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8/14/2019 09 FNCE 4070 Spring 2012 Posted Global Debt and Equity Markets
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FNCE 4070: FINANCIAL MARKETS
AND INSTITUTIONSLecture 9: Global Debt and Equity
Markets
With a Discussion of the
Globalization of Financial
Markets and theImplications of Global
Markets for Borrowers
and Investors
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Where is this Financial Center?
Arab Spring Risk. Cairo stockmarket closed from January27, 2011 to March 23, 2011
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Long Term Risk: Investing in the
Japanese Stock Market
January 1984
January 1990+270%
January 1990April 2012
-75%
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Fads in Equity Markets
January 2006
January 2008
+275%
January 2008December 2008
-61%
January 2000January 2006
-17%
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Importance of Capital Markets to
World Economy
330.60358.87
369.24 370.29
401.50
439.62
361.80
418.27
397.50
100.00
150.00
200.00
250.00
300.00
350.00
400.00
450.00
500.00
2002 2003 2004 2005 2006 2007 2008 2009 2010
World's Capital Market as a Percent of World GDP
World's Capital Market % of World GDP
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Institutional Arrangements in
Corporate Funding
The historical institutional patterns of corporateborrowing in various countries have influencedthe development a countrys bond markets and
equity markets. In Japan and Germany, companies have relied less on
equity markets for funds than their counterparts in theU.S. In both of these counties, banking has been arelatively more important source of funds.
In Europe, the close ties between banks and theircorporate clients hindered the development of aEuropean corporate bond market. That changed, however, with the launch of the euro in 1999,
which promoted the development of Europes bond market.
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Importance of Banking Markets for
the U.S., Japan and GermanyBanking Assets as a % of
Countrys GDPBanking Assets as a % ofCountrys Capital Markets
0.0
50.0
100.0
150.0
200.0
250.0
2002 2003 2004 2005 2006 2007 2008 2009 2010
U.S. Banking % GDP
Germany Banking % GDP
Japan Banking % GDP
0.0
10.0
20.0
30.0
40.0
50.0
60.0
2002 2003 2004 2005 2006 2007 2008 2009 2010
U.S. Banking % Capital Market
Germany Banking % Capital Market
Japan Banking % Capital Market
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Changing Corporate Capital
StructuresJapan, Germany & the U.K.
During the early post war years,Japanese corporation reliedheavily on banks and the bondmarkets to finance their capital
structures. In the 1970s, Japanese
corporate debt to equity ratioswere 4 times as high as that ofU.S. companies.
But, by the late 1980s, corporate
Japan and the U.S. had similarleverage ratios. Germany continued to rely
heavily on its banking market. The U.K. paralleled the U.S.
during this time.
Changing Debt/Equity
Ratios, 1977 - 1985
Germany
Japan
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Changing Nature of the Global
Bond Market Historically, the U.S. bond market dominated the global
bond market, with the U.S. market representing a keysource of financing for U.S. and foreign corporations.
However, since the expansion of the European Union and
the advent of the Euro-Zone, Europes importance in theglobal bond market as grown. In 2002, the U.S represented 43.7% of the worlds bond market;
the European Union represented 29.4%. By 2010, the U.S. shareof the global bond market had fallen to 34.3% and the European
Unions share had grown to 32.9%. In 2002, the U.S represented 53.8% of the worlds private bond
market; the European Union represented 29.2%. By 2010, the U.S.share of the global private bond market had fallen to 40% and theEuropean Unions share had grown to 38.9%.
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Individual Country Private Bond
Markets; % of Total, 2002 - 2010
53.8
40.0
3.9
8.3
0.0
10.0
20.0
30.0
40.0
50.0
2002 2003 2004 2005 2006 2007 2008 2009 2010
U.S. % of Private
Bonds
Japan % of Private
Bonds
Germany % of Private
Bonds
France % of Private
Bonds
Newly Industrialized
and Emerging % of
Private Bonds
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Bond Market Growth in Europe:
Pre and Post the Euro
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Bond Market Growth in Europe
Since the Introduction of the Euro
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Classifying 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 allsecurities 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 ofnon-residents borrowing in another countrys bond
markets Furthermore, the international bond market consists of two
groups: (1) Foreign Bonds and (2) Eurobonds.
