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Module V: International Capital Markets. Week 13 – November 18 & 20, 2002. Objectives. Understand basics of global capital markets and recent developments for corporate financing decisions Understand how foreign firms raise capital in the United States and elsewhere

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Module V: International Capital Markets

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module v international capital markets

Module V:International Capital Markets

Week 13 – November 18 & 20, 2002

  • Understand basics of global capital markets and recent developments for corporate financing decisions
  • Understand how foreign firms raise capital in the United States and elsewhere
  • Examine factors relevant to firms’ cost of financing in using international sources of financing
international cases context
International Cases: Context
  • The Hostile Bid for Red October
    • Russian equity market risks
      • Inflation
      • Liquidity problems
      • Reporting and transparency issues
      • Political risk: taxation, regulation, favoritism
  • Huaneng Power International
    • China in 1994
example stock markets 1999
Example Stock Markets 1999

Source: IMF Working Paper 00/216

emerging market performance
Emerging Market Performance

Source:IFC S&P/IFCI Index, 3/28/2002 (column 2) and WSJ, 11/15/2002 (column 3)

issues in global markets
Issues in Global Markets
  • Integration of capital markets
    • How much or how little do events in one market reflect events in other markets
    • Expected real returns across markets
  • Benefits of diversification
    • Risk reduction through correlations of returns
    • How to choose portfolio allocations
  • Risks of international investing
recent findings
Recent Findings
  • Importance of global effects has increased in the “new economy” of the 1990’s
  • Emerging country specific risk has increased dramatically since the crises of the 1990’s while developed-country specific risk has declined
  • Industry factors, especially technology, probably explain higher correlations
global financial management
Global Financial Management
  • Investment in assets
    • Find highest NPV or highest return projects on a risk-adjusted basis
    • Cash flows measured in purchasing power of owners (maximize shareholders’ wealth!)
  • Financing
    • Minimize cost of funds on a risk-adjusted basis
  • International finance: analysis of currency and political risks that are unique to foreign operations
currency and political risk
Currency and Political Risk
  • Currency risk is variability in cash returns due to variations in exchange rates
    • For important currencies can be hedged in financial markets
    • Often can be hedged on the balance sheet by operating and financing policies (recall American Airlines and Canada and G.E. turbine sales examples
  • Some currencies cannot be hedged: what kind of risk is currency risk (systematic, liquidity, etc.)?
international capital flows
International Capital Flows
  • Where are highest real returns to be found in the world today?
    • Emerging market economies (educated, hard-working labor, low capital stocks)
    • The United States? (capital inflow, new economy, benign business environment)
    • Europe? (opening to East, Euro, restructuring)
    • Latin America?
determinants of capital flows
Determinants of Capital Flows
  • Take advantage of higher returns
    • Japanese investments in Asian neighbors
    • OPEC investments in diversified economies
  • Benefits from diversification
    • Pension funds and other institutional flows
  • Arbitrage risk-return differentials
    • Temporary differentials that are expected to go away, as from political threats that can be managed by diversification
issues in international investing
Issues in International Investing
  • Taxes and/or restrictions of payment of dividends or proceeds of sale
  • Currency related issues
    • Ability to hedge and/or convert cash flows
    • Costs of currency hedging and/or conversion
    • Currency risk due to economic fundamentals (devaluation/revaluation)
  • Liquidity and transaction costs
emerging market equity issues
Emerging Market Equity Issues
  • Private equity versus public issues
    • Role played by private investors (like venture capital)
    • Importance of marketability for some investors
  • Second board markets
    • Examples: MOTHERS in Japan, U.S. NASDAQ Small Cap markets
    • Hong Kong GEMs, Korean Kosdaq, Sesdaq
markets and venture capital
Markets and Venture Capital
  • Emerging market economies in Asia have been active in developing venture capital industries
    • Most successful (like U.S.) is Taiwan
    • Others differ from U.S. experience, partially for cultural reasons
    • Organizational forms and exit possibilities
  • Second board markets in Asia have not represented a reliable exit strategy
trends in equity trading
Trends in Equity Trading
  • Global integration in equity trading
    • Natural economies of scale in markets: size promotes liquidity
    • Technology
    • History and legal system
  • Three models of future markets
    • Concentration, as in NYSE in U.S.
    • Alliances (e.g. Singapore and Australia)
    • Electronic markets (ECNs)
advantages of u s listing
Advantages of U.S. Listing
  • Liquidity provided by large markets
  • Established market with global reputation and known and enforced rules of conduct
  • Prestige of listing
  • Attractiveness to investors
    • Domestic U.S. retail investors
      • Reporting and currency issues
    • Institutional investors
      • Liquidity and liability concerns
american depository receipts
American Depository Receipts
  • American depository receipts (ADRs) are used for foreign companies to trade on U.S. markets
    • Shares deposited in custodial bank in firms’ home countries
    • ADRs have grown in popularity since 1980’s
      • Institutional investors wishing international diversification
      • Foreign firms wishing to raise funds in U.S.
  • Several levels of ADRs
levels of adrs
Levels of ADRs
  • Level I
    • Simplest but unlisted and traded over-the-counter (pink sheets)
    • Reporting requirements are minimal (Form F-6)
  • Level II
    • Required to list on exchanges (NYSE, AMEX, NASDAQ)
    • Disclosure but not meeting U.S. standards
  • Level III
    • Full compliance with U.S. reporting requirements (using GAAP standards)
  • Shanghai and Szenzhen stock exchanges
    • A and B shares
  • Currency (remninbi) non-convertible but discussion of changing policies
  • Rapid growth in non-government sector
  • State-owned enterprises (SOEs) and town and village enterprises (TVEs)
  • Banks and trust-and-investment companies
who owns chinese corporations
Who Owns Chinese Corporations?
  • SOEs partially privatized
    • Shares traded in China
    • Ownership by a variety of institutions
  • Stakes in firms also owned by
    • Regional governments
    • Government ministries
    • TVEs
    • Pension funds and TICs
  • Goal of management?
next week nov 25 27 2002
Next Week – Nov. 25 & 27, 2002
  • Review topics covered in RWJ, Chapter 13
  • Read and think carefully about issues of corporate governance in xxx case for discussion on November 25 and remember that this is the last individual case write-up
  • Use week of December xxx to begin review for final exam by reviewing course syllabus and weekly objectives and slides