Brexit's effect on UK ADRs

Abstract: On June 23rd 2016, the United Kingdom (UK) voted to leave the European Union, resulting in what is often referred to as Brexit. The day after the vote, the British pound (GBP) declined to the lowest level against the US dollar in 30 years and the FTSE 100 lost around GBP 85 billion. This thesis examines how UK firms with American Depositary Receipts (ADR) trading on US stock exchanges are affected by these currency fluctuations in terms of abnormal returns. The results show that UK ADRs experienced significant negative cumulative abnormal returns in the days surrounding the event date. However, when adjusting for the exchange rate, no abnormal returns are observed, suggesting that a perfectly currency hedged firm would not have experienced any abnormal returns. Further, an impact of firm-specific features on abnormal returns is observed. ADRs of firms with relatively larger firm size, financing and operation in the US experience less negative abnormal returns, implying that these firms are better shielded against the currency fluctuations surrounding the Brexit vote.