SOCIAL SCIENCES INSTITUTE
BUSINESS ADMINISTRATION DEPARTMENT
ATTRACTIVENESS OF THE BOSNIAN STOCK MARKET
Comparing Bosnian, Croatian, Macedonian and German stock markets; focusing on size, diversity, volume, liquidity, risk and return
Master Thesis
Mirza Avdagić Student No: 1450Y42104
Supervisor: Prof. Dr. Özgür Çengel
Istanbul, 2017
3 Acknowledgment
By most accounts my life should have been over before it even began. Before I was Mirza I was a small number besides a percentage sign. I came into this world three months early and the doctor told my mother that in all likelihood I would probably make a hasty exit as well. He was wrong. I suppose it was that same attitude, the one that made me over eager to get this party started that also kept fighting in those early, intense moments of my life. I've been fighting ever since.
After two years in United World College (UWC) in Mostar and four years in the US, living and studying in Turkey was very challenging. Different culture and new language presented another milestone I had to achieve in my life.
Writing the dissertation was not an easy task. Having a full time job in Bahrain and working on the thesis simultaneously was in times very challenging but towards the end very enjoyable.
Most importantly, I would like to thank my supervisor Dr. Özgür Çengel, who cared so much about my work, and who always responded to my questions and queries so promptly. This journey would be completely different and more challenging without his support and guidance. I just want you to know that I really appreciate everything you have done for me. Thank you!
4 Abstract
The study seeks to evaluate the attractiveness of Bosnian stock markets and determine whether consolidation of SASE and BLSE would increase the overall attractiveness of the Bosnian stock market. The current studies on capital markets of Bosnia and Herzegovina are very limited. Most studies focus on comparing the performance of Bosnian stock markets to large international stock markets from the United States, Germany and the United Kingdom. Research studies that focus on Bosnian stock markets are shallow and focus on the functionality of the stock exchanges in general. The aim of this study is to assess the attractiveness of stock markets in Bosnia and find whether consolidating Sarajevo and Banja Luka stock exchanges would make the Bosnian stock market more attractive.
Knowing that investors have the opportunity to invest in more than one market, it is important to have a fair understanding of the assessment criteria for the stock market. Listing standards, fees and regulatory environment are important factors to consider when selecting a stock exchange. However, as important, if not more so, are factors such as size, diversity, volume, liquidity, risk and return (or together “Attractiveness Factors”). Stock market’s Attractiveness Factors are essential part in determining company’s valuation and play an important role in investors’ decision-making process.
To determine the attractiveness, using the stock market Attractiveness Factors (i.e. size, diversity, volume, liquidity, risk and return), the study compares Bosnian stock markets with Croatian, German and Macedonian (or the “Focus Markets”). The study analyzes the composition of the Focus Markets and their main indexes providing the support for Sarajevo and Banja Luka stock exchange consolidation.
The outcome of the study contributes to the understanding of Bosnian capital market and stock exchange Attractiveness Factors. Moreover, it emphasizes on the benefits of larger stock markets, ultimately providing support for stock market consolidation of the small exchanges.
Key Words: Stock Market, SASE, BLSE, ZSE, FSE, MSE, Bosnia and Herzegovina, Croatia, Macedonia, Germany, Consolidation.
5 Özet
Çalisma Bosna Hersek borsasının cazipligini ve Saraybosna ve Banja Luka borsalarının birleşmesi durumunda Bosna borsasının daha çekici olabilirliği sorunu değerlendirmektedir.
Borsa seçiminde listeleme standardı, ücretler ve mevzuat önemli faktörlerdir. Ancak, bunlar kadar önemli diğer faktörler de boyut, çesitlilik, hacim, likitide, risk ve geri dönüş (veya birlikte
“Caziplik Faktorleri”). Caziplik Faktorleri şirket değerlendirmesinin temel parçasıdır ve yatırımcının karar verme sürecinde önemli rol oynamaktadir.
Borsanın ne kadar cazip oluduğuna karar vermek icin, Caziplik Faktorunu kullanarak, çalişma Bosna Hersek Borsasını Hırvatistan (“ZTE”), Almanya (“FSE”) ve Makedonya (“MES) (veya “Odak Marketler”) ile karşılaştırmaktadır. Çalışma Odak Marketlerin yapısını ve ana indekslerini kullanarak Bosna Hersek borsasını analiz etmektedir.
Ana Kelimeler: Borsa, SASE, BLSE, ZSE, MSE, Bosna Hersek, Hirvatistan, Makedonya, Almanya
6 Table of Contents
Acknowledgment ... 3
Abstract ... 4
Özet ... 5
Table of Contents ... 6
List of Tables ... 8
List of Figures ... 8
Abbreviations ... 9
I.INTRODUCTION ... 10
A. Motivation of the study:... 10
B. Problem statement: ... 10
C. Research questions: ... 11
D. The scope of the current studies: ... 11
E. Master thesis organization: aim & purpose ... 12
1.0 Bosnia and Herzegovina Country Background ... 13
1.1 Government of Bosnia... 13
1.2 Demographics of Bosnia ... 14
1.3 Economy of Bosnia... 15
2.0 Bosnian Stock Market Overview ... 19
2.1 Sarajevo Stock Exchange ... 19
2.1 Banja Luka Stock Exchange (BLSE) ... 22
1) The RS Stock Exchange Index (BIRS) ... 22
2) The RS Investment Funds Index (FIRS) ... 23
3.0 Benchmark Countries and Indices background ... 25
3.1 Croatia ... 26
3.2 Macedonia ... 28
3.3 Germany ... 30
II. THEORITICAL FRAMEWORK ... 32
1.0 The Concept of Stock Exchange... 32
1.1 Capital Markets ... 32
1.2 Why Stock Market ... 33
7
2.0 Attractiveness of the Stock Market ... 36
A. Size & Diversity ... 36
B. Volume ... 38
C. Liquidity ... 39
D. Risk ... 41
E. Regulations ... 41
F. Return ... 42
III. RESEARCH METHODOLOGY ... 43
1.1 Research approach and research philosophy: ... 43
1.2 Primary Data: ... 43
1.3 Secondary Data: ... 44
1.4 Reliability of results and evaluation: ... 44
IV. RESEARCH FINDINGS & DATA ANALYSIS ... 46
1.0 Primary Data ... 47
A. Interviewee: Mr. Abu Bakar Chowdhury ... 47
B. Interview ... 48
2.0 Secondary Data ... 50
A. Stock Market Size ... 50
B. Diversity ... 51
C. Volume & Liquidity ... 54
