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Royal Dutch And Shell Essay

1246 words - 5 pages

Background. Royal Dutch Shell Group is one of the world’s largest oil corporations and one of the largest companies in Europe. The company was created as a result of a merge between Netherlands’ Royal Dutch and UK’s Shell Corporation. The case looks at the issue of price differentials between several equity listings in different markets from the perspective of investors seeking an arbitrage opportunity. Royal Dutch trades more actively in the Netherlands and U.S. markets, whereas Shell trades more actively in the United States. The result is that the Royal Dutch/Shell relative price moves positively with the Netherlands and U.S. markets and negatively with the U.K. market.

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ADRs. An American Depository Receipt is a certificate that can be negotiable and issued by the banks located and operating in the US. This negotiable certificate represents as a number of shares in foreign shares that is issued and traded in the US stock exchange. Companies find it attractive to issue ADRs because it can help the company reduce its administrative costs while saving on duty costs. If a company does not issue an ADR, they must pay a higher duty on each transaction. For each transaction the company would also have to bear the additional cost for administrating that transaction. Investors are interested in ADRs because they raise equity capital and increase the chance to acquire equity at lower costs. This is because ADRs allow the investors to enter into the large market where equity investors are easily available to invest in the company. This would also reduce the legal requirements. Within an ADR, a foreign firm enjoys all the benefits of US listed firms without losing its original identity. The cost of listing in the US stock exchange is high but using the ADR it reduces the cost. Many companies issue ADRs, because it increases the exposures in terms of raising capital in the global market. It also increases the liquidity of a stock of the company and develops the trust in local equity investors to invest into the company. On the other hand, from an investor’s perspective ADRs increases its portfolio into global market where an investor invests into diversified portfolio that ensures the maximum returns of invested capital. It reduces the risks involved in direct investment into foreign market and investors get the benefits in investing ADR’s as the exchange rates of USD is competitive against other currencies that generates higher returns.

Price Differentials. Exhibit 3 presents evidence of a disproportion amongst the ownership of the Royal Dutch and Shell Corp in different markets. The ownership of Royal Dutch is approximately equally split between the U.S. and Dutch investors, while Shell Corp. stock is almost exclusively held in the UK. This could possibly be explained by different tax treatments of the two companies under different rules. For a private investor there would be no difference in the tax treatment between the two investment opportunities. However, pension funds have different tax treatments in each jurisdiction depending on whether the investor bought Royal Dutch or Shell. In Exhibit 8 of the case study, Royal Dutch was trading for $141.368 in Europe and $141.375 in New York (a 7 cent differential). Shell was trading for $124.222 in Europe and $126.554 in New York (a $2.332 differential). These price differences exist due to market inefficiencies; however, these differences are...

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