Equity Markets, Valuation, and Analysis

Discussion Questions and Answers (Chapters 2–24)

CHAPTER 2 OWNERSHIP STRUCTURE AND STOCK CLASSES

1. Compare and contrast depositary receipts and cross-listed stocks.

   Depositary receipts and cross-listed stocks both enable investors to purchase shares of a foreign corporation in their home market. Both mechanisms facilitate ownership in foreign institutions for investors. Cross-listed stocks represent direct listings by the corporation on a foreign stock exchange. Depositary receipts represent certificates of ownership in a company, which correspond to shares held by an intermediary financial institution. Cross-listed shares are always sponsored by the listing entity, whereas depositary receipts may or may not have the corporation's sponsorship. A financial institution can create a depositary receipt against the shares of a corporation without consulting the corporation. Moreover, because the financial institution holds the shares directly and then sells receipts representing those shares, depositary receipts are an indirect ownership vehicle.

2. Discuss the benefits and drawbacks for investors in tracking stocks.

   Tracking stock allows a corporation to offer shares for subdivisions of the parent organization, thereby increasing investor choice. If a conglomerate has a mature, slow-growing division and a high-growth division, it may offer tracking stock for the high-growth division. Investors may then choose whether to invest in the parent organization or invest solely in the high-growth ...