Flowback

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DEFINITION of 'Flowback'

When foreign investors perform a massive sell-off of a company's cross-listed shares back to the country of issuance as a result of an impending cross-border merger. In some situations, these cross-border mergers give foreign investors the perception that certain serious drawbacks are so apparent that they have no choice but to sell their shares.

Flowback can also refer to an investor's right to convert an American depositary receipt (ADR) into its representative stock.

BREAKING DOWN 'Flowback'

For example, country A's tech index fund only deals with tech stocks from country A. Country A's leading tech company, ABC, decides to merge with country B's leading company, DEF, and incorporates the new company, ABEF, in country B.

The net effect of this action would force the previously mentioned index fund to sell all of its shares in ABC, because the company will no longer fit into the fund's investment thesis. In such cases, companies should examine flowback that occurs as a result of corporate actions in order to prevent share prices from tumbling.

Flowback of ADRs occurs when arbitrageurs take advantage of domestic and foreign market mispricings.

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RELATED FAQS
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    The price of an American depositary receipt (ADR) is determined by the bank or other financial institution that issues it. ... Read Full Answer >>
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    Even the simplest merger and acquisition (M&A) deals are challenging. It takes a lot for two previously independent enterprises ... Read Full Answer >>
  3. How are American Depository Receipts (ADRs) exchanged?

    American depositary receipts (ADRs) are bought and sold on regular U.S. stock exchanges, either in the over-the-counter market ... Read Full Answer >>
  4. What are the differences between global depositary receipts (GDRs) and American depositary ...

    A global depositary receipt (GDR) is a bank certificate issued in multiple countries for shares in a foreign company. The ... Read Full Answer >>
  5. What are some common accretive transactions?

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