FNCE 3020 Financial Markets and Institutions

1
FNCE 3020Financial Markets and Institutions

• Lecture 8 Financial Markets (With A Global View)
• (1) The Money Markets
• (2) The Bond Markets
• (3) The Equity Markets

2
Where are we?
3
The Money Markets

• The money market is the financial market for
  short-term borrowing and short term lending (1
  year or less).
• Money market instruments can be as short as
  overnight.
• Federal Funds and Repurchase market
• Includes short-term debt securities, such as
  banker's acceptances, commercial paper,
  repurchase agreements, negotiable certificates of
  deposit, and Treasury Bills.
• Money market securities have historically been
  viewed as very safe investments.
• Many, but not all, have well developed secondary
  markets, and those that do are regarded as being
  highly liquid financial assets.

4
The Money Markets

• Many money market instruments sell at a discount
  of par value.
• Similar to zero coupon bonds (i.e., there is no
  coupon rate).
• Examples would include T-Bills and Bankers
  acceptances.
• Money market securities generally have
• (1) low default risks,
• (2) low price (i.e., interest rate) risk, and
• (3) high reinvestment risk.
• When trading in secondary markets, these assets
  generally have small bid and ask spreads (i.e.,
  the buying and selling spread).
• These spreads are relatively small due to the
  large size and competitive nature of the market.

5
Purpose of Money Markets

• Satisfying Needs of Investors
• Provides investors, non-financial business firms
  and financial institutions a place for investing
  surplus (i.e., idle) funds over short periods of
  time.
• For example, a non-financial business firm with
  net positive working capital (surplus cash).
• Again, these investments can be as short as
  overnight (e.g., Fed funds market or the
  repurchase agreement market) or out to a year.
• Firms can tailor their cash flow needs to the
  maturities of the money market instruments they
  are acquiring.
• In addition, money market instruments can offer a
  high degree of liquidity (as measured by relative
  price stability and good secondary markets).

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Purpose of Money Markets

• Satisfying Needs Borrowers
• Mainly corporates and governments.
• Provides borrowers a source of short-term funds.
• For example, financing the net deficit working
  capital needs of businesses.
• Commercial paper market
• Money markets provide a way to manage cash-timing
  problems.
• Important to borrowers because the timing of
  their short term cash inflows and outflows may
  not be well synchronized.
• Money markets also become important during safe
  haven situations.

7
Participants in U.S. Money Markets

• U.S. Treasury Department
• Financing its internal (domestic) deficit (when
  government expenditures exceed tax receipts), or
• Refinancing operations as national debt
  maturities.
• Foreign Governments (and Central Banks)
• Recycling their U.S. dollar (external) trade
  surpluses back into U.S. financial markets.
• Involves many Asian countries today (Japan,
  China, South Korea).
• Federal Reserve System (U.S. Central Bank)
• Federal Reserve Bank of New York conducts Open
  Market Operations in the money markets (buying
  and selling U.S. T-Bills) to meet the fed funds
  target.

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Participants in U.S. Money Markets

• Commercial Banks and Other Depository
  Institutions (e.g., savings banks)
• Important use and source of funds to these
  institutions
• They hold secondary reserves in the form of
  liquid U.S. Treasury bills (these are part of
  their investment portfolio) and earn interest on
  these.
• Also as a source of funds (cash) for meeting
  unexpected deposit withdrawals and increases in
  loan demands.
• Non Depository Financial Firms (e.g., finance
  companies, leasing companies)
• Securing funds in the money markets to lend to
  potential customers
• Non-financial Businesses Firms
• Financing short term working capital needs (cash
  shortfalls)
• Important for financing foreign trade (financing
  export sales is done through bankers acceptances)
• Investing their short term surplus funds (idle
  funds)

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Participants in U.S. Money Markets

• Contractual Financial Firms (e.g., property and
  casualty insurance companies)
• Holding liquid assets to meet unpredictable and
  unanticipated claims from policy holders.
• Investment firms (brokerage firms, asset
  managers mutual funds pension funds)
• Offering money market portfolios to investors.
• Encourages investors with limited funds (and
  limited investor knowledge) to participate in the
  money markets.
• Individuals (Households)
• In the U.S., investors enter this market
  primarily through money market mutual funds.
• Although individuals can invest directly (e.g.,
  commercial paper).

