3.2Who Owns u.S. Equities?

The ownership of U.S. equities can be roughly divided into two groups: individuals

and institutions. As Exhibit 3.2 demonstrates, there has been a dramatic increase since

1950 in the percent of equity held by U.S. institutions such as pension funds, insur-

ance companies, university endowments, and mutual funds. Alarge part of the increase

in institutional equity holdings, from 6 percent in 1950 to 50 percent in 1999, comes

from the increased importance of pension funds, whose holdings rose from 1 percent

in 1950 to 21 percent in 1999. Pension funds hold about half their portfolios in debt

instruments and proportionately are an even bigger player in the corporate bond mar-

ket than in the equity markets. Alarge part of the increase in the institutional owner-

ship of U.S. equities during the 1990s is the result of the increased popularity of mutual

funds, which provide better diversification than investors can achieve on their own.

Mutual funds held more than $2.7 trillion in equity in 1999 compared with only $233

billion in 1990.⁸

3.3The Globalization of Equity Markets

U.S. corporations sometimes raise equity capital from foreign investors by listing com-

mon equity on foreign stock exchanges. For instance, Verizon Communications has

equity listed not only on U.S. stock exchanges, but also on exchanges in the United

⁸New York Stock Exchange Fact Book, 1999.

Grinblatt170Titman: Financial	I. Financial Markets and	3. Equity Financing	© The McGraw170Hill
Markets and Corporate	Financial Instruments		Companies, 2002
Strategy, Second Edition

Chapter 3

Equity Financing

73

EXHIBIT3.2Percentage of U.S. Equity Held by Institutions

1950

1970

1990

1999

Equities held by U.S. pensions	1%	9%	25%	25%
Equities held by all U.S. institutions	6	27	43	50

Source:NYSE Fact Book, 1999.

Kingdom, Switzerland, and Japan. Listing securities in each of these countries means

complying with all local regulations and possibly with some that apply specifically to

foreign issuers. Foreign investors also buy U.S. stocks directly on U.S. exchanges or,

indirectly, through financial institutions such as mutual funds.

Foreign firms also raise capital in the United States. Because the United States has

one of the world’s largest capital markets, it is natural for many foreign firms to list

their equities there. Afirm must meet certain requirements, however, to be listed on a

U.S. exchange. For example, U.S. financial disclosure requirements are among the

strictest in the world, and many foreign firms face significant costs in producing U.S.-

style financial statements. American Depository Receipts (ADRs)provide a way to

get around these listing problems. With an ADR, a foreign firm deposits a number of

its own shares with a money-center bank in New York. The bank then issues an ADR,

which is a security that has a legal claim on the cash flows from the deposited shares.

In other words, the bank holding the shares receives the stock’s dividends, which it

pays to the holder of the ADR after deducting a small fee. At the end of 1999, close

to 400 firms were listed on the U.S. exchanges, either directly or indirectly (through

ADRs). These foreign firms have a market capitalization of close to $6 trillion. Other

major exchanges also trade large numbers of foreign issues: More than 800 are listed

in London, 250 in Zurich, and 125 in Tokyo.