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Equity. Chapter 12. 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 .

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equity

Equity

Chapter 12

Chapter 11 - Equity Financing

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

Chapter 11 - Equity Financing

depository receipts
Depository receipts
  • negotiable certificates
    • issued by foreign bank
      • backed by underlying security
      • traded in secondary markets
  • representing a multiple of underlying shares
    • traded in & dividends paid in foreign currency terms
    • DRs traded in accordance with foreign securities regulations
    • sponsored (firm)- unsponsored (investor)

Chapter 11 - Equity Financing

cross listing
Cross listing
  • Listing shares on different country exchanges
  • Purpose of crosslisting
    • Improving liquidity
      • More potential investors
      • International recognizability
    • Eliminate mispricing (underpricing)
    • Establish secondary market shares offered for foreign acquisitions

Chapter 11 - Equity Financing

relative market liquidity
Relative market liquidity
  • Value of trades in the year 2002
    • NYSE $10,311,156,000,000 (2,366)
    • NASDAQ $7,254,594,000,000 (3,649)
    • LSE $4,001,340,000,000 (2,274)
    • Euronext $1,988,359,000,000 (1,114)
    • Tokyo $1,564,244,000,000 (2,154)
    • Deutsche $1,212,302,000,000 (934)
    • Spain $653,229,000,000 (1,015)
    • Italy $634,635,000,000 (295
    • Swiss $599,749,000,000 (398)
    • Taiwan $633,632,000,000 (641)
    • Korea $596,632,000,000 (679)

Chapter 11 - Equity Financing

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

Chapter 11 - Equity Financing

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

Chapter 11 - Equity Financing

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

Chapter 11 - Equity Financing

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

Chapter 11 - Equity Financing

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

Chapter 11 - Equity Financing

directed public share issues
Directed public share issues
  • Float a new issue in a foreign country
    • May be needed to finance
      • An acquisition of existing production facilities
      • New production facilities
    • Complete foreign underwritten and floated

Chapter 11 - Equity Financing

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

Chapter 11 - Equity Financing

privatizations
Privatizations
  • selling government owned enterprises
    • Western Europe
    • Eastern Europe
  • political will
    • employment programs
    • profitability
  • market forces versus political forces

Chapter 11 - Equity Financing