D. Risk and Return ... 56
V. CONCLUSION ... 59
1.1. Research Contribution ... 59
1.2. Finding Summary ... 59
1.3. Areas of Further Research ... 62
VI. REFERENCE ... 63
Database: ... 63
Books: ... 63
Journals: ... 64
Websites (Web): ... 65
8 List of Tables
Table 1: Members of SASX-10 ... 21
Table 2: BLSE Listing Requirements: ... 22
Table 3: Members of BIRS - Source: Bloomberg ... 23
Table 4: Members of FIRS ... 24
Table 5 Members of CROBEX 10 ... 27
Table 6: Members of MIB10 ... 29
Table 7: Stock Market Attractiveness Factors ... 36
Table 8: Market Capitalization USD Billion ... 50
Table 9: Stock Market Turnover Ratio ... 54
Table 10: Turnover ratio Frankfurt Stock Exchange ... 55
Table 11: Turnover ratio of SASE, BLSE, SZE, and MSE ... 56
Table 12 Historical Performance ... 57
Table 13: Stock Exchange Risk Profile ... 58
List of Figures Figure 1: Government structure of Bosnia ... 14
Figure 2: Population of Bosnia ... 15
Figure 3: Government Debt and Inflation ... 16
Figure 4: Gross Domestic Product of Bosnia ... 16
Figure 5: FDI as % of GDP ... 17
Figure 6: Historical Performance of SASX-10 ... 20
Figure 7: Historical Performance of SASX-30 ... 22
Figure 8: Historical Performace of BIRS ... 23
Figure 9: Historical Performance of FIRS ... 24
Figure 10: Historical Performance of CROBEX 10 ... 27
Figure 11: Historical Performance of MIB10 ... 29
Figure 12: Historical DAX30 ... 31
Figure 13: Weight of the largest and three largest industries around the world ... 37
Figure 14: Sector weightings around the world ... 38
Figure 15: Volume Indicator ... 39
Figure 16: Indices Sector Breakdown ... 53
Figure 17: Historical Performance of DAX ... 57
Figure 18: SASX-10, BIRS, BROBEX 10, and MIB 10 Market Performance ... 57
9 Abbreviations
Attractiveness Factors Size, Diversity, Volume, Liquidity, Risk and Return
BAM or KM Convertible Mark
BOSNIA Bosnia and Herzegovina
BOSNIAN STOCK MARKET Includes both SASE and BLSE
BIRS Republic of Srpska Stock Exchange Index
BLSE Banja Luka Stock Exchange
CROBEX 10 Croatian Stock Exchange Index 10 DAX 30 German Stock Exchange Index 30
EUR Euro
Federation Federation of Bosnia and Herzegovina FIRS Republic of Srpska Investment Funds Index Focus Markets Bosnia, Croatia, Macedonia and Germany
FSE German Stock Exchange
GDP Gross Domestic Product
IPO Initial Public Offering or Listing
LSE London Stock Exchange
MIB10 Macedonian Stock Exchange Index 10
MSE Macedonian Stock Exchange
NYSE New York Stock Exchange
RS Republic of Srpska
SASE Sarajevo Stock Exchange
SASX-10 Sarajevo Stock Exchange Index 10 SASX-30 Sarajevo Stock Exchange Index 30
UK United Kingdom
UNDP United Nations Development Program
US United States of America
USD United States Dollar
ZSE Zagreb Stock Exchange
10 I.INTRODUCTION
A. Motivation of the study:
The aim of this study is to question whether Bosnia and Herzegovina needs two stock exchanges, SASE and BLSE (collectively “Bosnian stock market”). Unfortunately, the country is deeply divided by religion, nationality, ideology, politics and economy. In order to thrive, this study argues that economic interest should be a priority and a common theme for everyone. Despite living abroad for the past 9 years, it is my most sincere wish to help the country and hopefully change it for the better.
Stock market has been my passion for many years and it is the field that I understand very well.
This is the only topic that came to my mind when I thinking about the ideas for my thesis. This thesis is the combination of my passion for the stock markets and love for my country; and, there is no greater motivation than that.
B. Problem statement:
Stock market is extremely important from the standpoint of obtaining money for operations and expansion of businesses. However, the importance of stock market attractiveness and efficiency does not concern Bosnian political leadership. Lack of political interest is proven by the fact that Bosnia has two inefficient and unattractive stock markets.
The study argues that large, unlike small, stock markets are more attractive and have positive effects on the overall attractiveness of the country. Thus, hypothetically speaking, merging of small stock markets should improve the overall attractiveness of a market. Currently, the world is going through the phase of capital consolidation. Numerous examples of consolidation benefits provide a valid reason for merging Bosnian stock markets. The consolidation should not stop in Bosnia, it should include other countries in the region, ultimately creating the single market for Bosnia, Croatia, Serbia, Montenegro and Slovenia. Such market would increase the overall attractiveness of the region and provide many benefits for the Balkan economy.
11 Understanding the purpose and the drivers of a successful capital market is essential factor for a country that seeks to improve its attractiveness. Small countries with limited size economies have a chronic market liquidity problem. The study aims to provide support for a stock market consolidation by emphasizing the benefits of the larger stock markets. The US, EU and other economic unions are example of how working together can create value, attract investments and increase the benefits for everyone.
C. Research questions:
Assuming that large stock markets are more attractive implies that consolidation of small markets would improve their attractiveness. In this regard, the study seeks to evaluate the attractiveness of Bosnian stock markets and verify that consolidation of SASE and BLSE would increase the overall attractiveness of Bosnian capital market. In order to validate this hypothesis, the study will seek to answer the following research question:
What is the level of attractiveness of Bosnian stock markets and would the consolidation of SASE and BLSE improve the overall attractiveness of Bosnian capital market? - In addition, the aim of this study is to:
1. Define capital markets and provide an overview of Bosnian stock markets.
2. Provide reasoning for Bosnian stock market consolidation.
3. Compare Bosnian stock markets focusing on size, diversity, volatility, liquidity, risk, and return.
4. Determine the level of attractiveness of Bosnian stock markets when compared to Croatian, Macedonian and German markets (the “Focus Markets”).
