IB 431 Student Responses

Please respond with 150-200 words Student 1 Good Afternoon, By cross-listing and selling its shares on a foreign stock exchange a firm typically tries to accomplish one or more objectives. Briefly explain each of the objectives identified by your authors of our textbook. How does market segmentation impact the effect on share prices from cross-listing on foreign stock exchanges? The main objective for a firm cross-listing and selling its shares on a foreign stock exchange is initially to intended to expand the potential market for the firm’s shares to a large universe of investors. A firm needs to choose one or more stock markets on which to cross-list its shares and sell new equity. Cross-listing enables companies to trades its shares in numerous time zones and multiple currencies. This increases the issuing company’s liquidity and give it more ability to raise capital. Foreign companies that cross-list in the United States of America do so through American depository receipts. When a firm decides to cross-list and sell its shares on a foreign exchange, a firm will typically try to accomplish one or more of the following objectives; “The traditional argument for why cross-listing augments firm value is that it overcomes international investment barriers and thus leads to a reduction in the cost of capital, as the risk premium resulting from the investment barriers dissipates. According to the market segmentation hypothesis, the valuation gain around the cross-listing thus depends on the degree to which the home country is integrated in the world market (Roosenboom 2009).” Because market segmentation is essentially the process of dividing a larger market into clearer segments with similar needs, firms are able to divide foreign investor markets into markets that are easier to access. Gaining access to these markets with a reduced cost of capital, is another objective for many firms that cross-list. As mentioned above, their stocks become more available to foreign investors, which would otherwise have been restricted due to international investment barriers. There are four alternative financial instruments for sourcing equity abroad. Identify and explain one of these techniques. In your answer provide a motivation as to why a firm would wish to choose this particular technique for raising equity abroad. If I am understanding this one correctly, I believe one of the techniques would be private placement. A firm looking to raise equity capital is ultimately in search of an issuance, which could either be an IPO or SPO. This capital is to be utilized for funding and executing the business. When a company cross-lists, it is generally in a specific country market, gaining name recognition, visibility and hopefully preparing the market for an issuance. As our text outlines, the issuance does not need to be public. “A firm, public or private, can place an issue with private investors, which is a private placement (Moffett 2018).” Privately held companies will focus on raising greater quantities of equity at the lowest possible cost (which is privately), while publicly traded companies also aim to attract greater market visibility and reaching larger investor audiences. Investors in private placements can remain passive (Rule 144A investors – sales of securities to qualified institutional ers in the US without SEC registration), or active (investors aim to control and change the firm). Some of the advantages of the private placement instrument is that it allows the firm to choose their own investors, allows the firm to remain a private company, provides flexibility in the amount and type of funding, and it provides a faster turnaround on raising finance than the venture capital markets or public placements. Matt References: Moffett, M. H., Stonehill, A. I., Eiteman, D. K. (2018). Fundamentals of Multinational Finance. [6th Ed.]. Pearson Education. New York, NY Roosenboom, M. A. (2009). The Market Reaction to Cross-Listings: Does the Destination Market Matter? Journal of Banking & Finance. Eramus University. Retrieved on 15 July 2021 from https://static1.squarespace.com/static/531afe04e4b0b17f973f5962/t/531c9a87e4b03e512acb6ba2/1394383495367/Roosenboom+%26+van+Dijk+-+The+market+reaction+to+cross-listings+JBF.pdf (Links to an external site.) Student 2 Hello, 3. There are four alternative financial instruments for sourcing equity abroad. Identify and explain one of these techniques. In your answer provide a motivation as to why a firm would wish to choose this particular technique for raising equity abroad. The four tools responsible for raising equity abroad are: the Initial Public Offering (IPO), the Euroequity Issue, the Directed Public/Private Issue, and the Private Placement. “A directed public issue or directed private issue is defined as one that is targeted at investors in a single country and underwritten in whole or in part by investment institutions from that country.” (Moffett et al., 2018, p. 382). Analyzing one of these tools, the Directed Public/Private Issue in this case, it is possible to conclude that this method is quite advantageous and used by companies that reside in small capital markets. As these companies gain greater proportions in relation to the local market, the Directed Public/Private Issue becomes a great source of capital for them. It is important to note that this does not imply that the issue must be in the currency of the target market, furthermore it is usually combined with a cross-listing on a stock exchange in this market (Moffett et al., 2018, p. 382). 4. By cross-listing and selling its shares on a foreign stock exchange a firm typically tries to accomplish one or more objectives. Briefly explain each of the five objectives identified by your authors of our textbook. How does market segmentation impact the effect on share prices from cross-listing on foreign stock exchanges? Among the objectives of cross-listing and selling its shares on a foreign exchange are to improve the liquidity of its shares, thus making it easier for companies to have capital to invest in their respective futures. Establish a liquid secondary market for shares, so the companies can use such liquidity to acquire other companies in the foreign market, that is, to expand their businesses. Enhance companies’ visibility and image, as international companies get more attention from the whole world, attracting new investors and gaining the trust of more consumers. Finally, by cross-listing and selling its shares on a foreign exchange the companies increase their share price (Moffett et al., 2018, p. 391). Source: Moffett, M. H., Stonehill, A. I., Eiteman, D. K. (2018). Fundamentals of multinational finance. 6th Ed. New York: Pearson Education. Requirements: complete Improve the liquidity of its shares and support a liquid secondary market for new equity issues in foreign markets. Increase its share price by overcoming mispricing in a segmented and illiquid home capital market. Increase the firm’s visibility and acceptance to its customers, suppliers, creditors, and host governments. Establish a liquid secondary market for shares used to acquire other firms in the host market and to compensate local management and employees of foreign subsidiaries. Investor Protection: Companies who commit to cross-listing also must commit to a higher standard or corporate governance. Investors in return will feel more sage to invest, as their investments are protected.

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