International Dimensions of Long Term Planning

Integration and the associated globalization of capital markets have opened up a vast array of new sources and forms of financing.  Today’s corporate treasures of large multinational as well as domestic corporations can often access foreign capital markets as easily as they can access those at home.  We consider the international aspects of raising capital via stocks, bonds, parallel loans between corporations, credit swaps between banks and corporations, and loans from host governments and development banks.  We shall see the importance of exchange-rate risk, taxes, country risk, and issue costs for the form of financing chosen.  The principal international financial question concerning equity financing is in which country stocks should be issued.  A second question concerns the legal vehicle that should be used for raising equity capital; should this be done by the parent company or by a subsidiary, and if by a subsidiary, where should it be registered?. Clearly, shares should be issued in the country in which the best price can be received, net of issuing costs.  If for the time being we assume the costs of issue to be the same everywhere, the country in which the best price Can be received for the shares is the country in which the cost of equity in terms of the required expected rate of return for investors is lowest.  There is no concern about risk from the equity issuer’s perspective, other than to the extent that through the equity buyer’s concern for systematic risk, the riskiness of shares issued affects the required expected rate of return and hence the price received for the shares. If international capital markets are integrated, the expected cost of equity financing will be the same in every country.  That is, the expected return on the company’s shares will be the same everywhere.  If capital markets are segmented, the expected returns on the same security could be different markets.