Tài chính doanh nghiệp - Chapter 10: Stock offerings and investor monitoring

Chapter 10Stock Offerings and Investor MonitoringFinancial Markets and Institutions, 7e, Jeff MaduraCopyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.1Chapter OutlineBackground on stockInitial public offeringsSecondary stock offeringsStock exchangesInvestor participation in the secondary marketMonitoring by investorsThe corporate monitoring roleGlobalization of stock markets2Background on StocksA stock is a certificate representing partial ownership in a corporationStock is issued by firms to obtain long-term fundsOwners of stock:Can benefit from the growth in the value of the firmAre susceptible to large lossesIndividuals and financial institutions are common purchasers of stockThe primary market enables corporations to issue new stockThe secondary market creates liquidity for investors who invest in stockSome corporations distribute earnings to investors in the form of dividends3Background on Stocks (cont’d)Ownership and voting rightsThe owners are permitted to vote on key matters concerning the firm:Election of the board of directorsAuthorization to issue new sharesApproval of amendments to the corporate charterAdoption of bylawsVoting is often accomplished by proxyManagement typically receives the majority of the votes and can elect its own candidates as directors4Background on Stocks (cont’d)Preferred stockPreferred stock represents an equity interest in a firm that usually does not allow for significant voting rightsA cumulative provision on most preferred stock prevents dividends from being paid on common stock until all preferred dividends have been paidPreferred stock is less risky because dividends on preferred stock can be omittedPreferred stock is a less desirable source of funds than bonds because:Dividends are not tax deductibleInvestors must be enticed to purchase the preferred stock since dividends do not legally have to be paid5Background on Stocks (cont’d)Issuer participation in stock marketsThe ownership feature attracts many investors who want to have an equity interest but do not necessarily want to manage their own firmA firm issuing stock for the first time engages in an IPOIf a firm issues additional stock after the IPO, it engages in a secondary offering6Initial Public OfferingsAn IPO is a first-time offering of shares by a specific firm to the publicUsually, a growing firm first obtains private equity funding from VC firmsAn IPO is used to obtain new funding and to offer VC firms a way to cash in their investmentMany VC firms sell their shares in the secondary market between 6 and 24 months after the IPO7Initial Public Offerings (cont’d)Process of going publicAn investment banking firm normally serves as the lead underwriter for the IPODeveloping a prospectusThe issuing firm develops a prospectus and files it with the SECThe prospectus contains detailed information about the firm and includes financial statements and a discussion of risksThe prospectus is intended to provide investors with the information they need to decide whether to invest in the firmOnce approved by the SEC, the prospectus is sent to institutional investorsUnderwriters and managers meet with institutional investors in the form of a “road show”8Initial Public Offerings (cont’d)Process of going public (cont’d)PricingThe offer price is determined by the lead underwriterDuring the road show, the number of shares demanded at various prices is assessedBookbuildingIn some countries, an auction process is used for IPOsTransaction costsThe issuing firm typically pays 7 percent of the funds raisedThe lead underwriter typically forms a syndicate with other firms who receive a portion of the transaction costs9Initial Public Offerings (cont’d)Underwriter efforts to ensure price stabilityThe lead underwriter’s performance can be measured by the movement in the IPO shares following the IPOIf stocks placed by a securities firm perform poorly, investors may no longer purchase shares underwritten by that firmThe underwriter may require a lockup provisionPrevents the original owners from selling shares for a specified periodPrevents downward pressureWhen the lockup period expires, the share price commonly declines significantly10Initial Public Offerings (cont’d)Timing of IPOsIPOs tend to occur more frequently during bullish stock marketsPrices are typically higherIn the 2000–2001 period, many firms withdrew their IPO plansInitial returns of IPOsFirst-day return averaged about 20 percent over the last 30 yearsIn 1998, the mean one-day return for Internet stocks was 84 percentMost IPO shares are offered to institutional investorsAbout 2 percent of IPO shares are offered as allotments to brokerage firms11Initial Public Offerings (cont’d)Abuses in the IPO marketIn 2003, regulators attempted to impose new guidelines that would prevent abusesSpinning is the process in which an investment bank allocated IPO shares to executives requiring the help of an investment bankLaddering involves increasing the price above the offer price on the first day of issue in response to substantial demandExcessive commissions are sometimes charged by brokers when there is substantial demand for the IPO12Initial Public Offerings (cont’d)Long-term performance following IPOsIPOs