INTERNATIONAL FINANCIAL MANAGEMENT Fourth Edition EUN RESNICK 13

INTERNATIONAL FINANCIAL MANAGEMENT Fourth Edition EUN / RESNICK 13 - Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

International Equity Markets Chapter Objective: 13 Chapter Thirteen INTERNATIONAL FINANCIAL MANAGEMENT This chapter discusses both the primary and secondary equity markets throughout the world. Fourth Edition EUN / RESNICK 13 - Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Chapter Outline l l l l A Statistical Perspective n Market Capitalization of Developed Countries Market Structure, Trading Practices, and Costs n Market Capitalization of Developing Countries International Equity Market Benchmarks n Measures of Liquidity i Shares MSCI n Measures of Market Concentration Trading in International Equities Market Structure, Trading Practices, and Costs n Magnitude of International Equity Trading Returns Factors Affecting International Equity Market Benchmarks Cross-Listing of Shares l i n. Shares Yankee. MSCI Stock Offerings l Trading in International Equities n The European Stock Market n American Depository Receipts Equity l Factors Affecting International n 13 -2 Returns Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

A Statistical Perspective l l Market Capitalization of Developed Countries Market Capitalization of Developing Countries Measures of Liquidity Measures of Market Concentration 13 -3 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Market Capitalization of Developed Countries l Almost 90% of the total market capitalization of the world’s equity markets is accounted for by the market capitalization of the developed world. 13 -4 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Market Capitalization of Countries l The other 10% is accounted for by the market capitalization of developing countries in “emerging markets”. n n l Developing Latin America Asia Eastern Europe Mideast/Africa Recently the growth rates in these emerging markets have been strong, but with more volatility than we have here at home. 13 -5 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Measures of Liquidity l The equity markets of the developed world tend to be much more liquid than emerging markets. n l Liquidity refers to how quickly an asset can be sold without a major price concession. So, while investments in emerging markets may be profitable, the focus should be on the long term. 13 -6 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Measures of Market Concentration l Emerging Markets tend to be much more concentrated than our markets. n l Concentrated in relatively few companies. That is, a few issues account for a much larger percentage of the overall market capitalization in emerging markets than in the equity markets of the developed world. 13 -7 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Market Structure, Trading Practices, and Costs l Primary Markets n l Shares offered for sale directly from the issuing company. Secondary Markets n 13 -8 Provide market participants with marketability and share valuation. Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Market Structure, Trading Practices, and Costs l Market Order n l Limit Order n l An order to your broker to buy or sell share immediately at the market price. An order to your broker to buy or sell at the at a price you want, when and if he can. If immediate execution is more important than the price, use a market order. 13 -9 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Market Structure, Trading Practices, and Costs l Dealer Market n n l Auction Market n l The stock is sold by dealers, who stand ready to buy and sell the security for their own account. In the U. S. , the OTC market is a dealer market. Organized exchanges have specialists who match buy and sell orders. Buy and sell orders may get matched without the specialist buying and selling as a dealer. Automated Exchanges n 13 -10 Computers match buy and sell orders. Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

International Equity Market Benchmarks l l l North America Europe Asia/Pacific Rim 13 -11 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

North American Equity Market Benchmarks 13 -12 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

European Equity Market Benchmarks 13 -13 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Asia/ Pacific Rim Equity Market Benchmarks 13 -14 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

i Shares MSCI l l Country-specific baskets of stocks designed to replicate the country indexes of 21 countries. i Shares are exchange traded funds that trade on the American Stock Exchange and are subject to U. S. SEC and IRS diversification requirements. n 13 -15 Low cost, convenient way for investors to hold diversified investments in several different countries. Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Trading in International Equities l l l Magnitude of International Equity Trading Cross-Listing of Shares Yankee Stock Offerings The European Stock Market American Depository Receipts 13 -16 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Magnitude of International Equity Trading l l During the 1980 s world capital markets began a trend toward greater global integration. Diversification, reduced regulation, improvements in computer and communications technology, increased demand from MNCs for global issuance. 13 -17 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Cross-Listing of Shares l l Cross-Listing refers to a firm having its equity shares listed on one or more foreign exchanges. The number of firms doing this has exploded in recent years. 13 -18 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Advantages of Cross-Listing l It expands the investor base for a firm. n l l l Very important reason for firms from emerging market countries with limited capital markets. Establishes name recognition for the firm in new capital markets, paving the way for new issues. May offer marketing advantages. May mitigate possibility of hostile takeovers. 13 -19 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Yankee Stock Offerings l The direct sale of new equity capital to U. S. public investors by foreign firms. n n 13 -20 Privatization in South America and Eastern Europe Equity sales by Mexican firms trying to cash in on NAFTA Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The European Stock Market l l There is not as yet a single European stock market that comprises all national markets. A lack of common securities regulations, even among the countries of the European Union, is hindering this development. 13 -21 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

American Depository Receipts l l l Foreign stocks often trade on U. S. exchanges as ADRs. It is a receipt that represents the number of foreign shares that are deposited at a U. S. bank. The bank serves as a transfer agent for the ADRs 13 -22 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

American Depository Receipts l There are many advantages to trading ADRs as opposed to direct investment in the company’s shares: n n n 13 -23 ADRs are denominated in U. S. dollars, trade on U. S. exchanges and can be bought through any broker. Dividends are paid in U. S. dollars. Most underlying stocks are bearer securities, the ADRs are registered. Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Volvo ADR l l A good example of a familiar firm that trades in a U. S. as an ADR is Volvo AB, the Swedish car maker. Volvo trades in the U. S. on the NASDAQ under the ticker VOLVY. n n l The depository institution is JPMorgan ADR Group. The custodian is a Swedish firm, S E Banken Custody. Of course, Volvo also trades on the Stockholm Stock Exchange under the ticker VOLVB. 13 -24 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Global Registered Shares l l Daimler. Chrysler AG is a German firm, whose stock trades as a GRS are one share traded globally, unlike ADRs, which are receipts for banks’ deposits of homemarket shares and traded on foreign markets. They trade in both dollars and euros. All shareholders have equal status and voting rights. 13 -25 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Factors Affecting International Equity Returns l l l Macroeconomic Factors Exchange Rates Industrial Structure 13 -26 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Macroeconomic Factors Affecting International Equity Returns l l The data do not support the notion that equity returns are strongly influenced by macro factors. That is correspondent with findings for U. S. equity markets. 13 -27 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Exchange Rates l l Exchange rate movements in a given country appear to reinforce the stock market movements within that country. One should be careful not to confuse correlation with causality. 13 -28 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Industrial Structure l Studies examining the influence of industrial structure on foreign equity returns are inconclusive. 13 -29 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

End Chapter Thirteen 13 -30 Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.