American Depository Receipts are dollar denominated claims issued by U.S banks.

They represent ownership of shares in a foreign companys stock held on deposit by the U.S. bank in the issuing firms home country (Smart et al., 2007). They are called "receipts" because they represent a certain number of the foreign company's ordinary shares. Since 1983 the SEC requires that all new ADR programs be sponsored. That is the foreign company asks and pays a U.S. depositary bank to create an ADR issue. As a consequence only few unsponsored ADRs, issued before 1983, still exist where the foreign company was not involved in the issue and perhaps even opposed it. Unsponsored ADRs are securities issued by one or more depositary banks in response to market demand, without a formal agreement with the company whose shares are being traded (Smart et al., 2007). ADRs proved to be very popular for several reasons. Firstly, they allow U.S. investors to easily and cheaply diversify internationally. Even if denominated in dollar they represent residual claims on foreign companies that couldn't otherwise be held in dollar denomination. Therefore investors can invest in stock of foreign companies by buying ADRs without bearing the foreign exchange risk (Smart et al., 2007). Secondly, the shares are covered by U.S. securities laws and therefore even individual investors are granted high legal protection. Other reasons making the ADRs attractive for U.S. investors are that also dividends are paid out in dollars, while converted from local currency into dollars before being paid out, and the fact that they can be converted into ownerships of the underlying shares. Moreover, arbitrage ensures a rational dollar valuation of the ADR against the stock denominated in foreign currency (Smart et al., 2007). In October 2008 the SEC relaxed rules for trading depositary shares of major overseas companies in the over-the counter market. U.S. depositary banks can now register unsponsored ADRs on the equity securities of any non-U.S. company that automatically qualifies by meeting certain ongoing trading and on-line disclosure requirements. As a consequence U.S. investors are able to trade receipts reflecting ownership in shares denominated in dollars in more non-U.S.

companies than ever before. Unsponsored ADR programs increased sharply after the SEC relaxed the regulation. We can argue that the change was made in response to market demand while ADR programs appear to be even more popular than initially considered.