5. Conclude whether merging Bosnian stock markets would improve the attractiveness of Bosnian capital market.
D. The scope of the current studies:
Research studies about capital markets of Bosnia and Herzegovina are very limited. Most studies focus on comparing the performance of Bosnian stock markets to large international stock
12 markets from the United States (“US”), Germany and the United Kingdom (“UK”). Research studies that focus on Bosnian stock markets are shallow and focus on the functionality of stock exchange in general. Furthermore, many studies analyze the performance of individual companies and the possibility of including Bosnian companies into an investment portfolio.
Currently, there are no studies on the attractiveness of Bosnian stock markets or the benefits of potential consolidation.
E. Master thesis organization: aim & purpose
The main purpose of this project is to determine the level of attractiveness of Bosnian stock markets. Knowing that investors have the opportunity to invest in more than one market, it is important to have a fair understanding of the stock market assessment criteria. By analyzing attractiveness criteria emphasizing the benefits of larger stock markets, the study aims to provide support for stock market consolidation.
The thesis is organized in the following manner:
Chapter I outlines the scope of the study and provides a background information about Bosnia, Bosnian stock markets and benchmark countries (Germany, Croatia, and Macedonia).
Chapter II covers theoretical overview of the stock markets and Attractiveness Factors.
Chapter III presents primary and secondary data, methodologies and theories.
Chapter IV analyses findings from Chapter III.
Chapter V outlines the conclusion of the study and recommendations for future studies.
13 1.0 Bosnia and Herzegovina Country Background
Bosnia and Herzegovina (“Bosnia”) is located in Southeastern Europe, bordering the Adriatic Sea, Croatia, Serbia and Montenegro. The country's main natural resources include coal, iron and hydropower. The country's government is an emerging federal democratic republic, with its capital located in Sarajevo. Within Bosnia’s recognized borders, the country is divided into Federation, 51% of the territory, and the Republika Srpska or “RS” - 49% of the territory (The World Factbook – Web 1).
After the signing of the Dayton peace agreement, ending the Bosnian war, the international community has set up very complicated and expensive government structure. Bosnia’s governance structure levels are outlined below:
Two entities, RS and the Federation,
Ten cantons within the Federation;
Brčko District; and
147 municipalities.
In the immediate post-war period of the 1990’s and early 2000’s the international community stabilized the country by employing a number of political development and security instruments.
During this period, there was a noticeable progress in Bosnia, i.e. the creation of institutions, establishment of administrative frameworks, the reconstruction and rehabilitation of homes and infrastructure, as well as the return of refugees and displaced persons to their pre-war homes.
1.1 Government of Bosnia
The government of Bosnia consists of the Council of Ministers, the Parliamentary Assembly and the House of People. The Council of Ministers is the highest executive authority in in the country.
It consists of 10 members including nine ministers and one chairman. The Parliamentary Assembly is the highest legislative body of Bosnia. It consists of two chambers including the House of People and the House of Representatives. The House of People is made up of 15 delegates, of which five Bosniaks and five Croats from the Federation and the remaining five members are appointed by the National Assembly of the RS. The House of Representatives
14 consists of 42 members, who are elected directly through the general elections every four years.
28 members are from the Federation, and 14 from the RS. The head of the House of Representatives and the two deputies, who rotate the roles, must be of different nationalities.
The government of Bosnia is decentralized, where at every government level (i.e. entities, cantons, district and municipalities) each political unit has their own governing body – resulting in more than 850 elected state officials. The country has 13 prime ministers, 14 legislatures, more than 150 ministers, 5 presidents, and 3 constitutional courts. Consequently, the government expenses account for approximately 60% of the country’s budget. Bosnian Government is, most probably, the world’s most complicated and inefficient system of governance. The structure of Bosnia government is shown in the Figure 1 (DEI – Web 2).
Figure 1: Government structure of Bosnia
Source: The Government of Bosnia
1.2 Demographics of Bosnia
As of 2013, the population of Bosnia stood at 3.5 million. The three ethnic groups constituting population are Bosniaks, Serbs and Croats. According to 2013 census, the ethnic breakdown includes 51% Bosniaks, 30% Serbs, 14% Croats and 5% other. Additionally, 54% of the population is Muslim, 30% Serb Orthodox, 14% Roman Catholic, 1% Protestant, and 1% other religions. At
15 the 1991 census, Bosnia had a population of 4.47 million, which dropped to 3.8 million by 1996 (World Population Review – Web 3). The effects of the war were devastating as shown in the Figure 2.
Figure 2: Population of Bosnia
Source: Bloomberg
Bosnia has 3 official languages; Bosnian, Croatian, and Serbian – which are essentially the same.
As part of the former Yugoslavia, Bosnia had a highly-developed and educated population.
However, the war created a "brain drain", where many Bosnians left the country searching for work in North America, Europe and Australia.
1.3 Economy of Bosnia
From 1945 to 1990, as part of the overall economic plan of Yugoslavia, the focus of Bosnian economy was on agriculture, military (given its strategic geographic location within Yugoslavia), mining and power industries. During this time, the companies hired more labor force than it was necessary, creating high inefficiency and unproductive workforce.
During the Bosnian war (1992-1995), most of the economy and infrastructure was damaged or destroyed, leading to the enormous growth in unemployment. As the consequence of the war, Bosnia has been facing two serious economic problems i.e. rebuilding destroyed and ruined infrastructure, and completing the process of transition from socialism to capitalism. After the war, with large foreign investments and international aid, the economy has made significant progress. The country has managed to keep its macroeconomic stability by keeping its inflation
3.50 4.00 4.50 5.00
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Millions
B&H Population
16 and debt levels low (Figure 3) and pegging the domestic currency (“Convertible Mark or BAM”) against the Euro.
Figure 3: Government Debt and Inflation
Source: Bloomberg
Over the last decade, according to theUnited Nations Development Program (“UNDP”), Bosnia has achieved progress in a many areas. The country’s GPD has grown more than 6% annually, reaching c. EUR 18 billion in 2016. Such GDP growth led to the increase in the standard of living and reduction in poverty level. The Figure 4 depicts Bosnia’s GDP breakdown by sector (Indexmundi – Web 4).
Figure 4: Gross Domestic Product of Bosnia
Agriculture sector: farming, fishing, and forestry.
