Capital Market Development and“Nurturing” the IPO Market

Future of Domestic Capital Markets

Professor Reena AggarwalThe McDonough School of Business

Georgetown Universityaggarwal@georgetown.edu

The World Bank/IMF/Brookings ConferenceApril, 2003

TWILIGHT OF THE LATIN BOURSE

“The days of the independent national Latin American stock exchanges could be numbered …..Hampered by low liquidity and stagnant market

capitalization growth, many bourses are in decline and facing tough competition from US exchanges.”

Emerging Markets Investor

LATIN AMERICA’S STOCKMARKETS – High and Dry

Drying Up?

The Economist

REQUIEM – POR LAS BOLSAS DE AMERICA LATINA

AmericaEconomia

THE CHANGING MARKETPLACE

• GLOBALIZATION

• TECHNOLOGY

• EXCHANGE GOVERNANCE

FUTURE OF “DOMESTIC” CAPITAL MARKETS

• TRADING IS GLOBAL IN NATURE

• INVESTING IS GLOBAL IN NATURE

• TECHNOLOGY FACILITATES GLOBALIZATION

FUTURE OF “DOMESTIC” CAPITAL MARKETS

• WHY DO WE NEED DOMESTIC MARKETS?

• LARGE BLUE CHIP FIRMS CAN RAISE CAPITAL IN GLOBAL MARKETS

• WHAT HAPPENS TO THE CAPITAL RAISING PROCESS OF SMALL/MEDIUM FIRMS?

Depository Receipt Programs

1000

1200

1400

1600

1800

2000

2200

1998 1999 2000 2001 2002

LARGE FIRMS CAN RAISE CAPITAL GLOBALLY

DOMESTIC MARKETS

• LISTINGS IN LOCAL MARKETS

• TOTAL # OF LISTINGS• IPOs• LATIN AMERICA & ASIA

1990 2000MEXICO 390 177BUENOS AIRES 179 125SANTIAGO 216 261SAO PAULO 579 467

JAKARTA 123 286KOREA 677 702KUALA LUMPUR 271 790PHILIPPINE 153 230TAIWAN 205 531THAILAND 159 381

TOTAL # OF LISTINGS IN TROUBLE ……..

# OF IPOs IN TROUBLE ……..

1996 2000MEXICO 14 2BUENOS AIRES 7 10SANTIAGO 14 5SAO PAULO 26 24

JAKARTA 16 21KOREA 51 5KUALA LUMPUR 92 38PHILIPPINE 13 7TAIWAN 36 80THAILAND 40 2

TRENDS

LATIN AMERICA

• REDUCED IPO ACTIVITY • MORE DELISTINGS THAN IPOs

• EVEN CROSS-LISTED STOCKS TRADINGAWAY FROM DOMESTIC MARKETS

IMPACT OF DROP IN LISTINGS

• DIFFICULT FOR SMALL FIRMS TO RAISE CAPITAL

• LESS CHOICES FOR INVESTORS

• FINANCIAL TROUBLE FOR DOMESTIC EXCHANGES

“NURTURING” THE IPO MARKET

REGULATORS

• REGISTRATION INFORMATION

• ROLE OF UNDERWRITERS, LAWYERS, CORPORATE OFFICERS – due diligence, liability

• DEVELOPMENT OF UNDERWRITERS

• COSTS OF GOING PUBLIC

• OVER-ALLOTMNT OPTION

“NURTURING” THE IPO MARKET

REGULATORS

• DEVELOPMENT OF VENTURE CAPITAL

• ROLE OF BANKS

• PRICING & ALLOCATION MECHANISMS

• “EQUITY CULTURE” & EDUCATION

“NURTURING” THE IPO MARKET

FIRMS

• “PREPARE” TO GO PUBLIC

• STRATEGIC PARTNERS

• SELECT UNDERWRITER

• CORPORATE GOVERNANCE

• LIQUIDITY - FLOAT

“NURTURING” THE IPO MARKET

FIRMS

• DIFFERENT CLASSES OF STOCKS

• BE PREPARED TO “Leave money on the table”

• INSTITUTIONAL & RETAIL INVESTORS

• CONSIDER LOCK-UP

• CONSIDER OVER-ALLOTMENT

“NURTURING” THE IPO MARKET

CAN BENEFIT

• ECONOMC DEVELOPMENT• ISSUERS• INVESTORS• EXCHANGES