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Domestic Versus International Bond
Market by Country; % of GDP, 2009
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Foreign Bonds: Characteristics Foreign Bonds are bonds issued by a non-resident
and denominated in the currency of the country inwhich it is being placed (i.e., issued). 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 marketshave been in Zurich, New York, and Tokyo.
Zurich and Tokyo because of low market interest rates; theU.S. because of its large market.
Foreign bonds are often swapped out for anothercurrency.
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The Use of the Foreign Bond Market
In contrast to IPO equity financing, where the majority of
U.S. firms exhibit a strong home bias, in bond financing agrowing number of U.S. issuers are relying more on foreignbond markets for funding.
For example: The percent of all U.S. firms issuing bondsdomestically fell from 92% in 1995 to 82% in 2006.
Additionally, the share of non-financial U.S. firms issuingbonds domestically declined from 95% to 83% over thesame period. Thus, U.S. corporates are increasing their funding presence in
the foreign bond markets.
At the same time, the share of European issuers borrowing
in the U.S. bond market dropped from around 20% in 2000to approximately 9% in 2006. Thus, European firms are increasing turning to their own markets
In addition to issuing more equity in their home markets for debtfinancing
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Unique Names for Foreign Bonds
The financial markets
have come up withunusual nicknames forforeign bonds. Theseinclude: 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.
Panda bonds Issued in China.
Kangaroo or Matildabonds Issued in Australia.
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Eurobonds Eurobonds are bonds issued by a non-resident
and denominated in other than the currency ofthe country in which it is being placed. The bonds currency of denomination is referred to as an
offshore currency. Example: Coca Cola issuing a U.S. dollar denominated
bond in Europe.
They are generally issued and sold simultaneouslyin more than one market and thus the advantage ofthe Eurobond market is that issuers can raise largesums of capital from investors all around the world.
Issuers include national governments,
supranational organizations (such as the WorldBank),AAA corporations and global banks. The U.S. dollar is the dominant currency of
denomination for Eurobonds.
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History of the Eurobond Market The first Eurobond (which was also a U.S. dollar
denominated bond) was the July 1963 issue by the ItalianAutostrade (Italian National Highway Authority), led by SGWarburg & Co and issued in London. $15 million; 5.5% coupon; 15 year bonds; listed on the London
and Luxembourg stock exchanges.
By 1972, the market had grown to $5 billion; $42 billion by
1982 and $371 billion by 1995. In the early 1960s, the Eurobond market was mainly a
Eurodollar bond market. Today, the Eurobond market comprises bonds
denominated in all the major currencies and several minor
currencies. For example, in 1996, the Eurobond market included issues
denominated in the Egyptian pound, Polish zloty and Croatiankuna.
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The Main Features of a Eurobond Eurobonds are not regulated by the country of the currency in
which they are denominated. Eurobonds are bearer bonds, i.e., they are not registeredanywhere centrally, so whomever holds (or bears) the bond isconsidered the owner. Bearer status also enables Eurobondsto be held anonymously.
The Eurobond market is largely a wholesale (i.e., institutional
market) with bonds held by large institutions. Pension funds, insurance companies, mutual funds
Since they are denominated in an offshore currency, investorsin euro-bonds assume both credit and foreign exchange risks(if the currency if denomination is other than their homecurrency).
Some publically offered eurobonds trade on stock exchanges,normally in London or Luxembourg. Others are placeddirectly with institutional investors without a listing (privateplacement).
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Rise of the Euro-Bond Market The Eurobond market offers several
advantages for borrowers that may accountfor its rising popularity.
(1) It gives U.S. borrowers access to a wider
range of lenders, enabling them to diversify theirsources of long-term funding.