10
Comparing Major Money Market Securities
11
Money Market Rates Move Together
12
Marketable U.S. Government Debt June 2008

• Security Amount Percent of Total
• T-Bills 1,056 billion 23
• T-Notes 2,543billion 54
• T-Bonds 581 billion 12
• Other (TIPs) 497 billion
• Total 4,677 billion
• Note 10 of the marketable debt is held by the
  Federal Reserve. About half the marketable debt
  is held by foreigners (private and public
  holdings), with Japan the largest at 680 billion
  and China second at around 400 billion (end of
  2007 data).
• Source http//www.fms.treas.gov/bulletin/index.ht
  ml (federal debt link Table FD-2).

13
Repurchase Agreement (Repos)

• In a repurchase agreement, or repo, an investor
  provides cash to a government securities dealer
  or other financial institution in exchange for a
  Treasury bill, note or bond.
• Essentially a short-term collateralized loan to
  the government securities dealer.
• Party selling securities receives immediate cash.
• Party buying securities will receive interest.
• The repo is reversed the next day, with the
  investor receiving interest on the overnight
  loan.
• Under these agreements, one can invest or borrow
  money for periods ranging from 1 to 365 days.
• Major participants are primary government
  securities dealers.

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Use of Repurchase Agreements

• Financial institutions enter into repo
  transactions in order to cover cash short
  positions or to earn a return on idle cash.
• Borrow or lend funds for short periods of time.
• Most typical time frame 3 to 14 days.
• Central banks use repurchase agreements for
  temporary or defensive open market
  operations.
• Central bank buying securities from government
  securities dealers to temporarily increase funds
  in market (these are called repurchase
  agreements) seller agrees to buy back.
• Central bank selling securities to government
  securities dealers to temporarily remove funds
  from market (these are called reverse repurchase
  agreements, or matched sale-purchase
  transactions) buyer agrees to sell back.
• The United States has the largest repo market in
  the world, followed by France.

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Commercial Paper

• Short term, promissory notes, issued by financial
  and non-financial corporations as a way of
  raising money
• U.S. market About 1.7 trillion outstanding
  commercial paper offered by approximately 2,000
  companies.
• Non-financial companies (25) and financial (75)
• U.S. Commercial paper maturities are less than
  270 days.
• This does not require SEC registration for a
  public placement.
• In practice, most commercial paper has a maturity
  of between 5 and 45 days, with 30-35 days being
  the average maturity. Many issuers continuously
  roll over their commercial paper, financing a
  more-or-less constant amount of their assets
  using commercial paper.
• Small secondary market, thus generally held until
  maturity.
• Thus, not nearly as liquid as T-Bills.
• Commercial paper is viewed as an alternative to
  short term borrowing from commercial banks (prime
  loans).
• Spread between the two usually produces a lower
  nominal return (or cost) on commercial paper than
  on prime loans.
• Difference is about 200 to 300 basis points (See
  next slide)

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Prime Rate and Commercial Paper Rate
Notice that difference between the two ranges
from 200 to 300 basis points.
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Explaining the Cost Difference Commercial
Paper Backup Requirements

• What accounts for the interest rate differential?
• In 1970, Penn Central Transportation Co.
  defaulted on 82 million worth of commercial
  paper.
• Since that time, investors have required that
  almost all commercial paper be rated by a rating
  service.
• Rating services require evidence of short-term
  liquidity (a backup) and will not issue a
  commercial paper rating without it.
• Thus, commercial paper issuers need to have
  access to funds that can be used to pay off all
  or some of their maturing commercial paper.
• These back up funds are either in the form of
  their own cash reserves or bank lines of credit,
  with most commercial paper issuers maintain
  backup liquidity through bank lines of credit.
• Banks charge a fee for these lines of credit (a
  percentage of the credit line) whether or not the
  line is activated.

