FIN405A Chapter 6

La Porta et. al 2000

1) Looked at different correlations between foreign direct investment and domestic legal protections ( common law/ civilian monitoring ). 2) Lower costs of capital in emerging markets are more attractive to potential investors.

Direct Investment (II)

1) Reduce volatility of capital flows. ( Asian Emerging Market Crisis ); 2) Large outflows of investors led to dramatic declines in the equity markets --> led to significant devaluation of Asian national currencies. 3) De-regulation can lead to an improvement in equity performance in the long-run. (Trade Barriers, empirically, are bad for trade)

Vote by Proxy

A mechanism that allows a designated party--such as another shareholder, a shareholder representative, or management--to vote on the shareholder's behalf.

Depository Receipts

A security that trades like an ordinary share on a local exchange and represents an economic interest in a foreign company.

Direct Investment

All transactions (purchase, sale, dividends) are in the company's domestic currency rather than the investor's domestic currency.

Types of Stocks

Blue Chip, Income, Growth, Tech, Speculative, Cyclical, and Defensive

Declaration Date

Board announces the next dividend payment. Relatively unimportant except that the dividend is now a liability.

Cumulative Voting

Cumulative voting allows shareholders to cast all their votes for one candidate; Voting method that improves minority shareholders' chances of naming representatives on the board of directors.

Ex-dividend date

Day on which all shares bought and sold no longer come attached with the dividend. Before this date, the stock comes with the dividend. On this date or after, the stock is ex dividend (without dividend).

Mutual Funds

Institutional investor (portfolio manager) that manages regulations for foreign investment ( your interest) rather than direct handling of tax implications and foreign regulation by investor

Restrictions on Direct Investment

Limit on controls domestic regulators may enforce on foreign investors. Operations are limited.

Statutory Voting

One-share, one-vote rule that governs voting procedures in most corporations. Shareholders may cast one vote per share. The result of statutory voting is that those who control over 50% of the shares control the company.

Nonparticipating Preferred Shares

Preferred stock in which the dividend is fixed regardless of any increase or decrease in the issuing firm's profits. ( LESS in the success of the firm )

Noncumulative preferred shares

Preferred stock on which the right to receive dividends is lost for any period when dividends are not declared.

Cumulative preferred shares

Preferred stock on which undeclared dividends accumulate until paid; common stockholders cannot receive dividends until cumulative dividends are paid.

Convertible Preferred Shares

Preferred stock that an owner may exchange for a specified number of shares of common stock.

Participating Preferred Shares

Preferred stock that shares with common stockholders any dividends paid in excess of the percent stated on preferred stock. ( MORE in the success of the firm)

Preferred Shares

Ranks above common stock with respect to payment of dividends and distribution of company's net assets in liquidation. ( typically do not have voting rights)

Common Stock

Represents ownership in a publicly held company. Common stockholders have the right to vote at stockholders' meetings, sell or otherwise dispose of their stock, purchase their proportional share of any common stock later issued by corporation, receive the same dividend if any on each common share of the corporation, share in any assets remaining after creditors and preferred stockholders are paid.

Date of Record

Shareholders who have properly registered their ownership on or before this date will receive the dividend.

Sponsored Depository Receipts

Sponsored is when the foreign company has direct involvement in the issuance of the receipts.; Investors in the DRs have the same rights as direct owners (vote and receive dividends)

Expropriation of Wealth

Stripping a country of its wealth. Foreign investment exodus from countries. Too much control from international investors.

Payment date

The day the dividend checks are mailed.

American Depository Receipts

US dollar-denominated security [sometimes called American depository share (ADS)]

Unsponsored Depository Receipts

Unsponsored is when the foreign company has no involvement with the issuance of the receipts.; Depository purchases shares in the company's domestic market and then issues DRs locally through a broker. ;The depository gets the vote in this case as they are the owners.

Key Distinctions between Debt and Equity

ownership vs. borrowing; YTM (Yield to Maturity) à required rate of return for investors; Shareholders have voting rights.

Types of Voting Rights for Common Shareholders

vote by proxy; statutory voting; cumulative voting