(2) The market provides a good environment forinternationally active companies to hedge foreign
currency exposures (through offsetting liabilities) (3) finally, through this market companies can
enhance their global profile.
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Nicknames for Eurobonds
Dragons: U.S. dollar denominated bondsissued in Asia.
Shogun: Foreign currency bonds (including
U.S. dollar bonds) issued in Japan
Dim-Sum: Chinese yuan denominated bondissued in Hong Kong.
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Equity Markets
For most of the post WW II years, U.S. equity
markets had routinely attracted the lionsshare of global equity activity, especially frommarkets that were themselves consideredrelatively important (size, liquidity, regulation).
However, following the dramatic evolution inglobalization since the early 1990s, anincreasing number of alternative financial
centers have developed and achieve thelevel of sophistication needed to attract globalequity business.
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Early History of Equity Markets
In 1899, London was the worlds leadingfinancial center, with an estimated 30% of theglobal stock market. The U.S. ranked second with just under 20% but
was gaining momentum. Other Europeancountries held significant market caps, namelyFrance and Germany with 14% and 7%,respectively. (Note only 18 countries had major
stock markets in 1899). By 1970, the U.S. equity markets accounted
for 2/3rds of the worlds total equity market.
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Rise of Foreign Stock Markets
In 1985, the market value of foreign stockmarkets combined exceeded the marketvalue of the U.S. stock market. By 2005, theU.S. share had fallen to 40%, and currently it
is approximately 31% Over this time we have seen an unparalleled rise
in stock markets around the world. Today, almostevery country possess a stock market, and some
with multiple markets. For example: Today India has 23 stock exchanges,
trading over 12,000 companies (Sept, 2011).
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Trends in Global Equity Markets,
2002- 2010
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
2002 2003 2004 2005 2006 2007 2008 2009 2010
%o
fTotal
U.S. % World Equity Market
Japan % World Equity Market
U.K. % World Equity Market
Canada % World Equity Market
Germany % World Equity Market
France % World Equity Market
Rest of the World % World Equity
Market
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But the U.S. Equity Market Still
Dominates: Stock Market
Capitalization, By Country, 2011
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But at the Same Time U.S. Share of
Equity Financing Has Declined
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Which is Represented by a
Declining U.S. Share of Narrowly
Defined (Public Offerings)IPOs
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IPOs by U.S. Companies Done
Entirely Outside of the U.S.
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Cross Listing Equity Shares Cross listing refers to the listing of a company's
common shares on a different exchange otherthan its primary and original stock exchange. Inglobal finance, the term applies to the listing offoreign-based companies on national exchangesother than (and in addition to) its home
exchange. Example of cross listings:
Citigroup currently lists its stock on both the NYSEand the Tokyo Stock Exchange .
Sony Corporation currently lists its shares on theTokyo Stock Exchange, the NYSE and theLondon Stock Exchange.
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Why do Firms Cross List? (1) Improved liquidity: A listing on a more-liquid stock market can potentially
increase a stock's liquidity and produce larger price earnings multiples. Thus, firmswith shares trading in small, less liquid markets may see price benefits from crosslisting in larger secondary markets overseas; thus positive impact on value of thefirm.
(2) Raising capital: Having shares trade in multiple countries increases the ability offirms to raise capital. Cross listing as part of an IPO or secondary offering in theforeign market.
(3) Increasing the firms visibility to potential customers, suppliers andcreditors (e.g., banks and bond markets): Thus, increase sales and expand
funding opportunities. (4) Information quality: A firm's willingness to cross-list its stock on a market withstringent disclosure requirements and strong investor-protection laws can provideoutside investors with information they may need to determine the quality of the firm'saccounting information and financial statements.
(5) Investor protection: This motivation, described in academic research as"bonding," is based on the idea that registration on a US exchange acts as amechanism that voluntarily commits the firm to a higher standard of corporate
governance and investor protection. Bonding therefore might make firms attractive torisk-averse investors who might otherwise be reluctant to invest. (6) Cost of capital benefits: Cross listing may lower a companys cost of capital
through improving liquidity, better corporate governance, and providing direct accessto foreign capital markets. See next slide.
