FNCE 3020 Financial Markets and Institutions

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FNCE 3020Financial Markets and Institutions

• Lecture 12
• The Internationalization of Equity Markets

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Theme of this Lecture

• Americas post war (i.e., since the 1940s)
  capital market dominance has declined.
• While America still has the largest capital
  markets, other foreign markets have gown in
  relative importance.
• True for both bond and equity markets
• Therefore, it is critical that students be
  introduced to this internationalization process.
• Important for investors (individuals and
  institutions) and for corporate borrowers.
• This lecture will focus on the internationalizatio
  n of the worlds equity markets.

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Relative Importance of U.S. Equity Markets Its
Declining!

• 1970 2004
• U.S. 66 U.S. 44
• International 34 International 56

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Listing Shares on Many Exchanges

• Given the growth in stock markets around the
  world (over 300 by last count), companies now
  have the option to list their shares in foreign
  markets.
• This process is called cross listing.
• Why do companies cross list their shares?
• Main reason To raise money through foreign
  market IPOs
• In 2007, non-resident companies raised a record
  50.5 billion through 135 cross listed IPOs (BRIC
  companies accounted for 63 of this amount)
• From 1994 through 2007, 108 Chinese companies
  used 85 IPOs in the U.S. equity market and raised
  on average 250 million per IPO.
• Avon, Levi Strauss and PepsiCo have raised money
  in Japan through cross listed IPOs.

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Other Reasons for Cross Listing

• In addition to providing companies with greater
  access to capital, other reasons for cross
  listing are
• 1. To enhance visibility in foreign markets.
• A listed company receives more local publicity
  and local stock quotes.
• This helps to develop opportunities for business
  alliances and acquisitions.
• 2. To diversify shareholder base to enhance
  liquidity and improve stock price.
• Might be relevant if domestic market is
  segmented, or if
• Domestic shareholder base has been maximized
  need international shareholders (especially true
  for some U.K. companies).
• 3. To assist in marketing and internal
  recruitment efforts.

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Cost Factor in Cross Listing

• On the negative side, the cost (initial listing
  and annual fees) appears to be a strong influence
  in the decision of companies not to cross list
  (or perhaps where to cross list).
• Londons AIM market (for small to medium size
  companies) charges a company approximately 7,500
  to list and yearly fees of 10,000 to 30,000
  (depending on volume).
• NASDAQ charges 95,000 to list and annual fees of
  18,000 to 50,000.
• NYSE has a range of initial listing fees of
  140,000 to 250,000 and annual fees from 35,000
  to 500,000.
• Tokyo Stock Exchange Listing fee from 250,000
  to 300,000 and annual costs around 150,000

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Listing a Company on Foreign Stock Exchange

• There are two basic methods by which corporations
  can cross-list their stocks
• Listing their common stock directly on a foreign
  exchange.
• Listing on a foreign exchange in the form of a
  depository receipt.
• A depository receipt is a negotiable security
  that represents a claim against a foreign
  company's publicly traded equity.
• This has been the more popular of the two basis
  cross listing methods.

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Depository Receipts

• A depository receipt
• Trades on a foreign stock exchange (i.e., other
  than the home exchange of the corporation), while
• The actual shares of stock are held on deposit at
  a bank, generally in the home country of the
  corporation.
• The bank acts as the transfer agent this
  involves
• Recording ownership changes
• Paying declared dividends to receipt holders
• By the end of 2007, there were about 2,250
  depository receipt programs around the world
  representing companies from 76 countries.
• Estimated volume of depository receipts traded of
  3.3 trillion.
• 2.8 trillion on U.S. markets London and
  Luxembourg .4 trillion
• Major depository banks are Bank of New York
  (1,509 receipt programs in 2007), Citibank (350)
  and JPMorgan (309)
• Visit http//www.adrbny.com/dr_directory.jsp

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Number of Listed Companies, Feb 2007

• Exchange Total Domestic Foreign
• NYSE 2276 1861 415
• NASDAQ 3114 2795 319
• Tokyo 2416 2391 25
• Osaka 1071 1070 1
• London 3246 2604 642
• Euronext 1201 952 249
• Frankfurt 758 654 104
• Shanghai 844 844 0
• At year end 2007, Shanghai stock exchange was
  considering cross listings for foreign firms

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American Depository Receipts

• Defined A negotiable certificate issued by a
  U.S. bank representing a specified number of
  shares (or one share) of a foreign stock, with
  the underlying security (common stock) held by a
  U.S. financial institution overseas.
• ADRs are listed on U.S. exchanges, such as the
  NYSE, the American Stock Exchange, and NASDAQ.,
  or
• They can be privately placed as Rule 144A
  securities.

