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LOS f: Explain why companies choose to be listed abroad, and calculate the cost difference between buying shares listed abroad and buying ADRs

Large institutional investors prefer to purchase shares of a foreign company in its local stock market primarily because of:

A)	reduced administrative costs and lower foreign exchange currency risks.

B)	better execution of prices and reduced trading risks.

C)	lower costs and greater liquidity.

Generally it is more costly for large institutional investors to purchase American Depository Receipts (ADRs) than to directly purchase the securities in the local markets since the local market may provide more liquidity.

Belzinger Beer is an international brewery listed on the Paris Stock Exchange and has its American Depository Receipts (ADR) shares that trade on the U.S. NASDAQ. John Toga, CFA, a portfolio manager for the Europa Fund, wishes to purchase shares in Belzinger. The current exchange rate is USD1.15 for one euro. The current price on the Paris Stock Exchange is 34.68 euros, while the ADRs are trading at USD40.00. Brokerage commissions are 0.50% commission in Paris, while commissions in the U.S. are 0.75%. If John wishes to purchase shares in Belzinger at the lowest cost, what exchange should he trade on?

A)	U.S. NASDAQ, for a savings of $0.22 per share.

B)	Paris, for a savings of $0.22 per share.

C)	Paris, for a savings of $5.15 per share.

First, determine the cost of trading in the ADRs on the U.S. NASDAQ. USD40.00 + commissions (USD40 × 0.75% = USD0.30) = USD40.30 per share.

Second, determine the cost of trading on the Paris Stock Exchange: EUR34.68 + commissions (EUR34.68 × 0.50% = EUR0.17) = EUR34.85 per share. Convert to U.S. dollars at the current exchange rate = EUR34.85 × 1.15 = USD40.08

The savings would be greater in the Paris exchange. (USD40.30 ? USD40.08) = USD0.22 per share.

Arbitrage opportunities generally do not exist often because American Depository Receipts (ADRs) trade at:

A)	higher prices to the underlying foreign company’s shares and are highly correlated to U.S. markets in rising markets.

B)	parity to the underlying foreign company’s shares, except for higher foreign exchange currency costs.

C)	parity to the underlying foreign company’s shares, except for the additional administrative costs for listing on a U.S. exchange.

ADRs often trade at parity with very small differences mainly attributable to higher administrative costs. Foreign currency differences are generally factored in the ADRs.

Which of the following is a good reason for a U.S. company to list its shares on a foreign stock exchange?

A)	Avoid SEC registration and listing requirements.

B)	Create additional trading opportunities for the company’s investment bankers.

C)	Provide additional advertising opportunities for a U.S. company’s products.

There are four reasons why a company may want to list its securities abroad.

A company may desire a broader diversification of its capital across international boundaries.
Concern of take-over acquisitions by domestic competitors is minimized by global diversification of the company’s shares.
In the case where a company wants to raise additional external financing, exposure to broader capital markets provides access to additional resources.
Listing a company abroad provides additional advertising opportunities for the company’s products and services.

The Universal Pipe Corporation (UPC) wishes to list its common shares on the Frankfurt Stock Exchange. UPC does not currently have any business in Germany. Which of the following is least likely a valid reason for UPC to list its securities on the Frankfurt exchange?

A)	Listing a company abroad provides additional advertising opportunities for the company's products and services.

B)	International diversification makes the firm a more attractive takeover candidate for domestic companies.

C)	Being on the exchange will provide broad diversification for its shares with a large German investor base.

The following are reasons why a company may want to list its securities abroad:

A company may desire a broader diversification of its capital across international boundaries.
Concern of take-over acquisitions by domestic competitors is minimized by global diversification of the company’s shares.
In the case where a company wants to raise additional external financing, exposure to broader capital markets provides access to additional resources.
Listing a company abroad provides additional advertising opportunities for the company’s products and services.

LTD Corporation is concerned that Aquire, Inc. may wish to launch a hostile take-over of LTD. Which of the following strategies is a good defensive measure?

A)	Purchase a foreign company in a different market place to create a broader investor base.

B)	Concentration of shares among certain financial institutions who favor company changes.

C)	Broad global ownership diversification of a company’s shares can minimize a hostile take-over.

One good reason why a company may want to list its securities abroad is concern of take-over acquisitions by domestic competitors. This can be minimized by global diversification of the company’s shares.