International Equity Markets
Chapter Thirteen
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Chapter Outline
• The World’s Equity Markets: A Statistical
Perspective
• Market Structure, Trading Practices, and
Costs
• Trading in International Equities
• International Equity Market Benchmarks
• iShares MSCI
• Factors Affecting International Equity Returns
13-2
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Market Capitalization
• At year-end 2018, total market capitalization of the
80 organized stock exchanges tracked by the World
Federation of Exchanges (WFE) stood at $74,667b
– Five largest stock exchanges at end of 2018:
• New York Stock Exchange (NYSE)
• NASDAQ
• Japan Exchange Group
• Shanghai Stock Exchange
• Hong Kong Exchanges and Clearing
13-3
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Market Liquidity
• A liquid stock market is one in which investors can
buy and sell stocks quickly at close to the current
quoted prices
– A measure of liquidity for a stock market is the turnover
ratio, calculated as the ratio of stock market transactions
over a period of time divided by the size, or market
capitalization, of the stock market
– Generally, the higher the turnover ratio, the more liquid the
secondary stock market, indicating ease in trading
– In 2018, many national stock exchanges had relatively
high turnover ratios, with close to 40% of the exchanges in
excess of 30% turnover on average
13-4
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Market Concentration
• Investors would have difficulty diversifying their
investments in concentrated markets, those
dominated by a few large firms
– Concentrated financial markets also represent poor
access of firms to the stock market
– A common measure of stock market concentration is the
ratio of the market capitalization of the largest ten
companies divided by the total market capitalization
• In 2018, the largest ten companies on the Budapest Stock
Exchange accounted for a whopping 95.46% of the total
market capitalization of the stock exchange
• Alternatively, also in 2018, the London Stock Exchange had
a much lower concentration ratio of 29.38%
13-5
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Market Structure, Trading Practices,
and Costs
• Secondary equity markets of the world serve two
major purposes:
1. Provide marketability
2. Provide share valuation
• Investors who buy shares from the issuing firm in
the primary market may not want to hold them
indefinitely
• The secondary market allows those share owners
to reduce holdings of unwanted shares and
purchasers to acquire the stock
13-6
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Market Structure, Trading Practices,
and Costs (Continued)
• When conducting a trade in the secondary market,
public buyers and sellers are represented by an
agent, known as a broker
– Order submitted to broker may be a market or limit order
• Market order is executed at the best price available in the
market when the order is received, that is, the market price
• Limit order is an order away from the market price that is
held in a limit order book until it can be executed at the
desired price
13-7
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Market Structure, Trading Practices,
and Costs (Concluded)
• Secondary markets may have different designs that
allow for the efficient trading of shares
– Generally, a secondary market is structured as a dealer or
agency market
• In a dealer market, the broker takes the trade through the
dealer, who participates in trades as a principal by buying
and selling the security for his own account
• In an agency market, the broker takes the client’s order
through the agent, who matches it with another public order
– Both dealer and agency structures exist in the U.S.
13-8
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EXHIBIT 13.3
Characteristics of Major Equity Trading Systems
13-9
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Market Consolidations And Mergers
• Approximately 80 major national stock markets
– Western and Eastern Europe once had more than 20
national stock exchanges where at least 15 different
languages were spoken
– Possibly, over time a European stock exchange will
eventually develop; however, a lack of common
securities regulations, even among the countries of
the European Union, hinders this development
• Today, stock markets around the world are
under pressure from clients to combine or buy
stakes in one another to trade shares of
companies anywhere, at a faster pace
13-10
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Trading in International Equities
• During the 1980s, world capital markets began a
trend toward greater global integration due the
following factors:
1. Investors began to realize the benefits of
international portfolio diversification
2. Major capital markets became more liberalized
3. New computer and communications technology
facilitated efficient and fair securities trading
4. MNCs realized the benefits of sourcing new capital
internationally
13-11
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Cross-Listing of Shares
• Cross-listing 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
13-12
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Cross-Listing of Shares (Continued)
• A firm may cross-list shares for many reasons:
1. Provides a means for expanding the investor base for a
firm’s stock, thus potentially increasing its demand
2. Establishes name recognition of the company in a new
capital market
3. Brings the firm’s name before more investor and consumer
groups
4. May be a signal to investors that improved corporate
governance is forthcoming (if cross-listing into developed
capital markets with strict securities regulations and
information disclosure requirements)
5. May mitigate the possibility of a hostile takeover of the firm
13-13
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Yankee Stock Offerings
• Yankee stock offerings are sold directly to U.S.
investors by foreign companies
– Since the beginning of the 1990s, many foreign companies,
Latin America in particular, have listed their stocks on U.S.
exchanges to prime the U.S. equity market for future
Yankee stock offerings
– Three factors appear to be fueling the sale of Yankee stocks
1. Push for privatization by many Latin American and Eastern
European government-owned companies
2. Rapid growth in economies of developing countries
3. Large demand for new capital by Mexican companies
following approval of NAFTA
13-14
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American Depository Receipts
• Foreign stocks can be traded directly on a national
stock market, but frequently they are traded in the
form of a depository receipt
– Depository receipts (DR) market has grown significantly
over the years
– In 2018 alone, $15b was raised through 49 DR offerings
• An American Depository Receipt (ADR) is a
receipt representing a number of foreign shares
that remain on deposit with the U.S. depository’s
custodian in the issuer’s home market
– First ADRs began trading in 1927
13-15
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Advantages of ADRs
• Investment advantages of ADRs include the
following:
– ADRs are denominated in dollars, trade on a U.S.
