312 PART 2 Important Financial Concepts
proxy battle
The attempt by a nonmanagement
group to gain control of the man-
agement of a firm by soliciting a
sufficient number of proxy votes.
American depositary receipts
(ADRs)
Claims issued by U.S. banks
representing ownership of
shares of a foreign company’s
stock held on deposit by the U.S.
bank in the foreign market and
issued in dollars to U.S.
investors.
proxies from shareholders is closely controlled by the Securities and Exchange
Commission to ensure that proxies are not being solicited on the basis of false or
misleading information. Existing management generally receives the stockholders’
proxies, because it is able to solicit them at company expense.
Occasionally, when the firm is widely owned, outsiders may wage a proxy
battleto unseat the existing management and gain control. To win a corporate
election, votes from a majority of the shares voted are required. However, the
odds of a nonmanagement group winning a proxy battle are generally slim.Dividends
The payment of dividends to the firm’s shareholders is at the discretion of the
corporation’s board of directors. Most corporations pay dividends quarterly.
Dividends may be paid in cash, stock, or merchandise. Cash dividends are the
most common, merchandise dividends the least.
Common stockholders are not promised a dividend, but they come to expect
certain payments on the basis of the historical dividend pattern of the firm.
Before dividends are paid to common stockholders, the claims of the government,
all creditors, and preferred stockholders must be satisfied. Because of the impor-
tance of the dividend decision to the growth and valuation of the firm, dividends
are discussed in greater detail in Chapter 13.International Stock Issues
Although the international market for common stock is not so large as the inter-
national market for bonds, cross-border issuance and trading of common stock
have increased dramatically in the past 20 years.
Some corporationsissue stock in foreign markets.For example, the stock of
General Electric trades in Frankfurt, London, Paris, and Tokyo; the stocks of AOL
Time Warner and Microsoft trade in Frankfurt; and the stock of McDonald’s
trades in Frankfurt and Paris. The London, Frankfurt, and Tokyo markets are the
most popular. Issuing stock internationally broadens the ownership base and also
helps a company to integrate itself into the local business scene. A listing on a for-
eign stock exchange both increases local business press coverage and serves as
effective corporate advertising. Having locally traded stock can also facilitate
corporate acquisitions, because shares can be used as an acceptable method
of payment.
Foreign corporations have also discovered the benefits of trading their stock
in the United States. The disclosure and reporting requirements mandated by the
U.S. Securities and Exchange Commission have historically discouraged all but
the largest foreign firms from directly listing their shares on the New York Stock
Exchange or the American Stock Exchange. For example, in 1993, Daimler-Benz
(now Daimler Chrysler) became the first large German company to be listed on
the NYSE.
Alternatively, most foreign companies tap the U.S. market through American
depositary receipts (ADRs).These are claims issued by U.S. banks representing
ownership of shares of a foreign company’s stock held on deposit by the U.S.
bank in the foreign market. Because ADRs are issued, in dollars, by a U.S. bank
to U.S. investors, they are subject to U.S. securities laws. Yet they still give
investors the opportunity to diversify their portfolios internationally.