Equities Essay ⋆ Business Essay Examples ⋆ EssayEmpire

The term equity means different things in different contexts. In the business world, equity usually refers to stocks or other securities that represent ownership rights (to a company or some other business entity). A person possessing any amount of equity in a company owns the corresponding portion of that company. If a legal person (a person or a business entity) owns more than 50 percent of the outstanding shares of a company, then the person possesses a controlling share of that company. A company owning a controlling share of another company is called the parent company while the latter is called the subsidiary company. Equity can also mean the difference between the value of an asset (for example, a house) and the debt (mortgage) amount the owner still owes.

In the context of margin trading, equity is the value of the margin account less the amount borrowed from the brokerage firm. Margin trading is trading of securities using a margin account with a brokerage firm. Margin trading allows the investor to invest in securities with borrowed money from the brokerage house and thereby leverage their investment (magnify both the gains and losses from the investment).

In the context of global business, however, equity primarily refers to the stocks or other securities representing ownership rights to companies across the nations. The trading of global equity has created global capital flow across countries, and has created a single world financial market that truly spans all the economies. The economic impact of a single global financial market has been enormous. The growing businesses of the world now can raise capital faster than ever and the investors have the widest range of investment pool available to them. But it has also given rise to problems like capital flight, which has devastated different economies from time to time.

In a globalized world, a person can own equities in multiple foreign business entities. Foreign stocks are traded in all the major stock exchanges in the world. Global equity trading increased sharply beginning in the 1980s. Equity trading across borders has allowed companies to be cross-listed and dual-listed, has enabled the formation of parent subsidiary relationships between foreign companies, and has given rise to unique business structures like that of Renault-Nissan Alliance.

Cross-Listing Or Co-Listing Companies

Shares of many large companies are traded in multiple stock exchanges, so that investors from different countries can have easy access to their securities. For example, Fortis, a banking, insurance, and investment management company that has a presence in Europe and North America, is listed on three stock exchanges: Euronext Brussels (Ticker symbol FORB), Euronext Amsterdam (FORA), and Luxembourg stock exchanges (FOR). Getting listed on a stock exchange in a country other than the country of incorporation has certain business advantages. Many large Canadian companies are listed both on the Toronto Stock Exchange and the New York Stock Exchange (NYSE). Getting listed on the NYSE has helped these Canadian companies to expand in the large U.S. market. The disadvantage of cross-listing is, of course, the extra work necessary to adhere to the regulations (financial reporting) of different countries.

It is important to note at this point, however, that a foreign company’s security can be traded between investors through other channels. For example, in the United States, investors can buy and sell foreign companies’ stocks in over-the-counter trading (process of directly trading equities as opposed to trading through a stock exchange). Many banks like JP Morgan Chase issue instruments like ADR (American Depositary Receipt) and GDR (Global Depositary Receipt) that enable investors to buy foreign securities while bypassing the hassle of international transactions. Buying ADR, GDR, or similar other instruments essentially means buying the ownership rights to the underlying (foreign) securities; investors can buy them and receive their dividends in U.S. dollars.

Dual-Listed Companies

While cross-listed companies are those that are listed on more than one stock exchange, a dual-listed company (DLC) is a special corporate structure consisting of two listed companies, with separate bodies of shareholders sharing the ownership of the corporate entity. DLC works like a merger (a process of forming a new company by merging two existing companies) in some ways, but both the original companies continue to exist. The companies in a DLC have separate bodies of shareholders, but they share all the risks and rewards of the entire corporate structure in a fixed proportion. Dual-listing allows companies from different countries to collectively do business without having to undergo any merger or acquisition process. In this way, dual-listing facilitates integration of business operations of two companies where business environmental forces (national pride, commitment to corporate identity, etc.) do not support mergers or acquisitions between the two companies.

Unilever, the giant multinational corporation that owns many of the world’s consumer product brands, is a dual-listed company. Unilever consists of Unilever NV in Rotterdam (Netherlands) and Unilever PLC in London (United Kingdom). Both Unilever companies have the same directors and effectively operate as a single business. Similarly, Thomson Reuters, a leading media company of the world, is also a dual-listed company consisting of Thomson Reuters Corporation, a Canadian company, and Thomson Reuters PLC, a United Kingdom company.

Cross-Border Corporate Alliances

Global equity flows have allowed parent-subsidiary relationships between foreign companies, facilitating vertical integration of business operations across the border. For example, the U.S. soft drink giant Coca Cola has assumed control over various Chinese bottlers and distillers over the course of its several-decade business presence in China. Besides conventional parent-subsidiary relationships, global equity trading has enabled unique corporate alliance structures like Renault-Nissan Alliance Group.

Renault-Nissan Alliance is a group of two global carmakers (Renault and Nissan) that are linked by cross-shareholding. Renault S.A., a French company, owns 44.4 percent shares of Nissan, a Japanese company, which in turn owns a 15 percent share of Renault. Both the companies, especially Nissan, which was in deep financial crisis before the formation of the alliance, have benefited from the alliance. In some aspects the Renault-Nissan Alliance works much like a merger since it has allowed integration in operations and management of the two companies (Carlos Ghosn is the CEO of both the companies). But the alliance does not face the legal and corporate challenges associated with a merger.

Capital flight has been a problem in various countries’ capital markets. Aggressive foreign investors often initially flood a given country’s capital market with fresh investment capital for the time being. However, when in the presence of some triggering phenomena (e.g., political turmoil, economic worries, etc.), these investors often pull back their investment in droves and the capital market of that specific country faces cataclysmic crisis. This is commonly referred to as capital flight. It is hoped that better international regulations will alleviate such problems.

Bibliography:

Jaideep Bedi, Anthony Richards, and Paul Tennant, “The Characteristics and Trading Behavior of Dual-listed Companies,” Reserve Bank of Australia Research Discussion Paper No. 2003-06 (2003);
John Braithwaite and Peter Drahos, Global Business Regulation (Cambridge University Press, 2000);
Bahattin Buyuksahin, Michael S. Haigh, and Michel A. Robe, Commodities and Equities: A “Market of One”? (Commodity Futures Trading Commission, 2008);
Kristin Forbes, Why Do Foreigners Invest in the United States? (National Bureau of Economic Research, 2008);
Michael R. King and Dan Segal, “International Cross-listing and the Bonding Hypothesis,” Bank of Canada Working Paper No. 2004-17 (2004);
Mark Mobius, Equities: An Introduction to the Core Concepts (Wiley, 2007);
Matthew Tagliani, The Practical Guide to Wall Street: Equities and Derivatives (Wiley, 2009).

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