International Business Chapter 12 Turnover Can Also Apply Individual Stock What Are The Three Primary Components

Chapter 12

International Equity Financing

QUESTIONS

1. What are the differences between public and private bourses?

2. What is the difference between a price-driven trading system and an order-driven

trading system? Which system lends itself most easily to automation?

3. What is a dark pool?

4. Do we have a global stock market as we have a global foreign exchange market?

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Answer: In the global foreign exchange markets, it is possible to trade any currency almost

anywhere in the world at any time in the day. This is not true in the stock market, even

though globalization has had profound effects on stock market trading. First, there has been

increased cross listing of firms on exchanges throughout the world, with London and the U.S.

5. What is turnover?

6. What are the three primary components of transaction costs in trading stocks?

7. Does high turnover always signal lower transaction costs?

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8. What is the difference between an ADR and a GDR?

9. What motivates companies to cross-list their shares?

10. What is the difference between a GDR and a GRS?

Answer: A GDR, like an ADR, represents negotiable claims on home-market ordinary shares

(in bearer or registered form) and is issued by a depositary bank. Settlement of cross-border

11. Has cross listing been beneficial for most listed companies? If yes, why doesn’t every

company cross-list?

12. What is a strategic alliance?

13. What is a joint venture?

PROBLEMS

1. The following table shows how average share prices jump (in percentage) after the

announcement that the stocks will be cross-listed (see Miller, 2000). The price response

should be interpreted as corrected for risk and market movements that happened on

the same day:

All ADR

Issues

Capital

Raising

Non-Capital

Raising

Emerging markets

1.5

0.9

2.8

Developed markets

0.9

0.7

0.9

Total

1.2

0.8

1.4

Given what you learned in chapter, answer the following:

a. Why is there a positive price response when a company’s shares are cross-listed?

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b. Why might the response for emerging-market firms be larger than for developed-

market firms?

Answer: Because their own stock markets have poorer liquidity and corporate

c. Without knowing that equity issues in a domestic context are associated with

negative price responses, is the difference between capital-raising and non-capital-

raising ADRs a surprise? Why or why not?

2. Suppose you are a U.S.-based investor, and you would like to diversify your stock

portfolio internationally. What advantages do ADRs offer you? Would it be wise to

restrict your international portfolio to only ADRs?

3. Web question: Go to http://www.adrbnymellon.com and access the most recent

Depositary Receipt Market Review. Determine which five firms with Depositary

Receipts have the largest market capitalizations and which five investment firms have

the largest assets under management composed of Depositary Receipts.