Industry sector: mining, manufacturing, energy production, and construction.
Service sector: government activities, communications, transportation, finance, and all other private economic activities that do not produce material goods.
Source: Bloomberg
The country’s foreign trade deficit has been decreasing gradually, but still remains sizeable. The foreign debt is kept at a moderate level and the inflation rate remained low (Figure 3). Bosnia’s
17 dependence on international aid has also decreased considerably but is still present, as is the dependence on remittances by Bosnians living abroad. According to Eurostat, in 2016, Bosnia received US$2.1 billion in international remittance (equivalent to 11.3% of the country’s GDP).
During the last several years, Bosnian economy has been facing number of challenges. The economy has been experiencing liquidity issues, as the companies cannot accumulate enough capital, due to late payments by their counterparties, to pay for their own expenses.
Furthermore, widespread corruption and complicated bureaucratic system has created unfavorable business environment for the domestic producers. Key economic issues include low level of production, especially export-oriented, excessive imports and a large trade deficit.
As shown in the Figure 5, there is a reduction in the inflow of the Foreign Direct Investments (“FDI”), a record drop was recorded in 2010. The lack of the foreign investment is reflected in the economy through an army of unemployed, which reached the c. 550,000 people (c. 40% of the total active workforce). The drop in foreign investments is a result of failed economic policy and accumulated political problems of the country.
Figure 5: FDI as % of GDP
Source: Bloomberg
Bosnian economy has a high level of informal employment, and a high rate of youth unemployment (45-50%). According to UNDP, informal unemployment rate stood at 29%, while the official unemployment rate was recorded at 46.1% (UNDP – Web 5).
0 3 6 9 12 15
Percentage(%)
18 Bosnia is the 107Th largest export economy in the world and the 48Th most complex economy according to the Economic Complexity Index (ECI). In 2016, Bosnia and Herzegovina exported
$5.31B and imported $7.16B, resulting in a negative trade balance of $1.85B. The top exports of Bosnia include car seats, raw aluminum, leather footwear, refined petroleum and vehicle parts (OEC – Web 6).
19 2.0 Bosnian Stock Market Overview
The trade of all securities (i.e. stocks and bonds) in Bosnia is conducted through two exchanges located in Sarajevo and Banja Luka. Both exchanges are working in harmony and are regulated by the same regulatory principle. The Sarajevo Stock Exchange (“SASE”) is the primary exchange for the institutions and companies from the Federation, while the Banja Luka Stock Exchange (“BLSE”) is the primary exchange for the RS. A detailed overview of the respective stock exchanges is outlined in the following sub-sections.
2.1 Sarajevo Stock Exchange
SASE was founded on September 13th, 2001. It has two main segments as follows:
a) The Official Quotation; and b) The Free Market.
The Official Quotation is the segment where the country’s highest-quality companies are traded (blue chip companies). In order to be accepted into the Official Quotation, the company must meet certain criteria, as per below:
The company must operate in accordance with the regulations of the Federation;
The sum of core capital and the reserve funds of the company must be a minimum of 2 million euros);
The company must have at least 3 years of audited financial statements;
The company must have at least 25% of the shares floating;
The company must have a minimum of 150 shareholders.
Listing on the Official Quotation brings many benefits for the issuer. Given that company employs prudent financial and transparency policies, and investors have confidence in the management team of the company, the company may be able raise additional finance by issuing new shares.
20 The Free Market is the segment of the SASE with fewer strict requirements. The companies in the Free Market are divided in the following segments:
Free market sub-segment 1 (FM1) - includes the most liquid companies on the Free Market, that have a minimum free-float of 25% or the minimal market capitalization of 1 million euros;
Free market sub-segment 2 (FM2) - includes companies that are regularly traded but do not fulfill FM1 requirements;
Free market sub-segment 3 (FM3) - includes companies that are not regularly traded and do not fulfill the reporting requirements;
Sub-segment of shares in the procedure of bankruptcy – includes companies that are in the bankruptcy proceeding.
The most important indices on the SASE are the Sarajevo Stock Exchange Index 10 (”SASX-10”) and the Sarajevo Stock Exchange 30 Index (“SASX-30”).
1) The Sarajevo Stock Exchange Index 10
SASX-10 is the main index on SASE. It depicts the price movement of the largest companies in the market, ranked by market capitalization and frequency of trading. Following is SASX-10 historical chart.
Figure 6: Historical Performance of SASX-10
Source: Bloomberg 0
1000 2000 3000 4000 5000 6000 7000
Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15
Index
21 SASX-10 is a benchmark index for SASE. It is a market capitalization weighted index, where the influence of any company included in the index is limited at 20%. Companies included in SASX-10 meet the following criteria:
A company is ranked in the SASE top 10 by market capitalization.
The frequency of trading of company’s shares is at least 70% of the trading days in any given year.
A company is not in bankruptcy proceedings.
Following table includes companies included in SASX-10 index:
Table 1: Members of SASX-10
Company Index Weight
(%) Shares Price
(EUR)
Index Cap
(EUR)
JP Elektroprivreda BOSNIA 20.07 2,421,712 9.1545 11,306,477
BH Telecom dd 19.57 2,294,253 9.5064 11,123,144
Fabrika Duhana Sarajevo 15.28 770,234 22.95 9,015,204
Bosnalijek dd 14.71 3,191,734 5.253 8,550,751
JP Elektroprivreda HZHB 11.85 735,356 17.034 6,388,288 Tvornica Cementa Kakanj 7.04 637,306 11.5005 3,737,962
IK Banka dd Zenica 6.51 239,590 30.09 3,676,724
Energoinvest dd Sarajevo 3.30 3,874,713 0.9639 1,904,766
Hidrogradnja dd Sarajevo 1.16 1,866,184 0.51 485,394
Enker dd Tesanj 0.51 198,406 2.856 288,990
Source: Bloomberg (December 2015)
2) The Sarajevo Stock Exchange Index 30 (SASX-30)
SASX-30 serves as a benchmark for the Primary Free Market sub-segment 1 of SASE. SASX-30 is an equally weighted index, where each participant has the same influence on the index trend, regardless of the market capitalization. Only companies that are listed on the Free Market sub- segment 1 can be included in SASX-30. The Figure 7 depicts historical movement of SASX-30 index.