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American Depository Receipts (ADRs)

• ADR trades are denominated in U.S. dollars and
  conducted during regular U.S. exchange trading
  hours.
• Thus, they eliminate the need for U.S. investors
  to purchase those shares in the company's local
  stock market and in that market's currency.
• Each ADR generally represents a multiple of the
  underlying foreign stock.
• Why? Foreign shares normally carry smaller prices
  per share than a typical U.S. stock.
• This multiple allows ADRs to trade in a price
  range appropriate for the U.S. market, regardless
  of the share price in the home market.
• For Example Average IPO price in the U.S.
  public market is between 15 and 35 per share.
• ADRs must satisfy listing requirements for U.S.
  exchanges and must comply with U.S. GAAP and
  other disclosure and reporting requirements
  (e.g., Sarbanes Oxley).

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Examples of ADRs as Multiples of Underlying
Shares

• COMPANY ADR SHARE RATIO SECTOR (COUNTRY)
• All Nippon Airways 1 2 Airlines (Japan)
• Bridgestone Corp 1 2 Tires (Japan)
• Daiwa Securities 1 10 Financial Services
  (Japan)
• Komatsu 1 4 Machinery (Japan)
• GlaxcoSmithKline 1 2 Pharmaceuticals (U.K.)
• Vodafone 1 10 Telecommunications (U.K.)
• HSBC 1 5 Banking (U.K.)
• Benetton 1 2 Clothing (Italy)
• China Mobile 1 5 Telecommunications (China)
• China Life 1 15 Life Insurance (China)
• TELMEX 1 20 Telecommunications (Mexico)
• Cemex 1 10 Cement (Mexico)
• Telkom 1 4 Communications (South Africa)
• Anglogold 1 1 Gold Mining (South Africa)

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Setting Up an ADR Program

• There are many depository banks that issue ADRs
  in the United States.
• The biggest one being the Bank of New York.
• These depository banks help with the setup and
  operation of a foreign company's ADR program.
• The depository bank purchases the equivalent
  amount of shares in the local market stock
  market.
• Depository receipts are then issued against these
  underlying shares.
• Depository banks earn fees from
• Commissions when the ADR is first sold to
  investors.
• Fees on currency conversion of dividends into
  U.S. dollars.
• They do not charge foreign companies for setting
  up these ADR programs.

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American Depository Receipts

• ADRs first traded in the U.S. in 1927, when
  JPMorgan listed Selfridges, a U.K. retail
  company.
• Initially, ADRs were seen as a means of reducing
  the risk associated with holding shares overseas
  and also reducing the trading (clearing) times
  for American investors.
• Substantial growth in ADRs has been seen in the
  period since 2002.
• From about 500 billion to 3 trillion in volume
  (see next slide).
• Today, American depositary receipt volume
  accounts for approximately 15 of the U.S. equity
  market.
• Important While ADRs trade in U.S. dollars and
  pay dividends in U.S. dollars, they do not
  eliminate the currency risk associated with an
  investment in a non-U.S. company.
• Reason Underlying shares are trading on foreign
  stock markets in local currency.

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ADR Growth, 1992 - 2007
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JP Morgan ADR Web-Site

• Visit JP Morgans ADR web site
• http//www.adr.com/
• Go to market overview
• Pick a country
• Pick a company and then,
• Note the
• US stock exchange the ADR trades on
• And the (AO) ratio (ADR to Underlying Stock).

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JP Morgan ADRs by Selected Country, Dec 2007
(2004)

• Country Number of Companies
• Sweden 5 Companies
• Venezuela 4 Companies
• Argentina 14 Companies
• France 32 Companies (23)
• Turkey 1 Company
• South Africa 11 Companies (6)
• Brazil 41 Companies (33)
• Norway 7 Companies
• Portugal 2 Companies
• Switzerland 12 Companies
• India 13 Companies (6)
• Italy 12 Companies
• Russian Fed 34 Companies (19)
• Japan 49 Companies (29)
• Denmark 3 Companies
• Taiwan 10 Companies (3)
• Netherlands 21 Companies

