The cost of holding risk is a crucial concept for any corporation to understand. Most financial policy decisions, whether they concern capital structure, dividends, capital allocation, capital budgeting, or investment and hedging policies, revolve around the corporate costs of holding risk. These decisions can be made well only with a thorough understanding of how costly it is to originate and warehouse risk.
This issue is particularly acute for financial firms, since the origination and warehousing of risk constitutes their core value added. For these firms, capital is often their most expensive and important input in production. They deploy capital by holding a large number of financial risk positions that need to be evaluated. Moreover, these positions turn over and are competitively repriced far more often than the physical assets of non-financial firms. Unanticipated shocks to the demand for financial firms’ products can be planned for and actively protected against, unlike those for non-financial firms. For these reasons, financial firms have the greatest need to understand the costs and benefits of holding risk.
We investigate the distribution of trading volume across different venues after a company lists abroad. In most cases, after an initial blip, foreign trading declines rapidly to extremely low levels. However, there is considerable cross-sectional variation in the persistence and magnitude of foreign trading. The ratio between foreign and domestic trading volume is higher for smaller, more export and high-tech oriented companies. It is also higher for companies that cross-list on markets with lower trading costs and better insider trading protection. Domestic trading increases around the cross-listing, and afterwards is negatively correlated with past foreign trading activity. This accords with the “flow-back hypothesis” that declining foreign trading is associated with the gravitational pull of the home market.
Several companies list their shares not only on their domestic exchange but also on foreign stock exchanges –– a fact for which a variety of reasons have been offered and explored (see Karolyi, 1998, Pagano, Röell and Zechner 2002, and Sarkissian and Schill 2004, among others). A motive often advanced for this decision is that a foreign listing facilitates trading by foreign investors and therefore tends to attract them into the ranks of the company’s shareholders. If this is true, then cross-listings should be followed by reasonably large and persistent trading activity in the foreign market.
Over the past ten years, private equity and venture capital have played an increasingly important role in the European economy. Investments by European private equity and venture capital funds have increased by more than six times from €5.5bn in 1995 to a record of €36.9bn in 2004. Correspondingly, the number of companies receiving private equity or venture capital was 5,000 in 1995 and has increased to 7,000 in 2004.
In 2004, two thirds of the €36.9bn invested by European private equity and venture capital players was invested in companies at the buyout stage (€26.6bn), with the remaining €10.3bn invested in companies in the venture stage. As companies at the buyout stage are more mature, the average investment size is normally larger.