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Impact of Cross Listing on Cost of
Capital (Data: 1970 -1996)Australia Canada U K Europe Asia
Cost of Capital:
Before Cross Listing 13.74% 8.17% 15.56% 8.80% 16.15%
After Cross Listing 12.15% 7.49% 12.91% 8.47% 14.08%
Difference in Basis
Points
-159 -68 -265 -33 -207
Source: Andrew Karolyi, Financial Markets and Institutions,1998.
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Cross Listings for Selected Exchanges
59
77 8087 89
90
99
41
23 2013 11 10
10
10
20
30
40
50
60
70
80
90
100
Singapore
(782)
NYSE
Euronext
US (2312)
London
(2938)
NYSE
Euronext
Europe
(1132)
NASDAQ
(2760)
Deutsche
Brse
(756)
Tokyo
(2293)
Domestic and Foreign Firm Listings; Percent of Total
Firms (#), March 2011
Domestic
Foreign
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History of Cross Listing Dominant host country
listing site (firm listings) 1950s: U.K.: (South Africa
firms) 1960s: France: (U.S. firms) 1970s: U.K.: (U.S. and Irish
firms) 1980s: Japan (U.S. and U.K.
firms) 1990s: U.S. (Canadian and
emerging market firms) 2000s: U.S. (emerging
market firms)
Number of Companies
Cross Listing: 1950s: 114 1960s: 135 1970: 255 1980: 741
1990: 1,350 2000s: 2,784 Total: 5,379* *Number represents gross
listings (thus, not excluding anydelistings which occurred)
Source: (1950s through 1990s)Schill and Sarkisian, Cross-Listing Waves, 2011. WorldFederation of Stock Markets,
Annual Reports, (20002009)
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Distribution of Cross Listings by
Country of Listing: 1950 April 2006Country 1950s 1960s 1970s 1980s 1990s 2000s Total % of
Total
U.S. 5 26 42 263 703 367 1,403 39.1%
U.K. 22 26 63 105 184 71 471 13.1%
Luxembourg 3 5 18 8 133 118 285 7.9%France 22 28 24 64 38 18 194 5.4%
Germany 10 41 129 13 193 5.4%
Switzerland 13 19 28 55 37 14 166 4.6%
Japan 12 110 13 3 138 3.8%Belgium 24 19 24 18 26 11 122 3.4%
Canada 1 1 5 10 23 58 98 2.7%
Total 3,592
Source: Schill and Sarkisian, Cross-Listing Waves, 2011.
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Distribution of Cross Listings by Home
Country of Listing Firm: 1950 April 2006Country 1950s 1960s 1970s 1980s 1990s 2000s Total % of
Total
Canada 16 19 16 177 258 144 630 17.5%
U.S. 49 50 80 181 101 63 524 14.6%
U.K. 2 11 22 65 130 53 283 8.2%Japan 7 55 83 71 18 234 6.5%
Australia 1 3 2 33 102 31 172 4.8%
India 2 1 67 94 164 4.6%
Israel 1 1 20 90 37 149 4.2%S. Africa 18 8 9 10 29 7 81 2.3%
China 16 21 37 1.0%
Total 3,592
Source: Schill and Sarkisian, Cross-Listing Waves, 2011.
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Distribution of Cross Listings by
Industry: 1950 April 2006
Industry 1950s 1960s 1970s 1980s 1990s 2000s Total % of
Total
Electronics 6 12 40 74 178 177 427 11.9%
Financials 3 9 38 95 190 89 424 11.8%
Mining 23 13 16 101 124 89 366 10.2%
Telecom &Media
5 8 7 56 157 82 315 8.8%
ConsumerGoods
9 20 20 64 126 43 282 7.9%
Oil & Gas 10 12 21 65 100 50 258 7.2%
Total 3,592
Source: Schill and Sarkisian, Cross-Listing Waves, 2011.
