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Equity financing

Equity financing Chapter Eleven Eiteman, Stonehill, and Moffett Crosslisting reduce information asymmetry increases share price lower WACC improve liquidity larger primary market larger secondary market hedge operating risk

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Equity financing

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  1. Equity financing Chapter Eleven Eiteman, Stonehill, and Moffett

  2. Crosslisting • reduce information asymmetry • increases share price • lower WACC • improve liquidity • larger primary market • larger secondary market • hedge operating risk • denominate both assets and liabilities in terms of the same currency

  3. Depository receipts - Crosslisting • negotiable certificates • issued by bank, traded in secondary markets • representing a multiple of underlying shares • traded in & dividends paid in domestic currency terms • DRs traded in accordance with domestic securities regulations • sponsored (firm)- unsponsored (investor)

  4. Empirical evidence • share price reaction to crosslisting • negative effects to US firms listing in continental Europe • positive effects to US firms listing in London, Tokyo, Toronto • positive effects for foreign firms listing in the US • the larger a firm relative to its domestic market, the more likely it was to crosslist elsewhere

  5. Barriers to crosslisting • disclosure requirements vary with markets • rules in N. America • informationally onerous • expensive • feed information to market • rules elsewhere less stringent • reporting less frequent • lower disclosure requirements

  6. The New York Stock exchange • specialists • trade on floor • hold positions for liquidity • transaction costs (spread) • function of volume • function of volatility • limit orders take precedence over dealer orders

  7. Other exchanges • London exchange • less liquid • higher transaction costs • limit orders not executed chronologically • lower regulatory costs • more foreign firms listing • Tokyo exchange • substantially lower overall exchange market

  8. International equity • directed shares • targeting financing from target foreign market • private placements • euro-equity issues • equity sold in countries different than their origin • tranches - large stock blocks sold to underwriters • underwritten and distributed in multiple capital markets

  9. Strategic alliances • take advantage • economies of scale and scope • marketing • joint marketing and sales • Air Canada, United Airlines • financing • seeking to lower WACC • development • Airbus

  10. Privatizations • selling government owned enterprises • Western Europe • Eastern Europe • political will • employment programs • profitability • market forces versus political forces

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