EQUITY SECURITIES

In addition to the debt instruments in the local debt markets as well as the Eurodollar and Eurobond markets, the equity-capital market is another source of financing. The three largest international stock exchanges in the world in terms of market capitalization are the Tokyo, New York, and London stock exchanges. Market capitalization is the total number of shares of stock listed on the stock exchange times the market price per share. Prior to 1987 the New York market was by far the largest in the world. In 1984 Wall Street controlled 55 percent of the world's equity market, three times as much as Tokyo and eight times as much as London.12 From 1984 to 1986, however, the gap narrowed quickly. By 1986 the market capitalization of U.S. equities was down to 43 percent of the world total, whereas the Japanese had increased from 20.1 percent to 29.1 percent. The soaring yen and rapid increase in Japanese equity prices caused Tokyo to surpass New York in the spring of 1987 to become the world's largest equity market.13 As noted in Table 9.1, the Japanese continued to hold the lead in 1989.
The U.S. market is important for U.S. and foreign companies looking for equity capital. A partial explanation for the popularity of the U.S. market is the size and speed of offerings. For example, the large pension funds in the United States can take large blocks of stock at relatively low transaction costs. In the past few years, pension-fund managers have looked at foreign stocks as a good form of portfolio diversification. Many companies go to the United States because the depth and breadth of the market enable them to raise funds there easily. In a study of the 300 stocks traded the most internationally, only two Japanese stocks and six U.S. stocks were listed in the top 50. This reflects the depth and liquidity of the markets in both Japan and the United States and the fact that Japanese and U.S. companies can raise most of their capital in their own countries rather than having to rely on foreign markets.