22 Figure 7: Historical Performance of SASX-30
Source: Bloomberg
2.1 Banja Luka Stock Exchange (BLSE)
BLSE was founded on May 9th, 2001 by eight banks and one trading company. BLSE has two listing segments i.e. the Stock Exchange Listing and the Free Market, with trading conducted on separate rules. The requirement for listing on the Stock Exchange Listing and Free market are outlined in the Table 2.
Table 2: BLSE Listing Requirements:
Key eligibility criteria Stock Exchange
Listing
Free Market
Minimum free float 15% 15%
Minimum Capitalization EUR 2.5 million EUR 1.5 million Audited Historical financial information Three years Two years
Annual financial report Required Required
Corporate Governance Code Required n/a
Number of shareholders At least 50 At least 50
Source: BLSE
The most important indices on BLSE include BIRS and FIRS, as described in the following sections.
1) The RS Stock Exchange Index (BIRS)
BIRS is BLSE’s main index. It depicts the price movement of the largest companies listed on BLSE, ranked by market capitalization and frequency of trading. It is a market capitalization weighted
800 900 1000 1100 1200 1300
April-09 April-10 April-11 April-12 April-13 April-14 April-15
Index
23 index, where the influence of any company included in the index is limited at 20%. The Figure 8 depicts BIRS’s historical chart.
Figure 8: Historical Performace of BIRS
Source: Bloomberg
BIRS, like SASX-10, is a weighted index, determined by the company’s market capitalization.
Unlike SASX-10, the number of companies included in the BIRS varies from five to thirty, depending on how many companies comply with the conditions for inclusion. As of December 2015, BIRS includes 20 members. The Table 3 outlines 10 BIRS members with the highest market capitalization.
Table 3: Members of BIRS - Source: Bloomberg
Company Index Weight
(%)
Shares Price
(EUR)
Index Cap
(EUR)
Telekom Srpske 28.82 60,585,363 1.63 50,364,612
Hidroelektrane Na Drini 15.49 154,682,609 0.343 27,058,629 Hidroelektrane na Trebisnjici 14.56 134,814,338 0.37 25,439,466 Nova Banka AD Banja Luka 12.62 70,863,294 0.61 22,045,571 Hidroelektrane Na Vrbasu 4.53 35,824,669 0.433 7,911,162 ZTC Banja Vruica AD Teslic 4.30 28,309,803 0.52 7,507,760
RiTE Gacko AD Gacko 2.79 13,298,595 0.072 488,324
RiTe Ugljevik AD Ugljevik 2.62 89,600,091 0.1 4,569,605
Boksit AD Milici 2.27 11,099,138 0.701 3,968,053
Hemijska Industrija Destilacije 1.96 23,228,364 0.289 3,423,629 2) The RS Investment Funds Index (FIRS)
FIRS is free float cap weighted price index. Only investment funds that fulfill selection criteria can be included in FIRS. The Figure 9 depicts FIRS’s historical chart.
0 1000 2000 3000 4000 5000 6000
May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15
Index
24 Figure 9: Historical Performance of FIRS
Source: Bloomberg
The number of investment funds that meet BLSE conditions and that are included on the official stock exchange dictate the number of funds included in FIRS. FIRS was introduced on August 1, 2004. The Table 4 outlines the members of FIRS (as of December 2015).
Table 4: Members of FIRS
Company Index Weight
(%)
Shares Price
(EUR)
Index Cap
(EUR)
ZIF Zepter Fond AD Banja Luka 41.70 7,448,639 7.3 27,731,283
ZIF Kristal Invest Fond 13.08 3,224,829 5.29 8,700,266
Euroinvestment Fond 11.63 1,082,447 14.01 7,734,192
ZIF Invest Nova Fond AD Bijeljina 6.46 187,191,287 0.045 4,296,040 Polara Invest Fond AD Banja Luka 5.07 1,679,212 3.94 3,374,209 ZIF VIB Fond AD Banja Luka 4.56 1,987,956 2.99 3,031,434
ZIF Aktiva Invest Fond 4.05 1,321,822 4 2,696,517
ZIF BLB - profit ad Banja Luka 3.95 1,724,564 2.99 2,629,788
ZIF Jahorina Koin AD Pale 2.93 19,696 1.94 19,487
ZIF Bors invest fond ad Banja Luka 2.81 1,263,637 2.9 1,868,919
ZIF VB fond AD Banja Luka 1.81 152,609 1.55 120,637
ZIF Privrednik AD Banja Luka 1.06 1,079,344 1.28 704,596 Balkan Investment Fond ad Banja 0.88 1,151,882 1 587,460
Source: Bloomberg 0 2000 4000 6000 8000 10000 12000 14000
Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15
Index
25 3.0 Benchmark Countries and Indices background
The main purpose of this project is to determine the attractiveness of Bosnian stock markets. The study aims to provide support for stock market consolidation by emphasizing the benefits of the larger stock markets. The study analyzes the composition of Focus Markets’ stock markets and their indices and provides reasoning for SASE and BLSE consolidation by comparing Bosnian stock markets to the Focus Markets.
In the early 90’s, Croatia, Bosnia and Macedonia became independent states (from former Yugoslavia). When comparing these three countries, Croatia has a slightly larger population than Bosnia, while Macedonia has approximately the same population as Federation of Bosnia. GDP breakdown of the three countries is similar and their economies have experienced similar transition process (from communism to free market economy). Theoretically, in terms of size and attractiveness, Croatian stock market can be compared to Bosnian (consolidated) while Macedonian stock market can be compared to either SASE or BLSE (on a standalone basis).
According to the study’s hypothesis, larger stock market attracts more investors. In this case, Macedonia being a smallest country and having smaller stock market is expected to have lower diversity, volume, liquidity, return and higher risk in comparison to Bosnia and Croatia. On the other hand, Croatia is expected to have higher diversity, volume, liquidity, return and lower risk in comparison to Macedonia and Bosnia.
German stock market is used as an example of an attractive stock market that is highly efficient and characterized with high diversity, volume, liquidity and return. In other words, for the purpose of this research, German stock market is used as the model stock market.
26 3.1 Croatia
Croatia is located in Southeastern Europe, bordering the Adriatic Sea, between Bosnia and Slovenia. Croatia's main natural resources include oil, coal, salt and hydropower. Croatia has a population of 4.2 million, which is expected to decline over the coming years. In 2015, the GDP per capita stood at US$13,800, with the GDP breakdown: 69% services, 26% industry and 5%
agriculture.
