ≈ $78.57 | ≈ −1.8% |
ADR theoretical price = local price × 2 shares ÷ exchange rate. Even if the local price rises 10%, a larger fall in the won can push the dollar ADR price down.
Trading hours and price gaps
Korean and U.S. trading hours do not overlap. ADRs trade in the United States while the Korean market is closed, so news and currency moves in between reach the ADR first. Comparing same-day closing prices can therefore show a gap between the ADR and the theoretical price from the local share.
Because ADRs and local shares can be exchanged through the depositary, large gaps tend to attract trades that narrow them. Conversion costs fees and time, though, and some countries impose limits such as foreign ownership caps, so gaps can persist.
What comes out of dividends
If the local company pays a dividend of 1,000 won a share, each ADR is entitled to 2,000 won, or $1.60 at 1,250 won per dollar. Local withholding tax comes out first, then the depositary takes its fee. Assuming 15% withholding and a $0.03 fee per ADR, the holder receives 1.60 − 0.24 − 0.03 = $1.33.
Depositary fees may be deducted from dividends or, in years without dividends, charged to the brokerage account. Withholding rates depend on tax treaties and the investor's residence, and part may be creditable at home. Dividend yields should reflect all of these costs.
In this example, the stated dividend of $1.60 becomes $1.33 in hand, about 17% less. On an $80 ADR, that is the difference between a 2.0% and a 1.7% yield before any home-country tax.
Where to look in the filings
ADR documents are on SEC EDGAR, and the Korean issuer's own disclosures are on DART. Work through these steps.
- Find how many local shares one ADR represents.
- Calculate the theoretical ADR price from the local price and exchange rate and compare it with the actual ADR price.
- Find custody, dividend, and issuance or cancellation fees in the deposit agreement or the depositary bank's notices.
- Check the withholding rate on dividends and whether a tax credit is available.
- See how ADR holders vote and what happens if the company terminates the ADR program.
Program types and information gaps
Sponsored ADR programs involve the foreign company directly; unsponsored programs are created by a depositary without the company's participation. Sponsored ADRs listed on a U.S. exchange come with annual reports filed with the SEC, while some over-the-counter ADRs may offer limited information in the United States.
If a company delists its ADRs or ends the program, holders may receive local shares or cash from the depositary's sale of the shares. It helps to know in advance how that works and what it costs.
Scope of the example
The prices, exchange rates, tax rate, and fees here are hypothetical. Actual ADR ratios and fees vary by program, and withholding depends on each investor's circumstances.
When checking, use Investor.gov, the depositary bank's current notices, and company filings with their dates. Any decision remains yours, based on your own circumstances and risk tolerance.