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Cross Listing on The Tokyo Stock
ExchangeHistory of Foreign Listings End of the Year Data The Tokyo Stock Exchange
first permitted foreigncompanies to list in 1973. 6 companies (5 U.S.
companies) listed that year.
Foreign company listingspeaked in December 1991 at127 (with U.S. companies at78)
By November 2011, thenumber of foreign companies
listed had fallen to 11 (withU.S. companies at 8). http://www.tse.or.jp/english/listin
g/foreign/transition.html
Last foreign company listingwas Citigroup on Nov 5, 2007.
0
20
40
60
80
100
120
140
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2004
2006
2008
Number of Foreign Companies
Number of U.S. Companies
http://www.tse.or.jp/english/listing/foreign/transition.htmlhttp://www.tse.or.jp/english/listing/foreign/transition.htmlhttp://www.tse.or.jp/english/listing/foreign/transition.htmlhttp://www.tse.or.jp/english/listing/foreign/transition.htmlhttp://www.tse.or.jp/english/listing/foreign/transition.html8/14/2019 09 FNCE 4070 Spring 2012 Posted Global Debt and Equity Markets
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NYSE Foreign Company Listings:
1956 2008: Impact of SOX?
Non-U.S. Companies % of Total
0
2
4
6
8
10
12
14
16
18
20
Peak of 18% in 2003; 12% in2008
Foreign companies as a % of total
0
50
100
150
200
250
300
350
400
450
500
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
Peak of 473 in 2002; 410 in2008
Non U.S. Number of Companies
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Demutualization of Stock Exchange Since the turn of this century an increasing number of
stock exchanges have become public traded, for
profit, organizations Historically stock markets were private organizations. However, in February 2001, Germanys stock exchange, the Deutsche
Stock Exchange went public; In July 2001, both the London Stock Exchange and Euronext went
public; On March 8, 2006, the NYSE went public.
Visit the following sites: http://finance.yahoo.com/q?s=NYX&ql=0 http://finance.yahoo.com/q?s=LSE.L&ql=0 http://finance.yahoo.com/q?s=DB1.DE
Implications of publically traded exchanges: Inclusion of exchanges in investor portfolios. Facilitates mergers and take-overs (hostile or friendly) of exchanges.
http://finance.yahoo.com/q?s=NYX&ql=0http://finance.yahoo.com/q?s=LSE.L&ql=0http://finance.yahoo.com/q?s=DB1.DEhttp://finance.yahoo.com/q?s=DB1.DEhttp://finance.yahoo.com/q?s=LSE.L&ql=0http://finance.yahoo.com/q?s=NYX&ql=08/14/2019 09 FNCE 4070 Spring 2012 Posted Global Debt and Equity Markets
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Consolidations Among Exchanges On September 22, 2000, the Euronext Stock Exchange was
formed through the merger of the national stock exchanges of
France, Belgium, and the Netherlands. In December 2001, Euronext acquired the shares of the London International
Financial Futures and Options Exchange (LIFFE), in 2002 it acquired thePortuguese Stock Exchange.
On April 4, 2007, the New York Stock Exchange and Euronext
merged to form NYSE Euronext. On July 7, 2011, the stockholders of NYSE Euronext agreed to a
merger with the Deutsche Exchange Currently, Brussels is examining possible anti-trust issues and has yet to
approve the merger.
On November 11, 2011, the Tokyo Stock Exchange announcedthat they had agreed to purchase the Osaka Securities Exchangefor $1.68 billion. Merger will be completed by January 2013 andcombined company will be called the Japan Exchange Group.
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Stock Exchange Consolidations In 2006 and 2007, NASDAQ attempted hostile
takeovers of the London Stock Exchange. Both takeover attempts were rejected by LSE
shareholders.
Why are exchanges merging?
(1) cost reductions (to the exchangesthemselves through economies of scale).