After the collapse of communism in the 90’s, Croatian economy experienced the transition to an open market economy. Although, Croatian economy was hit hard during the financial crisis of 2008, it remained one of the strongest economies in South East Europe having higher GDP than some of the older member countries of the European Union (“EU”). The main economic activities in Croatia include agriculture, food industry, textile industry, wood processing, metal processing, chemical industry, oil industry, electrical industry, construction, trade, shipbuilding, seafaring and tourism.
The state of Croatian economy is typical for countries in transition from communism. Although there has been a privatization process and restructuring in all areas, the main problems are high unemployment and weak economic reform. Due to the war and illegally performed privatization, former industrial production has not yet reached the level of 1990. As of now the biggest problems of the Croatian economy remain small production, weak exports, large debt, unemployment, and rampant corruption.
Croatian Stock Market
The Zagreb Stock Exchange (“ZSE”) was established in 1991. With the merging of the Varazdin Stock Exchange into the Zagreb Stock Exchange in 2007, Croatian stock market consolidated under one roof. The market capitalization of ZSE stood at USD 29.6 billion as of December 31, 2015. Major indices include CROBEX, CROBEX10, and CROBEX Industry. For the purpose of comparing to Bosnian stock markets, the study focusses on CROBEX 10. CROBEX10 tracks 10 leading companies listed on ZSE, in terms of free-float market cap and liquidity. Starting value
27 was 1,000. Weights of individual stocks in the index are capped at 20%. The Table 5 outlines the members of CROBEX10 as of December 31, 2015.
Table 5 Members of CROBEX 10
Company Index Weight
(%) Shares Price
(EUR)
Index Cap
(EUR)
Hrvatski Telekom dd 19.94% 20,511,395 18.92 387,979,190
Adris Grupa DD 15.90% 6,444,895 47.98 309,254,420
INA Industrija Nafte DD 14.88% 700,000 413.77 289,640,050 Podravka Prehrambena Ind 12.01% 5,340,002 43.76 233,685,430
Valamar Riviera DD 10.85% 69,315,148 3.05 211,237,914
Koncar-Elektroindustrija DD 9.53% 2,057,695 90.14 185,476,100
Atlantic Grupa 7.56% 133,372 110.33 14,715,440
Ericsson Nikola Tesla dd 4.96% 732,408 131.78 96,518,850
Kras DD/Croatia 2.56% 824,173 60.56 49,915,461
AD Plastik DD 1.78% 272,973 12.73 3,474,510
Source: Bloomberg
Further analysis of CROBEX 10 will be included when comparing ZSE to Bosnian stock markets.
Historical movements of CROBEX 10 are illustrated in The Figure 10.
Figure 10: Historical Performance of CROBEX 10
Source: Bloomberg 800 900 1000 1100 1200 1300 1400
Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15
Index
28 3.2 Macedonia
The Former Yugoslav Republic of Macedonia is located in Southeastern Europe, north of Greece.
Macedonia's government is an emerging democracy, with its capital located in Skopje. As of 2016, the population of Macedonia was 2.1 million (equivalent to the population of the Federation of Bosnia). In 2015, the GDP per capita stood at US$5,093, with the GDP breakdown: 62% services, 28% industry and 10% agriculture.
Macedonia is a developing country that has made significant efforts in restructuring its economy since the 1990’s. However, the country’s economic progress failed to generate the desired economic growth, create jobs and improve the standard of living. After the dissolution of Yugoslavia in the early 90’s, Macedonia opened its economy and improved the overall business climate in hope to attract the foreign investors. Despite the economic overhaul, the unemployment rate remained high (more than 30% since 2008) and the fiscal deficit has increased – creating several political crisis.
The economy of Macedonia is highly dependent on the neighboring countries and the EU, as it relies on exports to the EU and foreign investments & financial aid from the EU. The country has managed to keep its macroeconomic stability by keeping its inflation level low and pegging the domestic currency (Denar) against the Euro (Indexmundi – Web 7).
Macedonian Stock Exchange
Macedonian Stock-Exchange (MSE) was founded in 1995. It is the country’s first organized exchange after declaring its independence from Yugoslavia. The MSE is operating on a non-profit basis (Macedonian Stock Exchange – Web 8).
The market capitalization of MSE stood at USD 1.74 billion as of December 31, 2015. Major indices of MSE include MIB10 and OMB. For the purpose of comparing to Bosnian stock markets, the study focuses on MIB10.
29 MIB10 is the most significant index in Macedonia. The index consist of 10 listed companies, chosen by the Macedonia Stock Exchange Index Commission. The Table 6 outlines the members of MIB10 as of December 31, 2015.
Table 6: Members of MIB10
Company Index Weight
(%)
Shares Price
(EUR)
Index Cap
(EUR)
Alkaloid AD Skopje 37.78% 1,431,353 85.23 121,993,644
Komercijalna Banka 23.26% 2,279,067 32.96 75,107,793
Makpetrol AD Skopje 10.95% 121,666 290.54 35,349,302
Makedonija Turist Skopje 8.18% 452,247 58.44 26,430,762
Granit Skopje 7.41% 3,071,377 7.79 23,933,398
Makstil AD Skopje 4.55% 14,622,943 1.01 14,717,992
TTK Banka AD Skopje 2.48% 907,888 8.82 8,003,214
Zemjod Komb Pelagonija 2.18% 271,602 25.97 7,054,780
Stopanska Banka Bitola 1.96% 389,779 16.23 6,327,750
Toplifikacija AD Skopje 1.20% 450000 8.67 3,901,095
Source: Bloomberg
Further analysis of MIB10 will be included when comparing MSE to Bosnian stock markets.
Historical movements of MIB10 are illustrated in the Figure 11.
Figure 11: Historical Performance of MIB10
Source: Bloomberg 0 2000 4000 6000 8000 10000
Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
Index
30 3.3 Germany
Germany is located in Central Europe, bordering the Baltic Sea and the North Sea, between the Netherlands and Poland, south of Denmark. The country's capital is Berlin. Germany has a population of 83 million, which is expected to increase at the slow rate over the coming years. In 2015, the GDP per capita stood at US$45.400, with the GDP breakdown: 69% services, 30% industry and 1% agriculture.