• Country Number of Companies
• United Kingdom 77 Companies (62)
• Philippines 4 Companies
• Hungary 3 Companies
• Hong Kong 10 Companies
• Chile 14 Companies
• Finland 4 Companies
• Austria 4 Companies
• Spain 8 Companies
• Australia 10 Companies
• Peru 1 Companies
• New Zealand 1 Company
• Ireland 8 Companies
• China 36 Companies (6)
• Israel 5 Companies
• Germany 28 Companies (24)
• Luxembourg 3 Company
• Indonesia 2 Companies

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Global Depository Receipt

• Term generally used when a foreign company lists
  its shares on an exchange in a country other than
  the United States.
• As with ADRs, these are in receipt form, rather
  than actual shares.
• Global Depository Receipts trade in the currency
  of the market in which they are listed.
• GDRs apply to U.S. companies trading overseas.
• Recently, some foreign countries have allowed
  ADRs to trade on their exchange.
• ADRs are can trade on the London Stock Exchange

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Cross Listing and Regulations

• When a company cross lists its share it is
  subject to
• Both, home and host country regulations!
• For foreign firms listing in the U.S. (ADRs) this
  means
• Meeting the disclosure requirements of the SEC,
  for example, reconsolidation of the companys
  financial statements to U.S. standards.
• Foreign firms can bypass these requirements
  through rule 144A (private placement) sales to
  qualified institution buyers. These buyers are
  generally pension funds, asset managers, or
  insurance companies. Shares can only be sold
  among these qualified buyers.
• And, also meeting Sarbanes-Oxley Act (2002)
  requirements.

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Trends in Cross Listing

• With the exception of the Tokyo Stock Exchange
  and the NYSE, cross listing of shares has
  continued to expand on the major exchanges of the
  world
• November 2007, 708 foreign companies were listed
  on the London Stock Exchange (79 were U.S.
  companies).
• Up from 642 in February 2007.
• Toronto Stock Exchange U.S. firm cross listings
  increased from 30 in 2002 to over 120 today.
• NYSE cross listings have declined in recent
  years
• Year end 2003, 467 foreign companies cross listed
  on the NYSE
• Year end 2007, 421 foreign companies are cross
  listed
• Canada 79
• Europe 153 (U.K., 44)
• Asia 105 (China, 41 and Japan 19)
• Is U.S. regulation and listing costs, in part,
  driving NYSE cross listings?

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Examples of U.S. and Japanese Companies Cross
Listed on the London Stock Exchange, April 2008

• U.S. Companies

• Japanese Companies

• Anheuser-Busch
• Boeing
• Bank of America
• Caterpillar
• Colgate Palmolive
• Exxon Mobil
• Ford
• GE
• General Motors
• JPMorgan Chase
• Merrill Lynch
• Sara Lee
• Verizon
• Note 79 U.S. companies were listed on the LSE
• Those in blue were also cross listed on the Tokyo
  Stock Exchange

• All Nippon Airways (OTC)
• Honda (NYSE)
• Mitsubishi (OTC)
• Nippon Telephone (NYSE)
• Sony (NYSE)
• Toshiba
• Toyota (NYSE)
• Note 16 Japanese companies were listed on the
  LSE
• Those in blue were also cross listed on an
  exchange in the U.S. (Exchange)

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Case Study Millea Holdings Delisting from NASDAQ

• July 5, 2007, (Reuters) - Japanese insurer Millea
  Holdings Inc. said on Thursday it will
  voluntarily have its shares delisted from the
  U.S. Nasdaq market and stop reporting its
  earnings under U.S. accounting rules to save
  costs.
• According to Reuters, several foreign companies
  have recently delisted their shares from U.S.
  exchanges due to the high cost of maintaining a
  listing and complying with the Sarbanes-Oxley
  Act, a set of tough accounting laws enacted to
  combat fraud after the Enron scandal.
• Millea said it no longer made sense to pay to
  keep its listing and report under U.S. accounting
  standards given that trading of its shares on
  Nasdaq accounted for only 2 percent of its total
  trading volume over the past 12 months.
• The company, owned about one-third by foreign
  investors, said its American Depositary Shares
  (ADS) would be delisted from Nasdaq on July 26,
  2007
• Millea will continue reporting earnings under
  Japanese standards and plans to keep its listings
  on the Tokyo Stock Exchange and the Osaka
  Securities Exchange.

