The international pricing of Telecom Corporation of New Zealand

Abstract

This thesis examines the foreign pricing of Telecom Corporation of New Zealand Limited's stock. In particular, it investigates the foreign influence on price determination, risk, and return that arises because the stock is listed on overseas stock markets. The important implication of foreign pricing is that it affects a firm's cost of capital, which plays a significant role in the firm's decision-making, especially with respect to investment. A review of the international asset pricing literature shows that the foreign pricing of a security is dependent on the degree of world capital market integration and the contribution the security's home country makes toward measures of international influence (such as the world market portfolio). When a stock lists on a foreign stock exchange, it enables a channel through which foreign influences can be transmitted. Using modern econometric techniques, the empirical analysis established that Telecom's stock price was determined largely in the US immediately after listing there and then mainly in NZ, with proportionate transaction volumes indicating to some extent where price discovery takes place. The dominant influence on Telecom's return was found to be the NZ market return, with the US market return observed as having a significant influence during periods in which substantially more Telecom shares were traded in the US than in NZ. Furthermore, Telecom's expected return was found to reflect its risk exposure to both the NZ and US markets (rather than just the NZ or US market alone) during periods of comparatively high volume trading in the US. This suggests that an appropriate model for describing Telecom's expected return, and hence cost of equity, is likely to be a multi-beta model.