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Equity financing Chapter Eleven Eiteman, Stonehill, and Moffett Crosslisting reduce information asymmetry increases share price lower WACC improve liquidity larger primary market larger secondary market hedge operating risk

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equity financing

Equity financing

Chapter Eleven

Eiteman, Stonehill, and Moffett

crosslisting
Crosslisting
  • reduce information asymmetry
    • increases share price
    • lower WACC
  • improve liquidity
    • larger primary market
    • larger secondary market
  • hedge operating risk
    • denominate both assets and liabilities in terms of the same currency
depository receipts crosslisting
Depository receipts - Crosslisting
  • negotiable certificates
    • issued by bank, traded in secondary markets
  • representing a multiple of underlying shares
    • traded in & dividends paid in domestic currency terms
    • DRs traded in accordance with domestic securities regulations
    • sponsored (firm)- unsponsored (investor)
empirical evidence
Empirical evidence
  • share price reaction to crosslisting
    • negative effects to US firms listing in continental Europe
    • positive effects to US firms listing in London, Tokyo, Toronto
    • positive effects for foreign firms listing in the US
  • the larger a firm relative to its domestic market, the more likely it was to crosslist elsewhere
barriers to crosslisting
Barriers to crosslisting
  • disclosure requirements vary with markets
  • rules in N. America
    • informationally onerous
    • expensive
    • feed information to market
  • rules elsewhere less stringent
    • reporting less frequent
    • lower disclosure requirements
the new york stock exchange
The New York Stock exchange
  • specialists
    • trade on floor
    • hold positions for liquidity
  • transaction costs (spread)
    • function of volume
    • function of volatility
  • limit orders take precedence over dealer orders
other exchanges
Other exchanges
  • London exchange
    • less liquid
    • higher transaction costs
    • limit orders not executed chronologically
    • lower regulatory costs
      • more foreign firms listing
  • Tokyo exchange
    • substantially lower overall exchange market
international equity
International equity
  • directed shares
    • targeting financing from target foreign market
    • private placements
  • euro-equity issues
    • equity sold in countries different than their origin
      • tranches - large stock blocks sold to underwriters
    • underwritten and distributed in multiple capital markets
strategic alliances
Strategic alliances
  • take advantage
    • economies of scale and scope
  • marketing
    • joint marketing and sales
    • Air Canada, United Airlines
  • financing
    • seeking to lower WACC
  • development
    • Airbus
privatizations
Privatizations
  • selling government owned enterprises
    • Western Europe
    • Eastern Europe
  • political will
    • employment programs
    • profitability
  • market forces versus political forces