German economy is the fifth largest in the world (the largest in Europe). Globally, Germany is one of the world’s largest exporters of manufacturing product such as cars, machinery, chemicals and household equipment. Furthermore, Germany has a young and highly developed industry, particularity mechanical engineering and transport equipment industries. It is the world’s second largest car manufacturer and a home to some of the world’s most famous car brands including BMW, Volkswagen, Mercedes and Audi.
According to the Organization for Economic Co-operation and Development (OECD), Germany has one of the highest levels of labor productivity in the world. The robustness of the German economy was demonstrated by its resilience to the global economic crisis of 2008. As of 2016, the unemployment rate stood at 4.2% (the lowest since the 90’s). The country has adopted the Euro, as the official currency, in 1999.
German Stock Exchange
The market capitalization of The Frankfurt stock exchange (“FSE”) stood at USD 1,541 billion as of December 31, 2015. DAX, the benchmark index for the German equity market, will be used when comparing to other stock markets. DAX tracks the performance of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange, representing around 80% of the market capitalization in Germany. The Index is free floating and has a base value of 1000 as of December 31, 1987 (Trading Economics – Web 9). Other major indices of FSE include MDAX, SDAX, and XTF.
DAX will be used for the purpose of this research and further analysis will be included when
31 comparing FSE to Bosnian and other focus stock markets. Historical movements of DAX are illustrated in The Figure12.
Figure 12: Historical DAX30
Source: Bloomberg 2000 4000 6000 8000 10000 12000 14000
Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15
Index
32 II. THEORITICAL FRAMEWORK
This part of the research paper covers literature review and provides theoretical overview of capital markets. It provides a clear understanding of investors’ interest and the criteria for stock market attractiveness.
1.0 The Concept of Stock Exchange 1.1 Capital Markets
Capital market is a long-term market, and the market of long-term securities. Many companies use capital markets as a tool for obtaining money for operations and expansion. There are two categories of financial instruments that capital in which markets are involved:
a) Debt securities, which are often known as bonds, and
b) Equity securities, which are often known as stocks or shares.
The capital markets have numerous participants including the central and commercial banks, stock markets, mortgage institutions, insurance companies and other intermediaries and investment institutions, whose task is to directly connect and confront interests in abundant supply of capital entities (depositors) with interests and demand of potential investors (capital seekers).
Stock exchanges are organized and strictly regulated financial markets for the purpose of trade of securities, goods, services and currencies. They operate under strict rules, binding to all who participate in trade on the market. In most cases, the governments, through securities commissions, oversee the operations of stock exchanges.
Trading on a stock exchange is based on the principle of supply and demand. Stock exchanges basically serve as the primary markets where corporations, governments, and other organizations and institutions can collect or raise capital for various purposes (i.e. expansion, capital gains, debt – bonds, etc.).
33 The stock market can be divided into two major divisions:
The primary market – where a company offers its shares for the first time (known as an initial public offering or IPO). At this time, mostly institutional investors and investment banks buy-out all the shares offered at the IPO, and a company receives the money.
The secondary market - includes all subsequent trading after the IPO. Both institutional and individual investors participate in the secondary market (Investopedia – Web 10).
1.2 Why Stock Market
Today, companies use stock markets to raise capital and fund themselves and their expansions.
However, it is only during the initial public offering or subsequent offering that the company actually receives the money. After the IPO, the stock are traded on the stock exchanges and their value changes in accordance to the market conditions and the company’s performance. At any given point, the company knows the price of their stock and the ultimate value of the company.
This is good for two reasons; first – if the company needs to raise more money, it already knows the price it will get for their stock, second – depending on the price of the stock, investors can sell their shares to make capital gains. It is clearly true, that a stock market makes money for all participants (companies and investors). However, as with any investment, there is a relationship between risk and return. Stock investments are one of the riskiest investments and, accordingly, have one of the highest returns.
Advantages of the Stock Exchange
Long Term Finance: In a situation when a company cannot raise more debt from financial institution (has a high outstanding debt) for expansion or other business related expenses, a stock market provides an attractive alternative for obtaining needed capital.
By listing, the company sells its shares to the general public (i.e. financial institutions, sovereign funds, and other ordinary individuals) in return for fresh capital. Ultimately, the stock exchange rewards the investors for their capital contribution.
34
Unlimited Opportunity of investment: The stock exchange offers an opportunity for investors to put their money to work. By providing liquidity for investors, a stock market attracts even more capital, thus increasing the value of the listed companies – ultimately, increase of the shareholders’ value.
Economic Stability: The economic stability provides a stable ground for the growth and development of a healthy industrial atmosphere. As capital is the blood for the companies, a stock exchange plays a significant role by employing capital that would otherwise be sitting in the savings accounts, for the expansion and development of the companies. Thus, the stock exchange adds value to the overall image and the attractiveness of the country.
Easy to participate: A stock exchange has no legal authority, or monopoly, over the companies or any other individuals participating on the market. There are no limitations on the participation in the market – any individual wishing to participate can do so by creating a simple investment account. The stock market is exclusive for everyone (Bank of Info – Web 11).
Disadvantages of the Stock Exchange
Excessive Cost: A company faces significant new costs once it is listed or is undergoing the process of becoming public. These costs include: due diligence cost (legal, accounting, market, technical), underwriter fees, new staffing cost, costs to transforming the organizational structure and other professional fees. According to PricewaterhouseCoopers (“PWC”), companies spend more than USD 1 million on one- time fees associated with the IPO.
Equity dilution: Listing on the stock exchange implies sale of a part of the company to the new investors. Depending on the listing, in some cases, the company has little or no control over the trade of its shares. Sometimes, the existing owners are ‘forced’ to sell more than 50% of their ownership to raise the money they need (ultimately, losing the control over the company).
35
Loss of Management Control: Once a company is listed, the decision-making process becomes more complex as all of shareholders have a right to be a part of the process.
Furthermore, the management has to considerer everyone’s interest – which may cause conflict of interest among the existing shareholders.
Loss of Capital: When listed, a company becomes exposed to the market fluctuations.
Depending on the market trends, a company may loose on the value – resulting in the loss of capital for its investors.
The Need for Transparency: Public companies are under the supervision of the government’s regulatory agencies. As per regulatory requirements, companies must meet certain transparency standards (not required for the private companies). A company and its management may be legally responsible for any misrepresentation or omitting information.
