Transcript Class 2 - University of Southern California

Module V:
International Capital Markets
Week 13 – November 18 & 20, 2002
J. K. Dietrich - FBE 432 – Spring, 2002
Objectives
 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
J. K. Dietrich - FBE 432 – Spring, 2002
International 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
J. K. Dietrich - FBE 432 – Spring, 2002
Example Stock Markets 1999
Number of
Firms
7,561
2,470
1,945
968
933
725
Market
Capitalization
(Billions)
$16,635
4,547
2,933
1,475
1,432
309
Non-OECD
China
Taiwan
950
462
331
376
World Total
35,044
35,346
Country
U.S.A.
Japan
United Kingdom
France
Germany
South Korea
Source: IMF Working Paper 00/216
J. K. Dietrich - FBE 432 – Spring, 2002
Percent of
Global Total
47.06%
12.86%
8.30%
4.17%
4.05%
0.87%
0.94%
1.06%
100.00%
Emerging Market Performance
Country
China
South Korea
Taiwan
Asia
East Europe
Latin America
Composite
Price Index
(1988=100)
Year-to-Date Total
Return (%)
44.89
51.09
117.96
106.96
71.32
531.87
198.21
-4.51
-7.29
-15.95
N/a
N/a
N/a
-21.3
Source:IFC S&P/IFCI Index, 3/28/2002 (column 2) and WSJ, 11/15/2002 (column 3)
J. K. Dietrich - FBE 432 – Spring, 2002
Issues 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
J. K. Dietrich - FBE 432 – Spring, 2002
Recent Findings
 Importance
of global effects has increased
in the “new economy” of the 1990’s
 Emerging country specific risk has
increased dramatically since the crises of
the 1990’s while developed-country specific
risk has declined
 Industry factors, especially technology,
probably explain higher correlations
J. K. Dietrich - FBE 432 – Spring, 2002
Global 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
J. K. Dietrich - FBE 432 – Spring, 2002
Currency 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.)?
J. K. Dietrich - FBE 432 – Spring, 2002
International Capital Flows
 Where
are highest real returns to be found
in the world today?
– Emerging market economies (educated, hardworking labor, low capital stocks)
– The United States? (capital inflow, new
economy, benign business environment)
– Europe? (opening to East, Euro, restructuring)
– Latin America?
J. K. Dietrich - FBE 432 – Spring, 2002
Determinants 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
J. K. Dietrich - FBE 432 – Spring, 2002
Issues 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
J. K. Dietrich - FBE 432 – Spring, 2002
and transaction costs
Equity Trading Costs
(One-Way Mean, in Basis Points)
70
60
50
40
30
20
10
Implicit
0
OECD
Latin
America
J. K. Dietrich - FBE 432 – Spring, 2002
Explicit
East
Europe
Asia
Emerging 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
J. K. Dietrich - FBE 432 – Spring, 2002
Markets 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
J. K. Dietrich - FBE 432 – Spring, 2002
Trends 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)
J. K. Dietrich - FBE 432 – Spring, 2002
Advantages 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
J. K. Dietrich - FBE 432 – Spring, 2002
American 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 1980’s
» Institutional investors wishing international
diversification
» Foreign firms wishing to raise funds in U.S.
 Several
levels of ADRs
J. K. Dietrich - FBE 432 – Spring, 2002
Levels 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)
J. K. Dietrich - FBE 432 – Spring, 2002
ADRs on NYSE 2000
Country/
Region
China
Japan
S. Korea
Taiwan
Asia
Europe
L. America
ADR
Issues
13
13
5
4
64
174
103
J. K. Dietrich - FBE 432 – Spring, 2002
Shares Volume Market Cap
($)
(mill)
($ mill)
166.5
5,631.0
2,480.3
242.8 22,588.0
10,594.5
351.0 15,469.9
6,649.5
229.1 14,299.0
2,858.8
2,346.1 920,617.6 45,331.2
9,763.3 514,235.1 399,607.2
3,563.4 141,416.9 79,795.9
China
 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
J. K. Dietrich - FBE 432 – Spring, 2002
Who 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?
J. K. Dietrich - FBE 432 – Spring, 2002
Next 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
J. K. Dietrich - FBE 432 – Spring, 2002