Equity - PowerPoint PPT Presentation

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Equity

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  1. Equity Chapter 12 Chapter 11 - Equity Financing

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. Privatizations • selling government owned enterprises • Western Europe • Eastern Europe • political will • employment programs • profitability • market forces versus political forces Chapter 11 - Equity Financing