36 2.0 Attractiveness of the Stock Market
Companies or investors considering their opportunities and feasibility of entering a new market perform the analysis of market attractiveness in order to determine whether the entrance into a particular market is profitable and worthwhile (Porter, 1980). Coffee (2002) states that the number of stock exchanges will undoubtedly decrease radically in the nearest future due to the globalization and technologies. As the number of stock exchanges decreases, the competition among those remaining will increase. However, for assessing the market attractiveness, it is necessary to identify the main factors influencing it. In this section, the factors defined as most important for stock market attractiveness will be analyzed.
The analysis of literature Pagano et al. (2001), Kennedy (2004), M. E. Porter (1980), Carpentier et al. (2004), Cantillon Pai-ling Yi (2008)) shows 12 factors with the biggest impact on the stock market attractiveness, as listed below.
Table 7: Stock Market Attractiveness Factors
Market Size Liquidity Diversity Trade Volume
Risk Return Listing fees Transaction fees
Shareholders’ protection Legal regulation New listings Cross listing
The literature review indicates that stock market size, diversity, volume, liquidity, risk and return as the most important criteria measuring the stock market attractiveness. The role and importance of these criteria is outlined in sections (A-F).
A. Size & Diversity
Stock market diversity, first considered in Fernholz (1999), is a measure of the distribution of capital in an equity market. Diversity is higher when capital is more evenly distributed among the stocks in the market, and is lower when capital is more concentrated into a few of the largest companies. According to Credit Suisse’s Global Investment Returns Yearbook for 2015, the three largest industries in 42 of the countries in the FTSE all world index make up at least 40% of total
37 country capitalization. Meanwhile the US, along with France, the UK, and Japan, have the most diverse stock markets.
The Figure 13 indicates the weight of the three largest industries in 28 of the 47 countries in the FTSE All World index. In the five countries at the top, three or fewer industries make up the country’s entire capitalization. The USA, Japan, France and UK are the least concentrated. But even in these countries, the three largest industries (out of 40 in total) make up between 26%
(USA) and 36% (UK) of country capitalization.
Figure 13: Weight of the largest and three largest industries around the world
Source: FTSE International World Index Series
The study also notes that investors in most markets, with fewer industries, have less-diversified portfolios, thus fueling their demand for foreign stocks. "This underlines the need for global diversification across countries in order to diversify effectively across industries" (Credit Suisse – Web 12).
38 It is noted that, unlike small countries, large and more developed countries have more diversified stock markets. The Figure 14 illustrates stock market diversity breakdown for various countries.
Figure 14: Sector weightings around the world
Source: FTSE International World Index Series
According to Fernholz (2005) Market diversity appears to be an important factor in the investors’
performance. Holding a portfolio that is closer to diversity weights than to capitalization weights should improve relative performance over the long term. According to Fernholz, the change in diversity is highly correlated to the performance of the managers, and since change in diversity comes as the result of the managers’ decisions, the managers consider diversity as one of the most important factors in the capital allocation process (Q Group - Web 13).
B. Volume
The volume shows the amount of securities traded over the period of time in terms of money (Carpentier, C., L’Her, J. F., Suret, J. M. 2008). When the trade volume is bigger, a market is more
23% 18% 22% 18% 16%
32%
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World United States United Kingdom Japan Germany Emerging Markets
Financials Consumer Goods Industrials Technology Consumer Services
Healthcare Oil and Gas Basic Material Telecoms Utilities
39 liquid as the issuers can attract the capital faster. “A liquid market is one in which large amounts of securities can be traded in a minimum number of transactions and with a little impact on prices” (Kennedy, 2004).Volume can be determined by looking at the volume bars, found on the bottom of a stock chart, as outlined in the Figure 15.
Volume is one of the most important factors in the technical analysis. Investors and traders use volume as a tool to determine trends, chart patterns and forecast stock prices. The movement in a stock price that is accompanied by a high volume is considered more relevant move than a movement with a weak volume. The following figure illustrates volume indicator.
Figure 15: Volume Indicator
Source: Bloomberg
Volume is a brilliant display of a stock’s liquidity. The number of transaction shows if there are enough buyers and sellers in the market to conduct efficient transactions. High volume markets are more likely to attract new investors. In practice, volume is very important in the case of smaller stock exchanges as it indicates the level of transaction efficiency in a market.
C. Liquidity
“Market liquidity refers to the ability of buyers and sellers of securities to transact efficiently and is measured by the speed, with which large purchases and sales can be executed, and the transaction costs incurred” (Eliot D.J. 2015).Some of the liquid market characteristic include:
40 ready and willing buyers and sellers (instant transactions), ability to convert shares into cash quickly, and ability to trade shares without affecting a share price. Some of characteristics of an illiquid market include: high transition costs, large price movements caused by transactions, and inability to buy or sell shares quickly enough to capitalize on gains or prevent losses.
Liquidity affects returns, thus it is extremely important from a standpoint of an investor as it is the main trigger of a stock market volatility. At an extreme, as seen prior to the 2008 financial crunch, volatility can cause financial crisis. Financial crises are caused by excessive share disposal by investors, causing significant devaluation of listed companies.
The most useful measure of liquidity for any stock is its average daily trading volume. This varies from day to day so it is best to use an average. Stock markets provide liquidity because they bring together investors and businesses from all over the world. Liquidity results in narrow bid-ask spreads, which results in lower transaction costs (Writer L.G. 2012 – Web 15).
Liquidity is important for stock exchanges and trading systems in general. In competition with each other and with alternative trading systems, liquidity tends to be an important argument to attract order flow and listings. Moreover liquid markets tend to attract even more liquidity.
Listed firms benefit from more liquidity. Liquidity is beneficial for the cost of capital of a firm through its impact on expected returns required by investors. Although a number of elements that impact liquidity are outside the firm’s control (i.e. those related to the setup of the trading system, e.g. anonymity, transparency, the presence of dealers). However, the firm is able to influence some factors. First, it can set-up an effective and open communication with the press and analysts. Disclosing more and better information should narrow the gap between informed and uninformed traders. This reduces asymmetric information in the market, leading to a reduction in the spread. Secondly, firms can request a listing or cross-listing on a liquid exchange.
Pagano, Randl, Roell and Zechner (2001) indeed find that firms are more likely to cross-list in liquid markets.
