Global cost of capital response

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Global integration has given many companies access to new sources of funds, which are cheaper for their companies in their domestic markets. Companies can achieve this by “increasing the market liquidity of its shares and by escaping from segmentation of its home capital market” (Eiteman, Stonehill, & Moffett, 2016). This allows these companies to take on more long-term projects for their companies as well as being able to invest more money into improvements and expansions for the company (Eiteman, Stonehill, & Moffett, 2016). The availability of capital and the cost of capital for companies in their home markets is directly linked to the liquidity and segmentation within the market.  Companies that are located in a country with illiquid capital markets will have the better opportunity of getting lower global cost and higher capital. Companies located in highly illiquid markets will most likely have a higher cost of capital with limited capital.

The dimensions of a strategy to capture the lower cost and greater availability of capital are based off of the firm-specific characteristics, the market liquidity of firm’s securities, and the effect of market segmentation on a firm’s securities and cost of capital. In the dimension of firm-specific characteristics, firms that are in the local market access shows that the firm’s securities only appeal to the domestic investors. Within the global market access, it shows that a firm’s securities are appealing to international portfolio investors. In the dimension of market liquidity for firm’s securities, firms that are in the local market access show that illiquid domestic securities market and have limited international liquidity. Within the global market access, it shows that the firm would have a highly liquid domestic market and broad international participation. In the dimension of the effect of market segmentation on a firm’s securities and cost of capital, firms that are in the local market access have segmented domestic securities market that prices shares according to domestic standards. Then in the global market access, firms have access to the global securities market that prices shares according to international standards. When the cost of capital is high and the capital is not as available, segmentation is the outcome. A segmented market comes about when the government puts constraints on the market. Firm’s that are in a segmented market can get relief by “sourcing its debt and equity abroad” to be able to get lower capital costs, the better liquidity of shares, and a large capital budget (Eiteman, Stonehill, & Moffett, 2016). The firm’s having a lower cost of capital will depend on if the company has an optimal financial structure, what their systematic risks are, how much available capital that they have, and if they have an optimal capital budget.

Jess

Eiteman, D.K., Stonehill, A.I., & Moffett, M.H. (2016). Multinational business finance, (14th ed.). Upper

                Saddle River, NJ: Pearson Education, Inc. 

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As a company grows and seeks to compete in the international marketplace, it will need access to more capital or cheaper capital than is generally available in their home country. As a result a company needs to develop a strategy for accessing the low cost and great availability of capital in the international financial markets ranging from international bond placements to euroequity issues on multiple stock exchanges. In order to determine the best strategy for their needs a company has to establish what their “desired and target capital structure” is before considering floating capital outside its home country (Eiteman, Stonehill, & Moffett, 2016). Before considering entering the international capital financial market a company should have already exhausted all available domestic capital, though this maybe difficult in countries that have illiquid capital markets. If the company is not well known outside of its home country it will have to start by issuing international bonds in countries in less reputable  markets that will help to develop the company’s international reputation. After a while and once their reputation is established in these less reputable  international bond markets, the company can start issuing bonds in their target country’s market with the eventual goal of issuing equity in the international market.

Even after issuing bonds in their target country, a company will have to be listed and possible issue new stock in less reputable equity markets to again build up its reputation, this within the international equity marketplace. At this point the company will want to consider whether it wants to issue new equity shares in the markets that it is already listed in as a way to continue to develop its reputation or to seek a listing in more reputable equity markets and their target equity market. It would not be advisable to issue new equity holdings in the less reputable market and be listed in the target market at the same time, as it may lead to a disruption in the company’s desire and targeted capital structure. A listing in a foreign stock exchange does not involve the issuance of shares in multiple markets, while a issuance on a foreign exchange will require the issue of new equity stockholdings. Listing in foreign equity markets are done through depositary receipts, which are “issued by banks to represent the underly shares of stock that are held in trust at a foreign custodian bank” (Eiteman, Stonehill, & Moffett, 2016). While a company’s stockholder may not want it have multiple IPOs/SPOs after they are listed on a foreign stock exchange because of the overall impact can be reduced by the creation of a subsidiary in the foreign capital market that will issue the IPO or to convince existing stockholders that the additional stock issuances will lead to increased access to capital with the potential of greater returns on existing shares.

References

Eiteman, D. K., Stonehill, A. I., & Moffett, M. H. (2016). Multinational Business Finance. Boston: Pearson.