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Investors in Commercial Paper

• Major investors in the commercial paper market
  are institutions, and include
• Money market mutual funds and commercial bank
  trust (private banking) departments
• Money market mutual funds hold about 33 of
  outstanding commercial paper, while bank trust
  departments hold up to 25 percent.
• Other important investors include non-financial
  corporations, life insurance companies, and
  pension funds.
• Individuals hold little commercial paper
  directly.
• However, individuals are large indirect investors
  in commercial paper through their investment in
  money market mutual funds.

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Money Market Mutual Funds

• Investment funds that invest only in short-term
  securities.
• Money market fund investments can include U.S.
  Treasury securities, federal agency notes,
  certificates of deposit, repurchase agreements,
  bankers acceptances, and commercial paper (see
  next slide).
• Open end funds (also called mutual funds)
  unlimited capitalization (number of shares)
  offered to the public.
• Purchase and sale of mutual fund share is through
  the investment funds themselves (e.g., Vanguard
  and T. Rowe Price money market funds)
• Closed end funds fixed (limited) number of
  shares offered to the public
• Purchase and sale of shares is done through
  financial markets such as OTC or organized
  exchanges like the NYSE (e.g., John Hancock,
  Money Market Fund JHMXX on NASDAQ)
• Combined these funds totaled 3.1 trillion at the
  end of 2007 (up from 2.4 trillion at the end of
  2006).
• Market consists of retail market (sold to
  individuals) and Institutional market (sold to
  pension funds and businesses)

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Assets of Money Market Mutual Funds

• Corporate notes Debt instruments with
  maturities of 9 month out to a few years.

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Bankers Acceptances Background

• Assume an exporter and importer agree on the
  terms of a particular sale
• What are the issues that remain for both?
• The exporter usually wants to maintain legal
  title to the goods until they are paid for (or at
  least until payment is assured),
• While the importer typically is reluctant to pay
  for the goods before they are shipped
  (additionally, the importer wants to make sure
  that the goods ordered are indeed the goods
  shipped).
• Commercial banks have developed procedures to
  bridge this gap between the concerns of exporters
  and importers.
• In the process, banks provide external financing
  needed by the trading partners (specifically the
  importing firm).
• Critical to this process is a letter of credit.

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Letter of Credit

• Defined A Letter of Credit is a document which
  acknowledges a banks promise to pay a
  beneficiary (exporter) for merchandise sold to a
  buyer (importer) if specified conditions are met.
• Thus, a letter of credit substitutes the bank's
  credit for the credit of another party (i.e., the
  buyer of the goods).
• Letters of credit are used to ensure that payment
  will be received and that the goods ordered will
  be shipped.
• The use of letters of credit has become a very
  important aspect of international trade due to
  the nature of international dealings including
  factors such as distance, differing laws in each
  country and the potential difficulty in knowing
  each party personally,
• The bank acts on behalf of the buyer (i.e.,
  importer) by ensuring that the supplier (i.e.,
  exporter) will not be paid until the bank
  receives a confirmation that the goods which have
  been ordered have been shipped.
• A letter of credit is a tool to reduce payment
  risk.

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Letter of Credit and Bankers Acceptances

• Letter of credit arrangement will be requested by
  the exporter (seller) and will required the
  importer (buyer) to initiate a formal letter of
  credit with his/her bank.
• The letter of credit will detail the conditions
  surrounding the transaction between an exporter
  and importer.
• What is being purchased, how shipped, when
  shipped, etc.
• When these conditions have been met, the bank
  will issue a draft (i.e., promise to pay or
  promissory note) which is presented to the
  exporter.
• Draft can either be a sight draft (on demand) or
  a time draft.
• When this draft is guaranteed by the importers
  bank it becomes a bankers acceptance.
• Through the letter of credit, the exporter has
  the promise of a bank to pay, rather than a
  promise of the importer.
• The bankers acceptance can be sold by the
  exporter before its maturity date in secondary
  markets.
• It is sold at a discount at the existing bankers
  acceptance rate.
• Bankers acceptances are a popular investment for
  money market funds.

