Thị trường tài chính và các định chế tài chính_ Chapter 10

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Chapter 10
Stock Offerings and
Investor Monitoring
Financial Markets and Institutions, 7e, Jeff Madura
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
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Chapter Outline

Background on stock

Initial public offerings

Secondary stock offerings

Stock exchanges

Investor participation in the secondary market

Monitoring by investors

The corporate monitoring role

Globalization of stock markets
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Background on Stocks

A stock is a certificate representing partial ownership in a
corporation


Stock is issued by firms to obtain long-term funds

Owners of stock:

Can benefit from the growth in the value of the firm

Are susceptible to large losses

Individuals and financial institutions are common purchasers of
stock

The primary market enables corporations to issue new stock

The secondary market creates liquidity for investors who invest in
stock

Some corporations distribute earnings to investors in the form of
dividends
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Background on Stocks (cont’d)

Ownership and voting rights

The owners are permitted to vote on key matters
concerning the firm:

Election of the board of directors

Authorization to issue new shares


Approval of amendments to the corporate charter

Adoption of bylaws

Voting is often accomplished by proxy

Management typically receives the majority of the
votes and can elect its own candidates as directors
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Background on Stocks (cont’d)

Preferred stock

Preferred stock represents an equity interest in a firm that
usually does not allow for significant voting rights

A cumulative provision on most preferred stock prevents
dividends from being paid on common stock until all preferred
dividends have been paid

Preferred stock is less risky because dividends on preferred
stock can be omitted

Preferred stock is a less desirable source of funds than bonds
because:

Dividends are not tax deductible

Investors must be enticed to purchase the preferred stock since
dividends do not legally have to be paid

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Background on Stocks (cont’d)

Issuer participation in stock markets

The ownership feature attracts many investors who
want to have an equity interest but do not necessarily
want to manage their own firm

A firm issuing stock for the first time engages in an
IPO

If a firm issues additional stock after the IPO, it
engages in a secondary offering
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Initial Public Offerings

An IPO is a first-time offering of shares by a
specific firm to the public

Usually, a growing firm first obtains private
equity funding from VC firms

An IPO is used to obtain new funding and to
offer VC firms a way to cash in their investment

Many VC firms sell their shares in the secondary
market between 6 and 24 months after the IPO
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Initial Public Offerings (cont’d)


Process of going public

An investment banking firm normally serves as the lead
underwriter for the IPO

Developing a prospectus

The issuing firm develops a prospectus and files it with the SEC

The prospectus contains detailed information about the firm and
includes financial statements and a discussion of risks

The prospectus is intended to provide investors with the
information they need to decide whether to invest in the firm

Once approved by the SEC, the prospectus is sent to institutional
investors

Underwriters and managers meet with institutional investors in the
form of a “road show”
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Initial Public Offerings (cont’d)

Process of going public (cont’d)

Pricing

The offer price is determined by the lead underwriter


During the road show, the number of shares demanded at
various prices is assessed

Bookbuilding

In some countries, an auction process is used for IPOs

Transaction costs

The issuing firm typically pays 7 percent of the funds
raised

The lead underwriter typically forms a syndicate with other
firms who receive a portion of the transaction costs
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Initial Public Offerings (cont’d)

Underwriter efforts to ensure price stability

The lead underwriter’s performance can be measured by the
movement in the IPO shares following the IPO

If stocks placed by a securities firm perform poorly, investors may
no longer purchase shares underwritten by that firm

The underwriter may require a lockup provision

Prevents the original owners from selling shares for a specified
period


Prevents downward pressure

When the lockup period expires, the share price commonly
declines significantly
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Initial Public Offerings (cont’d)

Timing of IPOs

IPOs tend to occur more frequently during bullish stock
markets

Prices are typically higher

In the 2000–2001 period, many firms withdrew their IPO plans

Initial returns of IPOs

First-day return averaged about 20 percent over the last 30 years

In 1998, the mean one-day return for Internet stocks was 84
percent

Most IPO shares are offered to institutional investors

About 2 percent of IPO shares are offered as allotments to
brokerage firms
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Initial Public Offerings (cont’d)


Abuses in the IPO market

In 2003, regulators attempted to impose new
guidelines that would prevent abuses

Spinning is the process in which an investment bank
allocated IPO shares to executives requiring the help of an
investment bank

Laddering involves increasing the price above the offer
price on the first day of issue in response to substantial
demand

Excessive commissions are sometimes charged by
brokers when there is substantial demand for the IPO
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Initial Public Offerings (cont’d)

Long-term performance following IPOs

IPOs perform poorly on average over a period of a
year or longer

Many IPOs are overpriced at the time of issue

Investors may be overly optimistic about the firm

Managers may spend excessively and be less efficient with
the firm’s funds than they were before the IPO
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Secondary Stock Offerings

A secondary stock offering is:

A new stock offering by a firm whose stock is already publicly
traded

Undertaken to raise more equity to expand operations

Usually facilitated by a securities firm

In the late 1990s, the volume of publicly placed stock
increased substantially

From 2000 to 2002, the volume of publicly placed stock
declined as a result of the weak economy

Existing shareholders often have the preemptive right to
purchase newly-issued stock
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Secondary Stock Offerings (cont’d)

Shelf-registration

A corporation can fulfill SEC requirements up to two
years before issuing new securities

Allows firms quick access to funds

Potential purchasers must realize that information

disclosed in the registration is not continually updated
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Stock Exchanges

Stock trading between investors occurs on an
organized stock exchange or on the over-the-
counter (OTC) market

Organized exchanges

Includes the NYSE and AMEX

The NYSE controls 80 percent of the value of all
organized exchange transactions

There are 1,366 seats

Floor brokers and specialists are members of the NYSE
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Stock Exchanges (cont’d)

Organized exchanges (cont’d)

Trading floor

Consists of trading posts and trading booths

20 trading posts are maintained by specialists and their clerks

There are 1,500 trading booths along the perimeter of the floor

where brokers obtain orders

Listing requirements

NYSE requirements include number of shares outstanding,
minimum level of earnings, cash flow, and revenue

Minimum number of shares ensures adequate liquidity

Exchanges charge a listing fee, which depends on the size of the
firm
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Stock Exchanges (cont’d)

Over-the-counter market

Buy and sell orders are completed through a
telecommunications network

Nasdaq

The Nasdaq is an electronic quotation system that
provides immediate price quotations

Firms must meet requirements on minimum assets, capital,
and number of shareholders

Transaction costs as a percentage of the investment tend
to be higher on Nasdaq than on the NYSE