exchange, and can be purchased through the investor’s
regular broker
– Dividends received on the underlying shares are
collected and converted to dollars by the custodian
– ADR trades clear in 3 business days, as do U.S. equities
– ADR price quotes are in U.S. dollars
– ADRs (except Rule 144A issues) are registered
securities that provide for the protection of ownership
rights, whereas most underlying stocks are bearer
securities 13-16
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Advantages of ADRs (Continued)
• Investment advantages of ADRs include the
following:
– An ADR investment can be sold by trading the
depository receipt to another investor in the U.S. stock
market, or the underlying shares can be sold in the local
stock 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
U.S. investors
– ADR holders give instructions to the depository bank as
to how to vote the rights associated with the underlying
shares
13-17
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American Depository Receipts
(Continued)
• There are two types of ADRs:
– 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 U.S. stock markets
– Unsponsored ADRs were usually created at the request
of a U.S. investment banking firm without direct
involvement by the foreign issuing firm
• Consequently, the foreign company may not provide
investment information or financial reports to the
depository on a regular basis or in a timely manner
13-18
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13-19
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EXHIBIT 13.6
Types of ADRs

Global Registered Shares
• Merger of Daimler Benz AG and Chrysler
Corporation in November 1998 created
DaimlerChrysler AG, a German firm
• Merger simultaneously created a new type of equity
share, called Global Registered Shares (GRSs)
– GRSs are traded globally, unlike ADRs
– GRSs are fully fungible – a GRS purchased on one
exchange can be sold on another
– Main advantages of GRSs over ADRs 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
13-20
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Empirical Findings on Cross-Listings
and ADRs
• Several empirical studies document important
findings on cross-listing in general and on ADRs
in particular
• Listed below are a few examples:
– Ammer et al. (2012) found that the single most
important determinant of the amount of U.S.
investment a foreign firm receives is whether the firm
cross-lists on a U.S. exchange
– Sarkissian and Schill (2016) established that cross-
listing occurs in waves at the host market, home
market, and industry levels
13-21
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Empirical Findings on Cross-Listings
and ADRs (Continued)
• Jayaraman, Shastri, and Tandon (1993) interpreted their
results as evidence that an ADR listing provides the
issuing firm with another market from which to source
new equity capital
• Results of Berkman and Nguyen (2010) indicate that
cross-listed firms from countries with poor corporate
governance and/or weak accounting standards gain from
improvements in domestic liquidity in the first two years
after cross-listing but tend to diminish later
13-22
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International Equity Market
Benchmarks
• As a benchmark of activity or performance of a
given national equity market, an index of the
stocks traded on the secondary exchange (or
exchanges) of a country is used
– Indexes constructed and published by MSCI are an
excellent source of national stock market performance
– MSCI presents return and price level data for 23
national stock market indexes from developed
countries, 27 emerging market countries, and 34
frontier markets that cover investment opportunities
beyond traditional developed and emerging markets
13-23
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International Equity Market
Benchmarks (Continued)
• MSCI also publishes a market-value-weighted
World Index representing large and mid-cap
stocks across 23 developed markets
– Includes approximately 2,600 stock issues of major
corporations in the world
• MSCI publishes several regional indexes
– The European, Australasia, Far East (EAFE) Index, the
North American Index, the Far East Index, several
Europe Indexes, the Nordic Countries Index, the Pacific
Index, and the Emerging Markets Index
13-24
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iShares MSCI
• BlackRock Inc., an international investment
management firm, operates iShares MSCI as
vehicles to facilitate investment in country,
regional, and world funds
– iShares MSCI are baskets of stocks designed to
replicate various MSCI stock indexes
– Currently dozens of iShares MSCI
– Exchange-traded funds, with most trading on NYSE
AMEX
– Low-cost, convenient way for investors to hold
diversified investments in several different countries
13-25
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Factors Affecting International Equity
Returns
• Which factors influence equity returns?
– Macroeconomic factors
– Exchange rates
– Industrial structure
13-26
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Macroeconomic Factors
• Two studies have tested the influence of various
macroeconomic variables on stock returns
1. Solnik (1984) found that international monetary
variables had only weak influence on equity returns
in comparison to domestic variables
2. Asprem (1989) found that changes in industrial
production, employment, and imports, the level of
interest rates, and an inflation measure explained
only a small portion of the variability of equity returns
for ten European countries, but that substantially
more of the variation was explained by an
international market index
13-27
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Exchange Rates
• Adler and Simon (1986)
– Found changes in exchange rates generally explained
a larger portion of the variability of foreign bond
indexes than foreign equity indexes
• Eun and Resnick (1988)
– Found that the cross-correlations among major stock
markets and exchange markets are relatively low, but
positive
• Gupta and Finnerty (1992)
– Concluded that exchange risk is generally not priced
13-28
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Industrial Structure
• Studies examining the influence of industrial
structure on foreign equity returns are
inconclusive
13-29
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