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14 Steps in Trade Transaction
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Eurodollars (aka Offshore Market)

• U.S. Dollar denominated time-deposits deposited
  in banks located outside of the United States.
• These banks can be either foreign banks or U.S.
  banks.
• What is important is location banks must be
  offshore from the U.S.
• Largest euro-dollar market by location is in
  London, England.
• Today, other major currencies can also be
  deposited in these offshore markets.
• Yen, pounds, Swiss francs, European euros.
• These deposits are also offshore from their
  legal tender countries and are designed by the
  prefix Euro (e.g., euro-yen, euro-pounds, etc.)
• Large global banks attract these deposits by
  offering interest rates on offshore time
  deposits (with maturities ranging from overnight
  deposits out to one year.
• These banks then lend these offshore deposits to
  global business who are in need of foreign
  currencies (e.g., needing dollars to pay for
  trade related activities).

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Brief History of the Eurocurrency Market

• Market originated in 1956, at the time of the
  Hungarian revolt when communist governments
  (mainly the Soviet Union) concerned about the
  potential freeze of their dollar accounts in U.S.
  banks and needing dollars for international trade
  and, shifted their deposits to London.
• The first bank in the London which accepting
  these U.S. dollar deposits was the Soviet-owned
  Banque Commerciale pour I'Europe du Nord.
• This bank was known by its cable code, EURBANK.
• From this cable code the term euromarket
  originated.
• By the 1960s, the practice of euro-deposits was
  extended to regular business customers.
• As the economies of Europe and Asia grew, the
  market was extended to additional currencies
  other than the US dollar.

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Euro-currency Deposit Rates

• LIBOR is the London market that establishes the
  interest rate for offshore deposits of various
  currencies.
• These rates are set by major banks each morning
  (London time)
• Rates for U.S. dollar deposits can be found at
• http//www.federalreserve.gov/releases/h15/update/
  

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TED Spread (A Measure of Risk)TED 3-month
LIBOR 3-month T-Bill

• Peak in October 2008?

• Data and Daily Quote

• From 1990 to July 2007 the average spread was 41
  basis points.
• For daily quotes link to
• http//www.bloomberg.com/apps/quote?ticker.TEDSP
  3AIND

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Corporate Spreads Another Measure of Risk
Aversion

• Baa Aaa and Baa- Govt

• Basis Point Spreads

• Both a measure of confidence and risk aversion.
• Baa-Aaa average spread (1977 to Present)
  107basis points.
• Baa-10 yr Govt average spread (1977 to Present
  208 basis points.

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What is this?
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Follow the Stock Market

• 2001

• Halfway Rule

• Forecasters have noted that historically
  investors start discounting a recovering about
  half way through an average recession.
• Historically, stock prices move up (on average)
  about 5 to 6 months before a recession ends.
• Has the market bottomed out?
• 2 weeks ago (Nov 24 29) stocks posted their
  biggest weekly gain since 1974

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Stock Market Signals

• 1970s

• 1980s Early 1990s

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Follow the Stock Market

• http//finance.yahoo.com/marketupdate?u

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Capital Markets

• Capital Markets Defined Financial markets
  involving financial assets with maturities of
  greater than one year.
• Best known capital market securities include
• Stocks and bonds
• Mortgages
• Primary issuers of these securities
• Federal government and local governments
• Corporations (U.S. and foreign)
• Individuals
• Largest purchasers of capital market securities.
• Individuals and Financial Instructions.
• Pension funds, mutual funds.

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Size and Composition of Capital Markets, 2006

• Stock Bond
  Total Capital
• Markets Markets
  Markets
• World 50.8 (43) 68.7 (57) 119.5
  (100)
• U.S. 19.6 (39) 26.7 (39) 46.3 (39)
• EU 13.1 (26) 23.2 (34) 36.6 (31)
• Euro 8.4 (17) 18.8 (27)
  27.2 (23)
• U.K. 3.8 ( 8) 3.3 ( 5)
  7.1 ( 6)
• Japan 4.8 ( 9) 8.7 (13) 13.5
  (11)
• Note Trillions of U.S. dollars, and () of
  total.
• Source IMF, Global Financial Stability Report,
  2007 http//www.imf.org/External/Pubs/FT/GFSR/2007
  /02/index.htm

