Title: Module V: International Capital Markets
1Module VInternational Capital Markets
- Week 13 November 18 20, 2002
2Objectives
- Understand basics of global capital markets and
recent developments for corporate financing
decisions - Understand how foreign firms raise capital in the
United States and elsewhere - Examine factors relevant to firms cost of
financing in using international sources of
financing
3International Cases Context
- The Hostile Bid for Red October
- Russian equity market risks
- Inflation
- Liquidity problems
- Reporting and transparency issues
- Political risk taxation, regulation, favoritism
- Huaneng Power International
- China in 1994
4Example Stock Markets 1999
Source IMF Working Paper 00/216
5Emerging Market Performance
Country Price Index (1988100) Year-to-Date Total Return ()
China 44.89 -4.51
South Korea 51.09 -7.29
Taiwan 117.96 -15.95
Asia 106.96 N/a
East Europe 71.32 N/a
Latin America 531.87 N/a
Composite 198.21 -21.3
SourceIFC SP/IFCI Index, 3/28/2002 (column 2)
and WSJ, 11/15/2002 (column 3)
6Issues in Global Markets
- Integration of capital markets
- How much or how little do events in one market
reflect events in other markets - Expected real returns across markets
- Benefits of diversification
- Risk reduction through correlations of returns
- How to choose portfolio allocations
- Risks of international investing
7Recent Findings
- Importance of global effects has increased in the
new economy of the 1990s - Emerging country specific risk has increased
dramatically since the crises of the 1990s while
developed-country specific risk has declined - Industry factors, especially technology, probably
explain higher correlations
8Global Financial Management
- Investment in assets
- Find highest NPV or highest return projects on a
risk-adjusted basis - Cash flows measured in purchasing power of owners
(maximize shareholders wealth!) - Financing
- Minimize cost of funds on a risk-adjusted basis
- International finance analysis of currency and
political risks that are unique to foreign
operations
9Currency and Political Risk
- Currency risk is variability in cash returns due
to variations in exchange rates - For important currencies can be hedged in
financial markets - Often can be hedged on the balance sheet by
operating and financing policies (recall American
Airlines and Canada and G.E. turbine sales
examples - Some currencies cannot be hedged what kind of
risk is currency risk (systematic, liquidity,
etc.)?
10International Capital Flows
- Where are highest real returns to be found in the
world today? - Emerging market economies (educated, hard-working
labor, low capital stocks) - The United States? (capital inflow, new economy,
benign business environment) - Europe? (opening to East, Euro, restructuring)
- Latin America?
11Determinants of Capital Flows
- Take advantage of higher returns
- Japanese investments in Asian neighbors
- OPEC investments in diversified economies
- Benefits from diversification
- Pension funds and other institutional flows
- Arbitrage risk-return differentials
- Temporary differentials that are expected to go
away, as from political threats that can be
managed by diversification
12Issues in International Investing
- Taxes and/or restrictions of payment of dividends
or proceeds of sale - Currency related issues
- Ability to hedge and/or convert cash flows
- Costs of currency hedging and/or conversion
- Currency risk due to economic fundamentals
(devaluation/revaluation) - Liquidity and transaction costs
13Equity Trading Costs (One-Way Mean, in Basis
Points)
14Emerging Market Equity Issues
- Private equity versus public issues
- Role played by private investors (like venture
capital) - Importance of marketability for some investors
- Second board markets
- Examples MOTHERS in Japan, U.S. NASDAQ Small Cap
markets - Hong Kong GEMs, Korean Kosdaq, Sesdaq
15Markets and Venture Capital
- Emerging market economies in Asia have been
active in developing venture capital industries - Most successful (like U.S.) is Taiwan
- Others differ from U.S. experience, partially for
cultural reasons - Organizational forms and exit possibilities
- Second board markets in Asia have not represented
a reliable exit strategy
16Trends in Equity Trading
- Global integration in equity trading
- Natural economies of scale in markets size
promotes liquidity - Technology
- History and legal system
- Three models of future markets
- Concentration, as in NYSE in U.S.
- Alliances (e.g. Singapore and Australia)
- Electronic markets (ECNs)
17Advantages of U.S. Listing
- Liquidity provided by large markets
- Established market with global reputation and
known and enforced rules of conduct - Prestige of listing
- Attractiveness to investors
- Domestic U.S. retail investors
- Reporting and currency issues
- Institutional investors
- Liquidity and liability concerns
18American Depository Receipts
- American depository receipts (ADRs) are used for
foreign companies to trade on U.S. markets - Shares deposited in custodial bank in firms home
countries - ADRs have grown in popularity since 1980s
- Institutional investors wishing international
diversification - Foreign firms wishing to raise funds in U.S.
- Several levels of ADRs
19Levels of ADRs
- Level I
- Simplest but unlisted and traded over-the-counter
(pink sheets) - Reporting requirements are minimal (Form F-6)
- Level II
- Required to list on exchanges (NYSE, AMEX,
NASDAQ) - Disclosure but not meeting U.S. standards
- Level III
- Full compliance with U.S. reporting requirements
(using GAAP standards)
20ADRs on NYSE 2000
Country/ Region ADR Issues Shares (mill) Volume ( mill) Market Cap ()
China 13 166.5 5,631.0 2,480.3
Japan 13 242.8 22,588.0 10,594.5
S. Korea 5 351.0 15,469.9 6,649.5
Taiwan 4 229.1 14,299.0 2,858.8
Asia 64 2,346.1 920,617.6 45,331.2
Europe 174 9,763.3 514,235.1 399,607.2
L. America 103 3,563.4 141,416.9 79,795.9
21China
- Shanghai and Szenzhen stock exchanges
- A and B shares
- Currency (remninbi) non-convertible but
discussion of changing policies - Rapid growth in non-government sector
- State-owned enterprises (SOEs) and town and
village enterprises (TVEs) - Banks and trust-and-investment companies
22Who Owns Chinese Corporations?
- SOEs partially privatized
- Shares traded in China
- Ownership by a variety of institutions
- Stakes in firms also owned by
- Regional governments
- Government ministries
- TVEs
- Pension funds and TICs
- Goal of management?
23Next Week Nov. 25 27, 2002
- Review topics covered in RWJ, Chapter 13
- Read and think carefully about issues of
corporate governance in xxx case for discussion
on November 25 and remember that this is the last
individual case write-up - Use week of December xxx to begin review for
final exam by reviewing course syllabus and
weekly objectives and slides