Financial Returns of Pharmaceutical American Depository Receipts:Do they Perform Better than US Pharmaceuticals or S&P 500?

Nandy, S. and Sussan, F.
Presentation Date: 
Saturday, September 30, 2017
Event or Conference: 
SIBR Conference on Interdisciplinary Business and Economics Research
Presentation Type: 
Paper Presentation
Boyer's Domain: 
Presentation Location: 
Hong Kong S.A.R., China
Associated Awards: 
A Reserch Grant was awarded by Office of Scholarship Support to Subhashis Nandy
Research Objective: Prior research on the performance American Depository Receipts (ADRs) has not introduced a risk-free perspective within a specific industry. Filling this gap of knowledge, the purpose of this research is to investigate the risk-free returns of individual ADRs of pharmaceutical companies listed on New York Stock Exchange (NYSE). We use the Sharpe ratios for the risk-free measurement and measure the risk-adjusted buy-and-hold returns. Further, we use non-parametric rather than parametric hypothesis tests to compare whether the median Sharpe ratios and the risk-adjusted buy-and-hold returns of pharmaceutical ADRs are the same as those of large US Pharmaceutical companies, and of S&P 500 index for a period of seventeen years, from 2000 through 2016. Methodology: The Sharpe ratio is used to measure the mean annual return of an ADR, in terms of how many standard deviation it is above or, below the risk-free rate of 91-day US Treasury Bill. The buy-and-hold return of an ADR is obtained by compounding of the annual returns from 2000 through 2016. Preliminary Findings: From the results of the non-parametric hypothesis tests, it is concluded that the null hypothesis of the distributions of Sharpe ratios of foreign ADRs, equities of US large pharmaceutical companies, and S&P 500 index having the same medians cannot be rejected at 5% level of significance. However, at 5% level of significance, the null hypothesis that the distributions of risk-adjusted buy-and-hold returns of foreign ADRs, equities of US large pharmaceutical companies, and S&P 500 index having the same medians can be rejected. The results show that although the distributions of the Sharpe ratios may have the same medians, the distributions of the risk-adjusted buy-and-hold returns may not have the same medians. Our results showed that only the buy-and-hold returns of Taro Pharmaceuticals (Israel), and Dr. Reddy’s Lab (India) exceed the final seventeen-year (2000-2016) buy-and-hold return of S&P 500 index. This leads to us to conclude that S&P 500 index may be a judicious investment for some financial investors. Potential Contributions to the Literature: This study adds new knowledge to previous literature in three areas. One, we added risk-free baseline to our measurement of ADR performance against 91 day treasury which previous studies did not use. Adding a risk-free component in measuring ADR performance is important for portfolio managers. Two, unlike previous studies that reported on ADRs from all industries, we focus on ADRs of an individual industry of pharmaceuticals. Three, in our analysis, we used non-parametric hypothesis tests that do not assume normal distributions and found results that are opposite of that on parametric tests. Further, instead of summing up all the daily average excess returns of individual ADRs, in order to calculate the cumulative daily excess returns of all ADRs from different industries as a single entity, (Schaub, 2007, 2009, 2010, 2012, 2014, 2015 and Schaub and Lacewell, 2016) we use Sharpe ratio to compare the return of individual ADRs to that of risk-free 91-day US Treasury Bill.