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Global Capital Markets Summary

• By year end 2006, the estimated value of all the
  worlds capital markets was 115.5 trillion (this
  was an increase of 24 over 2005).
• In 2006, stock markets grew by 37 and the bond
  markets by 16
• Bond markets are the larger of the two capital
  markets (57 versus 43 in 2006 but down from 61
  and 39 in 2005).
• The United States capital market is the largest
  at 39 of the total (but down from 42 in 2005),
  while the EU is second at 31 (up from 29 in
  2005).
• Japans share of the worlds capital markets fell
  from 17 in 2005 to 11 in 2006.

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Size and Composition of Developed and Emerging
Capital Markets, 2006

• Stock Bond
  Total Capital
• Markets Markets
  Markets
• World 50.8 (43) 68.7 (57) 119.5 (100)
• Developed 39.2 (77) 62.1 (90) 101.3
  (85)
• Emerging 11.6 (23) 6.1 (10) 17.7
  (15)
• Asia 6.9 (13) 3.5 (
  5) 10.4 ( 9)
• Latin Amer 1.5 1.6
  3.1
• Europe 1.9 .7
  2.6
• Africa .9
  .1 1.0
• Note Trillions of U.S. dollars, and () of
  total.
• Source IMF, Global Financial Stability Report,
  2007 http//www.imf.org/External/Pubs/FT/GFSR/2007
  /02/index.htm

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Developed and Emerging Capital Markets Summary

• Developed country capital markets dominate the
  worlds total capital markets.
• But their share is declining (89 in 2005 to 85
  in 2007)
• The increase in emerging capital markets is
  occurring in Asia, and especially in their equity
  markets.
• Emerging market equity markets increased from 18
  of total world equity markets in 2005 to 23 in
  2006.
• By 2006, emerging Asia equity markets represented
  13 of the worlds total equity markets.

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The Bond Markets Governments and Corporates, 2006

• Bonds Total
• Government Corporate Bonds
• World 25.6 (37) 43.1 (63) 68.7(100)
  
• U.S. 6.2 (24) 20.5 (48) 26.7 (39)
• EU 7.7 (30) 15.5 (36) 23.2 (34)
• Euro 6.6 (26) 12.2 (28)
  18.8 (27)
• UK .8 ( 3) 2.5 ( 6)
  3.3 ( 5)
• Japan 6.7 (26) 2.0 ( 5) 8.7
  (13)
• Emerging 3.8 (15) 2.2 ( 5)
  6.0 ( 9)
• Note Trillions of U.S. dollars, and () of
  total.
• Source IMF, Global Financial Stability Report,
  2007

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Government and Corporate Bond Markets Summary

• From 2001 to 2006, the worlds bond markets grew
  from 37 trillion to 69 trillion.
• This represents an increase of about 85
• The greatest increase in this total was
  represented by the corporate (i.e., private) bond
  market.
• The corporate (private) bond markets share of
  the total bond market increased from 50 in 2001
  to 63 by 2006.
• With the exception of Japan, in the United States
  and in the EU, the corporate bond markets are now
  larger than the government bond markets.
• In the emerging countries as a group, the
  government bond markets dominate the corporate
  bond markets.

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Rise of the Eurozone Bond Market

• Historically, the U.S. bond market has dominated
  the global bond market.
• For both U.S. companies and non-residents.
• But, since the introduction of the euro in 1999
  and the resulting development of a true
  pan-European debt market, the Eurozone bond
  market has increased in importance.
• In 2001, the U.S represented 47 of the worlds
  bond market and the Eurozone countries
  represented 21.
• But by 2006, the U.S. share had fallen to 39 and
  the Eurozone share had grown to 27.

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Bond Market Growth in Europe
43
The Worlds Bond Markets

• The worlds bond market can be divided into two
  broad groups (1) the domestic bond market and
  (2) the international bond market.
• (1) The domestic bond market is comprised of all
  securities issued in each country by domestic
  government entities and corporates.
• In this case, issuers are domiciled (i.e.,
  headquartered) in the country where those bonds
  are traded.
• (2) The international bond market is comprised of
  non-residents borrowing in another countrys bond
  markets
• The international bond market consists of two
  groups Foreign Bonds of and Eurobonds.
• The domestic market dominates the global bond
  market, accounting for about 80 of the total.