(2) to expand global capital raising benefits
(IPOs) to corporations and (3) to provide liquidity (turnover) and global
outreach benefits to investors.
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Appendix 1
The Process of Cross Listing Shares
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Methods of Cross Listing
Cross listing can take the form of either a directshare listing or a depository receipt program.
A Depositary Receipt represents ownership ofequity shares in a foreign company. These
receipts are issued against ordinary shares heldin custody in the issuer's home market.
Depository Receipt Programs American Depository Receipt (ADR): arrangement by which
foreign companies cross list on U.S. exchanges. Global Depository Receipt (GDR): arrangement by which foreign
companies (including U.S. companies) cross list on foreignexchanges, other than U.S. exchanges.
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Depository Receipts A depositary receipt is a claim against specified
number of underlying common stock shares. The DR ratio to the underlying share will vary based
upon the local market share price and, in the case ofan ADR, the US share price of other companies insimilar industries.
DRs can be listed (and traded) on a majorexchanges: For example: NYSE, AMEX, NASDAQ in the U.S. and
London, Luxembourg, or Singapore outside of the
U.S.. DRs may also trade in the over-the-counter (OTC)
markets, or be privately-placed.
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American Depository Receipts
The first ADRs issued and traded in the U.S.occurred in 1927 when JPMorgan listed theretail U.K. company, Selfridge's. ADRs were initially seen as a means of reducing the risk
associated with holding shares overseas and reducingthe trading (clearing) times for American investors.
Today companies from around 80 countries haveADR programs in the United States.
Currently, ADR Depositary receipt volumeaccounts for about 15% of the U.S. equity market.
A i D i R i
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American Depository Receipts American Depository Receipts (ADRs):
Certificates that represent ownership of sharesof foreign companies. ADRs can be listed on any U.S. exchange, such as
the NYSE, the American Stock Exchange, orNASDAQ. They can also be privately placed as Rule144A securities.
ADRs trade in the United States just like shares ofdomestic companies, with each ADR representingsome multiple of the underlying foreign shares.
ADR programs are managed by commercial
banks on behalf of foreign companies. In the U.S. the major depository banks (April 2009data) are Bank of New York (1,732 programs)Citibank (322 programs) and JP Morgan (250programs)
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The Price of an ADR The price of an ADR trading on a U.S. stock
market corresponds to the local currency price ofthe foreign stock in its home market, adjusted tothe ratio of the ADRs to foreign company shares.
Thus, the ADR price also reflects the exchange
rate between the two markets. Example:
ADR ratio of 1:2 for a Japanese company (i.e., eachADR represents 2 shares of the underlying stock)
This stock trades in Japanese market at 1,000 yen pershare and the exchange rate is 95 yen to the dollar.
Given this information, this ADR would trade in theU.S. at $21.05 or (1,000 x 2)/95 = $21.05
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What Causes the Price of an ADR
to Change? (1) Changes in the home currency price of the
foreign company. Price risk resulting from changes in the outlook for the
company.
(2) Changes in the overall stock market of the ADRcountry. Systematic risk.
(3) Changes in the exchange rate between the U.S.dollar and the currency associated with the
underlying asset. Everything else equal: A strong foreign currency will increase the price of theADR.
A weak foreign currency will decrease the price of the ADR.
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Depository Receipt Web-Site
The 3 major U.S. banks offering DR
programs with their web sites are as follows: (1) JP Morgan:
http://www.adr.com/
(2) Bank of New York http://www.adrbnymellon.com/
(3) Citibank
http://www.citiadr.idmanagedsolutions.com/www/front_p
age.idms
http://www.adr.com/http://www.adrbnymellon.com/http://www.citiadr.idmanagedsolutions.com/www/front_page.idmshttp://www.citiadr.idmanagedsolutions.com/www/front_page.idmshttp://www.citiadr.idmanagedsolutions.com/www/front_page.idmshttp://www.citiadr.idmanagedsolutions.com/www/front_page.idmshttp://www.adrbnymellon.com/http://www.adr.com/