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Trends in Cross Listing Tokyo

• Beginning in 1973, the Tokyo Stock Exchange
  permitted the cross listing of foreign
  companies.
• Dow Chemical was the first U.S. company to list
  (1973) IBM listed in 1974.
• By 1991, 127 foreign companies were listed on the
  Tokyo Stock Exchange (this was the peak year).
• From 1992 to 2007, 63 U.S. companies delisted
  (e.g., Apple in 2004 and IBM and PepsiCo in 2005)
  
• By the end of 2007, only 25 foreign companies
  remained listed (8 of them were U.S. companies).
• View http//www.tse.or.jp/english/listing/foreign
  /frhistorye.pdf
• Why have companies de-listed from Tokyo?
• Volume and listing/annual fee cost issues.

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8 U.S. Companies Cross Listed on the Tokyo Stock
Exchange, April 2008

• AFLAC (listed in 1987)
• American International Group (1987)
• Bank of America (1975)
• Boeing (1990)
• Citi (2007)
• Dow Chemical (1973)
• JPMorgan Chase (1987)
• Merrill Lunch (1986)
• Note Those in blue also listed on the LSE

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Case Study Apple Computer Delisting from the
Tokyo Stock Exchange

• November 18, 2004, Bloomberg reported that
  Apple's stock will be removed from the Tokyo
  Stock Exchange on December 25th of this year.
• Trading on the Tokyo Stock Exchange for Apple has
  averaged a mere 1,340 shares per day in 2004, a
  tiny fraction of the 7.74 million shares per day
  that trade on the NASDAQ.
• According to a news release issued by the Tokyo
  Stock Exchange, the delisting was done by
  request.
• Apple was first listed on the Tokyo exchange on
  September 18th, 1990.

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Case Study Citigroup Lists on the Tokyo Stock
Exchange

• November 05, 2007 Citigroup announced that the
  company's shares were being cross listed on the
  Tokyo Stock Exchange (TSE) as "Citi.
• Citigroups announcement included the following
  "Today's TSE listing is a milestone for Citi in
  Japan. In this year alone, we have formed a
  comprehensive strategic alliance with Nikko
  Cordial Corporation, localized our banking
  operations, and now listed on the TSE. In all
  these ways, we have advanced the Citi franchise
  in Japan and positioned it for accelerated
  growth. Our TSE listing is a natural next step in
  Citi's long-term commitment to Japan, which is an
  important part of our global growth strategy.
  Citi is committed to providing our clients in
  Japan with an unrivalled breadth of products and
  services. Citi is also firmly rooted in Japan and
  will strive to contribute to the Japanese economy
  and financial markets.
• Citi's common stock is also listed on the New
  York Stock Exchange and cross listed on the
  Mexican Stock Exchange.

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Case Study Wealth Gains from Cross Listing in
Japan

• Study by Fry, Lee and Choi (March 1994, Review of
  Quantitative Finance and Accounting)
• They found that shareholders of U.S. firms that
  listed stock on the Tokyo Stock Exchange from
  1973 to 1989 experienced no significant longer
  term wealth gains. The pattern of the market's
  reaction to a Tokyo listing tracked closely the
  reactions to a domestic listing, where gains
  prior to listing are later erased.
• The findings indicate no advantages to a listing
  for a U.S. firm with a prior business presence in
  Japan.
• The findings are consistent with the integration
  of international capital markets.
• If markets are completely integrated,
  cross-listing a firm's stock in other markets
  should have no impact on stock prices, since
  investors could presumably undertake financial
  market transactions in any market.

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Stock Market Web Site

• For stock market data around the world,
  including
• Current data
• Historical charts
• Visit http//quote.yahoo.com/m2?u

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• Appendix 1 Depository Receipt Data in Previous
  Years

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Depository Receipt Activity in 2006

• In 2006, about 1.9 trillion of DRs traded on US
  and non-US markets.
• This was an increase of 58 over 2005.
• 79 of the trading occurred in the US.
• 16 of the trading occurred in Europe.
• In 2006, 44.5 billion was raised through new and
  follow-up DR offerings.
• Largest DR IPO offering occurred in August 2006
  when the Russian oil company, Rosneft, raised
  6.3 billion with its DR program on the London
  Stock Exchange.

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ADRs and ADSs

• Foreign IPO process in the US
• When a foreign company wants to raise money by
  selling shares of stock in the US markets, it
  will offer these shares through a US bank, which
  is known as the depositary bank.
• Creation of an ADS and an ADR
• The depositary bank holds the foreign company's
  shares these shares are known as American
  depositary shares (ADSs). The depository bank,
  in turn, will then offer shares to US investors
  as certificates known as American depositary
  receipts (ADRs).
• The JP Morgan web site quotes ADRs and the Wall
  Street Journal quotes ADSs.
• These two are used interchangeably (the quotes
  are similar).