44
Foreign Bonds

• Foreign Bonds Bonds issued by a non-resident and
  denominated in the currency of the country in
  which it is being placed.
• Example Ford Motor Corporation issuing a yen
  denominated bond in Japan
• Foreign bonds are subject to the regulations of
  the country in which the bond is being offered.
• The SEC regulates foreign bond offerings in the
  U.S.
• Historically, the most important foreign bond
  markets have been in Zurich, New York, and Tokyo.
• Foreign bonds are often issued because of
  interest rate considerations (see next slide) and
  then swapped out for another currency.

45
Names for Foreign Bonds

• The financial markets have come up with unusual
  nicknames for foreign bonds. These include
• Yankee bonds
• Issued in the United States,
• Matador bonds
• Issued in Spain,
• Rembrandt bonds
• Issued in the Netherlands,
• Samurai bonds
• Issued in Japan,
• Bulldog bonds
• Issued in the United Kingdom,
• Kiwi bonds
• Issued in New Zealand.
• Kangaroo bonds
• Issued in Australia.
• Maple bonds
• Issued in Canada.

46
Eurobonds

• Eurobonds Bonds issued and sold simultaneously
  in more than one market, and all in a
  jurisdiction outside the country of the currency
  of denomination.
• Coca Cola issuing a U.S. dollar denominated bond
  in Europe and Asia.
• The advantage of the Eurobond market is that
  issuers can borrow from individual and
  institutional investors all around the world.
• Thus the advantage of a large global capital
  market.
• Issuers include national governments, AAA
  corporations and global banks.
• Issue size can range from 50 million to 1
  billion and over.
• U.S. dollar is the dominant currency of
  denomination for Eurobonds.

47
The Main Features of a Eurobond

• Denominated in an offshore currency.
• Therefore, investors in eurobonds take both
  credit and foreign exchange risks.
• Sold to a wide range of individual and
  institutional investors through a multinational
  syndicate of underwriting firms and banks.
• Generally bearer instruments to ensure the
  anonymity of the ultimate investors.
• Some publically offered eurobonds trade on stock
  exchanges, normally in London or Luxembourg.
  Others are placed directly with institutional
  investors without a listing (private placement).

48
Eurobond Market Surpasses U.S. Bond Market in 2005
49
Common Stock

• Defining Common Stock These are securities
  representing
• equity ownership in a corporation,
• providing voting rights, and
• entitling the holder to a share of the company's
  success through dividends and/or capital
  appreciation.
• One of three major ways in which business obtain
  funds
• (1) Equity Offerings (IPOs)
• (2) Issuing Bonds
• (3) Borrowing Short term in Money Markets

50
World Stock Market Capitalization, 1980 -2007,
Trillions of U.S. Dollars
51
Global Stock Markets Trillions of U.S. Dollars
and of Total, 2006 (2002)

• World 50.8 100.0
• Developed Markets 39.1 77.0 (91.8)
• U.S. 19.6 38.6 (50.1)
• Japan 4.8 9.5 ( 9.4)
• UK 3.8 7.5 ( 8.2)
• EU 13.1 25.8 (25.0)
• Euro area 8.4 16.5 (15.7)
• Germany 1.6 3.2
• Emerging Markets 11.7
  23.0 ( 8.2)
• Emerging Asia 6.9 13.5 ( 5.7)
• Emerging Latin America 1.5
  3.0
• Emerging Europe 1.8
  3.5
• Note Dollar amount of global equity markets in
  2002 22.1 Trillion

52
Global Stock Markets Summary

• From 2002 to 2006, the combined stock markets of
  the world has grown 130.
• Developed markets have grown 93
• Emerging markets have grown 550
• U.S. market has grown 77
• From 2002 to 2006
• Developed markets share has declined from 92 to
  77
• Emerging markets share has increased from 8 to
  23
• U.S. share has declined from 50 to 39

53
Country Preferences for Raising Capital, Debt to
Equity Ratios Average 1980-91
54
Trends in Debt to Equity Ratios, 1977 - 1992
55
Recent Trend in U.S. , 1996 - 2006
56
What Influences a Firms Financing Preferences?

