10-International Equity Trading

8/13/2019 10-International Equity Trading

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International Equity Trading



Introduction National stock markets usually have different legal

systems as well as different accounting methods.

Stock markets provide valuable information about

publicly traded companies. Different organizations and macro and micro

economic environments will affect the quality of theinformation disseminated by a stock market.

The better a market is at disseminating information,the more attractive it becomes to internationalinvestors.

Equity markets mostly differ in 3 areas – liquidity,taxation and stock market benchmarks.



To implement the goal of gaining access to global capital markets, acompany must begin by designing a strategy that will ultimately attractinternational investors.

This would mean identifying and choosing alternative paths to accessglobal markets.

This would also require some restructuring of the company, improving thequality and level of its disclosure and making its accounting and reporting

standards more transparent to potential foreign investors. Designing a capital sourcing strategy requires that the management agrees

upon a long-run financial objective and then choose from amongst the various alternative paths to get there.

Often, this decision making process is aided by an early appointment of aninvestment bank as an official advisor to the company.

Most companies raise their initial capital in their own domestic market.However, the fact is that most companies that have only raised capital intheir domestic market are not well known enough to attract foreigninvestors.

Incremental steps to bridge this gap include conducting an internationalbond offering and/or cross-listing their equity shares on more highly liquidforeign stock exchanges.

Sourcing Capital Globally



Multiple or Cross Listing Multiple or Cross listing of shares is when a firm lists its equity shares

on one or more foreign stock exchange in addition to its domestic

exchange. Examples include American Depository Receipt (ADR), European

Depositary Receipt (EDR), International Depositary Receipt (IDR) andGlobal Registered Shares (GRS).

Generally such a company's primary listing is on a stock exchange in its

country of incorporation and its secondary listing(s) is on an exchangein another country.

Cross listing is especially common for companies that started out in asmall market but grew into a larger market.

For example, numerous large Canadian companies are listed on the

New York Stock Exchange or NASDAQ as well as the Toronto StockExchange.

The term can also be used to refer to the listing of a company on morethan one stock exchange in the same country.

For example, there are a handful of companies in the United States thatare listed on both the New York Stock Exchange and the NASDAQ.



Market Segmentation - The traditional argument for why firmsseek a cross listing is that they expect to benefit from a lower costof capital that arises because their shares become moreaccessible to global investors whose access would otherwise berestricted because of international investment barriers.

Market Liquidity – Cross listings on deeper and more liquid

equity markets could lead to an increase in the liquidity of thestock and a decrease in the cost of capital. Information Disclosure – Cross listing on a foreign market can

reduce the cost of capital though an improvement of the firm’sinformation environment. Firms can use a cross listing onmarkets with stringent disclosure requirements to signal theirquality to outside investors and to provide improved informationto potential customers and suppliers (for example, by adoptingUS GAAPs or IFRS as against IAS). Also, cross listings tend to beassociated with increased media attention, greater analystcoverage, better analysts’ forecast accuracy and higher quality ofaccounting information.

Advantages of Cross Listing



Advantages of Cross Listing Investor Protection (“Bonding") - Recently, there is a growing

academic literature on the so-called “bonding” argument. According to this view, cross listing in the US acts as a bondingmechanism used by firms that are incorporated in a jurisdiction

with poor investor protection and enforcement systems tocommit themselves voluntarily to higher standards of corporategovernance. In this way, firms attract investors who wouldotherwise be reluctant to invest.

Other Advantages – Cross listing may also be driven by product

and labour market considerations (for example, to increase visibility with customers by broadening product identification),to facilitate foreign acquisitions and to improve labour relationsin foreign countries by introducing share and option plans forforeign employees.



Increased pressure on executives due to closerpublic scrutiny

Increased reporting and disclosure

requirements

Additional scrutiny by analysts in advancedmarket economies

Additional listing fees

Disadvantages of Cross Listing



The period considered here is from the year 2000 tothe first half of the year 2010

The exchanges covered here are the four major stock

exchanges namely:- Hong Kong Exchange

NYSE Euronext

NASDAQ

London Stock Exchange



The share prices react favorably to cross border listings in thefirst month after listing.

Post-listing, price performance up to one year is highly variable across companies depending on the home and listingmarket, its capitalization, capital-raising needs and other

company-specific factors. Post-listing, trading volume increases on an average and for

many issues, home-market trading volume also increases.

The liquidity of trading in shares improves overall butdepends on the increase in total trading volume, the listinglocation and the scope of foreign ownership restrictions in thehome market.

The domestic market risk is significantly reduced and isassociated with only a small increase in global market risk andforeign exchange risk.

Some Evidences of Cross Listing



Cross listing of one company on multiple exchanges should not beconfused with dual listed companies where two distinct companies with separate stocks listed on different exchanges function as onecompany.

A dual-listed company or DLC is a corporate structure in which twocorporations function as a single operating business through a legal

equalization agreement but retain separate legal identities andstock exchange listings. Virtually, all DLCs are cross-border and have tax advantages for

both the corporations and their stockholders. In a conventional merger or acquisition, the merging companies

become a single legal entity with one business buying (for cash orstock) the outstanding shares of the other.

However, when a DLC is created, the two companies continue toexist and to have separate bodies of shareholders but they agree toshare all the risks and rewards of the ownership of all theiroperating businesses in a fixed proportion laid out in a contractcalled as an "equalization agreement."

Confusion between Cross Listing andDual Listing



Confusion between Cross Listing andDual Listing

The equalization agreements are set up to ensure equaltreatment of both companies’ shareholders in voting andcash flow rights.

The contract covers issues that determine the distributionof these legal and economic rights between the twin

parents including issues related to dividends, liquidationand corporate governance. Usually, the two companies will share a single board of

directors and have an integrated management structure. A DLC is somewhat like a joint venture but the two parties

share everything they own and not just a single project. The concept of DLC is yet to become popular in India but

this is a very old concept in some developed countries. Unilever (from 1930 in UK & Netherlands) and Royal Dutch

Shell (from 1907 in UK & Netherlands) are prime examples

of dual listed companies.

10-International Equity Trading

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