International Equity Financing

Abstract

In 2014, Alibaba, the Chinese e-commerce giant, did an initial public offering of its equity on the NYSE, raising $25 billion in one day. When a company lists its shares on a stock market, it seeks to access capital from a wide pool of investors. Apart from this primary market at the time of an initial public offering, the daily trading of a corporation's shares among investors (the secondary market ) provides an objective, forward-looking valuation of the company's activities. This activity determines the cost of additional equity capital: the more investors are willing to pay for a company's shares, the cheaper will be additional capital when the company issues additional shares. Consequently, everything that affects stock market prices is important for a capital-hungry MNC. (However, we leave a formal discussion of the international cost of capital to Chapter 13.) Another benefit of listing on a public stock exchange is that the presence of a stock market price can be used to align the interests of managers with the interests of shareholders in management compensation schemes. This chapter examines how and why MNCs list their shares on international equity markets. Most MNCs list their shares on the stock exchanges of the countries in which they are headquartered. However, many MNCs also list their shares on stock exchanges located in other countries. For example, in 2015, the total value of shares traded in the stock of BP on the NYSE exceeded $80 billion. Such a large volume for a single company is not unusual for the NYSE. IBM's total NYSE trading volume during 2015 was well over $150 billion, for instance. Nevertheless, BP, which is one of the world's premier oil companies, is headquartered in the United Kingdom, in contrast to IBM, which is a US company. Even though US investors can directly buy BP stock on the UK stock exchange in what is called cross-border trading , BP must find this international (“cross-exchange”) stock listing valuable. Why? After first giving you a tour of the world's stock exchanges and how they work, we explore the advantages and disadvantages of cross-listing. A Tour of International Stock Markets The Size of Stock Markets Exhibit 12.1 indicates that the US stock market capitalization was about 35% of the world's stock market capitalization in mid-2015.