• Equity Risk Cultures (Investors and Owners)
• U.S and U.K. well developed and acceptance of
  risk.
• Europe and Asia not as well developed less
  tolerance for equity risk taking.
• Chinese versus Americans.
• Tax Treatment of Sources of Funds
• Level of Development of Financial Markets
• Especially equity markets How large, how liquid,
  how open?
• Level of Development of Financial Institutions
• Commercial banks, investment banks, brokerage
  firms

57
The Value of Financial Claims on Firms, 2003 as a
of GDP (A Measure of Equity Risk Culture
58
Comparison of Household Financial Asset
Allocation (Risk Cultures)
59
Global Equity Market Recent Trends

• (1) Equity markets (stock exchanges) going public
• Historically stock markets were private
  organizations.
• However, in February of 2001 Germanys stock
  exchange, the Deutsche Börse went public
• In July 2001, the London Stock Exchange and
  Euronext went public
• In 2006, the NYSE followed.
• (2) Consolidations (mergers) between stock
  exchanges.
• Facilitated by publically traded exchanges.
• NYSE and Paris based Euronext merged on April 4,
  2007 (formed NYSE Euronext, NYX).
• Visit their web site at http//www.nyse.com/
• Why are exchanges merging to provides liquidity
  and global outreach benefits to investors,
  capital raising benefits to corporations and cost
  reductions to the exchanges themselves

60
Global Equity Market Recent Trends

• (3) Increasing number of stock markets
• John Thain, 2006, CEO, the NYSE Most countries
  have an army, a flag, an airline, and a stock
  exchange.
• Approximately 300 stock exchanges around the
  world.
• Today, many emerging countries have their own
  stock markets.
• Part of their privatization process.
• (4) Declining share of U.S. equity market in the
  overall global equity picture.
• Down to 38.6 in 2006 compared to 50 in 2002.

61
Global Equity Market Recent Trends

• (5) Companies listing their common stock on
  foreign stock markets as well as their home stock
  market
• Done through a process called cross listing.
• Viewed as a means of raising capital globally
  (IPOs) and facilitating global trading in company
  shares (taking on an international investor
  base).
• (6) Foreign companies engaging in IPOs in foreign
  equity markets, with the U.S. historically being
  dominant, but
• Perhaps recently slipping in importance because
  of the June 2002 Sarbanes-Oxley Act and its
  requirements (see next slide).
• London is becoming a major foreign company IPO
  market.

62
Percent of Foreign IPOs in the U.S.
63
Is the U.S. Equity Markets Competitive Position
Declining?

• Those that say yes, point to data which show a
  decline in U.S. equity market involvement in
• IPO distribution
• In 1999, the American markets accounted for 57
  of world wide IPOs. In 2006, Americas share had
  fallen to 18 and to about 7 in 2007.
• Foreign stocks listed in the U.S.
• U.S. equity markets have seen a decline in the
  number of foreign companies listings.
• Since peaking in 2002, NYSE foreign listings have
  fallen 4 to 451 and NSADAQ has fallen 34 to 321
  (since 2000).
• In 2007, 68 foreign companies delisted from the
  NYSE (including British Airways, Fiat, and
  Bayer), representing about 15 of all foreign
  listings.
• The explanation for this decline is that
  increasing regulation is putting U.S. markets at
  a competitive disadvantage.
• It is estimated that Sarbanes Oxley added 2 to
  3 million in average annual compliance costs for
  companies.

64
Is Americas Competitive Position Really
Declining?

• Some argue no and suggest that the data simply
  suggests that foreign markets have become larger,
  thus encouraging companies to seek IPOs in their
  home markets.
• In addition, trading across borders has become
  easier, thus reducing the usefulness of a
  non-home country listing.
• In essence, the changing U.S. position simply
  represents the changing nature of global
  financial markets.
• For a full development of this side of the
  argument, please see web site reading A Global
  Twist.