12: Raising Long-Term Financing12-3d INTERNATIONAL SHARE ISSUES
Although the international market for ordinary equity is not, and probably never will be, as large as
the international market for debt securities, cross-border trading and issuance of ordinary equity have
increased dramatically since 1990. Much of this increase can be attributed to a growing desire on the
part of institutional and individual investors to diversify their investment portfolios internationally.
Foreign shares currently account for a small fraction of US institutional holdings and of holdings in other
developed economies, but it is likely that this total will grow in the years ahead.
Besides issuing shares to local investors, corporations have also discovered the benefits of issuing
equity outside their home markets. For example, several top US multinational companies have chosen
to list their stock in half a dozen or more stock markets. Issuing stock internationally broadens the
ownership base and helps a company integrate itself into the local business scene. A local stock listing
increases local business press coverage and also serves as effective corporate advertising. Furthermore,
having locally traded shares can facilitate corporate acquisitions, because shares can then be used as an
acceptable method of payment.American Depositary Receipts
Many non-US companies, including numerous Australian companies like Rio Tinto, have discovered the
benefits of trading their shares in the United States, though they do so differently than do US companies.
The disclosure and reporting requirements mandated by the US Securities and Exchange Commission
have historically discouraged all but the largest foreign firms from directly listing their shares on American
stock exchanges. Instead, most foreign companies tap the US market through American depositary receipts
(ADRs). These dollar-denominated claims issued by US banks represent ownership of shares of a foreign
company’s equity held on deposit by the US bank in the issuing firm’s home country.
ADRs have proven to be very popular with US investors, at least partly because they allow investors
to diversify internationally. In addition, because the shares are covered by American securities laws and
pay dividends in dollars (dividends on the underlying shares are converted from the local currency into
dollars before being paid out), US investors are able to diversify at very low cost. The non-US companies
benefit from expanded sources of funding and expanded markets. For example, via its ADR listing, Rio
Tinto gains exposure to US investors, and potentially increases awareness of its existence and products
among US customers. Because of these factors, the market value and trading volume of ADRs on the
major US stock exchanges grew rapidly in the 1990s. More recently, though, foreign firms increasingly
opt to raise capital abroad rather than in the United States.12-3e SHARE ISSUE PRIVATISATIONS
Anyone who examines international share offerings is soon struck by the size and importance of share
issue privatisations in non-US stock markets. A government executing a share issue privatisation (SIP) will
sell all or part of its ownership in a state-owned enterprise to private investors, via a public share offering.
The words ‘public’ and ‘private’ can become confusing in this context; an SIP involves the sale of shares
in a state-owned company to private investors via a public capital market share offering. Since Britain’s
Thatcher government first popularised privatisations in the early 1980s, there have been privatising
share offerings by more than 100 national governments. These SIPs have raised almost $2.5 trillion.
Australian examples include the privatisation of Commonwealth Bank, Telstra and various power, rail
and airport assets.LO 12.6
American depositary
receipts (ADRs)
Dollar-denominated claims,
issued by US banks, that
represent ownership of shares
of a foreign company’s equity
held on deposit by the US
bank in the issuing firm’s
home countryshare issue privatisation
(SIP)
A government executing one
of these will sell all or part
of its ownership in a state-
owned enterprise to private
investors via a public share
offering