lecture 9 (1)

Question 1

market consolidations and mergers

Answer 1

western and eastern europe once had more than 20 national stock exchanges where at least 15 different languages were spoken

Today, stock markets around the world are under pressure from clients to comine or buy stakes in another to trade shares of companies anywhere at a faster pace

Question 2

During the 1980s, world capital markets began a trend toward greater global integration. There are 4 factors

Answer 2

Investors began to realize the benefits of international portfolio diversification

Major capital markets became more liberalized

New computer and communications technology facilitated efficient and fair securities trading

M N Cs realized the benefits of sourcing new capital internationally

Question 3

Investors began to realize the benefits of international portfolio diversification

Answer 3

Investors try to estimate the risk (volatility) and return (expected return) of individual securities

But also try to discover their relations with each other; their covariances

Lowly correlated assets may increase the reward risk ratio of the portfolios (sharpe ratio)

Question 4

Major capital market became more liberalized

Answer 4

Neoliberalism and marketism -> financialization

Idea market can allocate the resources better than govt

individuals are better at maing economic choices

De-regulation

Question 5

Cross listing

Answer 5

refers to a firm having its equity shares listed on one or more foreign exchanges in addition to the home country stock exchange

Not a new concept but amount of cross listing has exploded in recent years due to increased globalization

MNCs often cross list their shares, but non MNCs may choose to cross-list as well

Question 6

A firm may cross list shares for many reasons

Answer 6

Expand the investor base for a firms stock thus potentially increasing its demand –> potentially increasing stock prices and liquidity

Establish name recognition of the company in a new capital market

Bring the firms name before more investor and consumer groups

Signal to investors that improved corporate governance is forthcoming (if corss-listing into developed capital markets with strict securities regulations and information disclosure requirements)

May mitigate the possility of a hostile takeover of the firm

Question 7

Yankee stock offerings

Answer 7

are sold directly to us foreign investors by foreign companies

Question 8

Why did latin american firms fuel the sale of yankee stocks in the 90s?

Answer 8

Push for privatization/financialization by many latin american and eastern european government owned companies

Rapid growth in economies of developing countries

Large demand for new capital by mexican companies following approval of NAFTA

Question 9

Investment advantages of ADRs include

Answer 9

ADRS are denominated in dollar, trade on US exchange and can be purchased through the investors regular broker

Dividends received on the underlying shares are collected and converted to dollars by the custodian

ADR trades clear in three business days, as do US equities

ADRs are registered securities that provide for the protection of ownership rights, whereas most underlying stocks are bearer securities

An ADR investmen can be sold by trading the depository receipt to another investors in the US market or the underlying shares can be sold in the local market

ADRs frequently represent a multiple of the underlying shares, rather than a one-for-one correspondence, to allow the ADR to trade in a price range customary for US investors

ADR holders give instructions to the depository bank as to how to vote the rights associated with the underlying shares

Question 10

American depository receipt (ADR)

Answer 10

is a receipt representing a number of foreign shares that remain on deposit with the us depositorys custodian in the issuers home market

Question 11

Two types of ADRs

Answer 11

sponsored

unsponsored

Question 12

Sponsored ADR

Answer 12

Sponsored ADRs are created by a bank at the request of the foreign company that issued the underlying security

ONly type that can be listed on the US stock markets

Question 13

Unsponsored ADRs

Answer 13

Unsponsored ADRs were usually created at the request of a US investment banking firm without direct inovlvement by the foreign issuing firm

Consequently, the foreign company may not provide investment information of financial reports to the depository on a regular basis or in a timely manner

Question 14

Globaly registered shares

Answer 14

GRSs are traded globally, unlike ADRs

GRSs are fully fungible - a GRS purchase on one exchange can be sold on another

Question 15

Main advantages of GRSs over ADRs

Answer 15

Appear to be that all shareholders have equal status and direct voting rights, while main disadvantage of GRSs appears to be the greater expense in establishing the global registrar and clearing facility

Question 16

what factors influence quity returns

Answer 16

Macroeconomic factors

exchange rates

industrial factors

market factors

Question 17

Macroeconomic factors

Answer 17

Many studies have tested the influence of various macroeconomic variables on stock returns

Hjalmarsson used over 20000 monthly observations from 40 countries and found that interest rate variables can predict stock returns in developing markets

Question 18

Exchange rates (which factors influence equity returns)

Answer 18

Eun and Resnick (19 88)
* Found that the cross-correlations among
major stock markets and foreign exchange
markets are relatively low, but positive.
Bartram and Bodnar (2012)
* Firms in emerging markets were affected by
foreign exchange rate risk to a greater extent
than firms in developed markets.
Dunne et al. (2010)
* Exchange rate, together with
macroeconomic order flows, can explain
about 60 percent of the daily variation in the
S&P return and 40 percent of the C A C40
return fluctuations.

Question 19

Industrial factors ( which factors influence equity returns)

Answer 19

In general studies suggest taht industry factors have become more important in recent years.
Phylaktis and Xia (2006) found that since 1999
there has been a shift toward industry effects
on international equity returns.
The degree of the shift varies across regions
and is more pronounced in Europe and North
America, whereas country effects dominate in
Asia-Pacific and Latin America.

Question 20

market factors (factors that influence equity returns)

Answer 20

Many studies examined the ability of market
factors such as size, value, and momentum to
explain global stock returns.
In general, studies suggest that industry factors
have become more important in recent years.
* Fama and French (2012) found strong value
premiums in all regions studied and strong
momentum returns in all regions except
Japan.
* Chaieb et al. (2021) found that factors such as
market, size, value, momentum, and
profitability have higher average returns.
However, local factors, not world or global
factors, are still important.