perform poorly on average over a period of a year or longerMany IPOs are overpriced at the time of issueInvestors may be overly optimistic about the firmManagers may spend excessively and be less efficient with the firm’s funds than they were before the IPO13Secondary Stock OfferingsA secondary stock offering is:A new stock offering by a firm whose stock is already publicly tradedUndertaken to raise more equity to expand operationsUsually facilitated by a securities firmIn the late 1990s, the volume of publicly placed stock increased substantiallyFrom 2000 to 2002, the volume of publicly placed stock declined as a result of the weak economyExisting shareholders often have the preemptive right to purchase newly-issued stock14Secondary Stock Offerings (cont’d)Shelf-registrationA corporation can fulfill SEC requirements up to two years before issuing new securitiesAllows firms quick access to fundsPotential purchasers must realize that information disclosed in the registration is not continually updated15Stock ExchangesStock trading between investors occurs on an organized stock exchange or on the over-the-counter (OTC) marketOrganized exchangesIncludes the NYSE and AMEXThe NYSE controls 80 percent of the value of all organized exchange transactionsThere are 1,366 seats Floor brokers and specialists are members of the NYSE16Stock Exchanges (cont’d)Organized exchanges (cont’d)Trading floorConsists of trading posts and trading booths20 trading posts are maintained by specialists and their clerksThere are 1,500 trading booths along the perimeter of the floor where brokers obtain ordersListing requirementsNYSE requirements include number of shares outstanding, minimum level of earnings, cash flow, and revenueMinimum number of shares ensures adequate liquidityExchanges charge a listing fee, which depends on the size of the firm17Stock Exchanges (cont’d)Over-the-counter marketBuy and sell orders are completed through a telecommunications networkNasdaqThe Nasdaq is an electronic quotation system that provides immediate price quotationsFirms must meet requirements on minimum assets, capital, and number of shareholdersTransaction costs as a percentage of the investment tend to be higher on Nasdaq than on the NYSE18Stock Exchanges (cont’d)Over-the-counter market (cont’d)Nasdaq (cont’d)Nasdaq components are:Nasdaq National MarketNasdaq Small Cap MarketMore stocks are listed on Nasdaq than on NYSEThe market value of stocks listed on Nasdaq is smaller than stocks listed on the NYSE19Stock Exchanges (cont’d)Over-the-counter market (cont’d)OTC Bulletin BoardLists stocks that have a price below $1 per share (penny stocks)More than 3,500 stocks are listedStocks are mostly traded by individual investorsPink sheetsLists stocks smaller than those listed on the OTC Bulletin BoardContains about 20,000 stocksFamilies and officers of the firms commonly control much of the stock20Stock Exchanges (cont’d)Extended trading sessionsThe NYSE, AMEX, and Nasdaq markets all offer extended trading sessionsLate trading sessions enable investors to buy or sell stocks after the market closesAn early morning session enables investors to buy or sell stock just before the market opens on the following dayTotal trading volume of widely traded stocks is typically about 5 percent or less of the trading volume during the dayECNs also allow for trading at any time21Stock Exchanges (cont’d)Stock quotations provided by exchangesThe format varies among newspapers, but most provide similar information:52-week price rangeSymbolDividendDividend yieldPrice-earnings ratioVolumePrevious day’s price quotations22Computing A Dividend YieldXYZ Corporation annual dividend is $1.02 per share. XYZ’s prevailing stock price is $20. What is the annual dividend yield of XYZ stock?23Stock Exchanges (cont’d)Stock index quotationsThe Dow Jones Industrial Average (DJIA) is a price-weighted average of stock prices of 30 large U.S. firmsAssigns a higher weight over time to those stocks that experience higher pricesDoes not necessarily serve as an adequate indicators of the overall marketThe Standard and Poor’s (S&P) 500 is a value-weighted index of stock prices of 500 large U.S. firmsDoes not serve as a useful indicator for stock prices of smaller firms24Stock Exchanges (cont’d)Stock index quotations (cont’d)Wilshire 5000 Total Market IndexCreated in 1974 to reflect the values of 5,000 U.S. stocksRepresents the broadest index of the U.S. stock marketClosely monitored by the Federal ReserveNew York Stock Exchange IndexesThe Composite Index represents the average of all stocks traded on the NYSESector indexes:IndustrialTransportationUtilityFinancial25Stock Exchanges (cont’d)Stock index quotations (cont’d)Other stock indexesAMEX indexesNasdaq indexes26Investor Participation in the Secondary MarketThe price of a firm’s stock represents the value of the firm per share of stock:The stock price by itself does not clearly indicate the firm’s valueThe return on the investment is determined by dividends received and the price of the stock from the time when they purchased the shares until they sell them27Investor Participation in the Secondary Market (cont’d)How investor decisions affect the stock priceInvestors buy or sell shares based on their valuation of the stock relative to the prevailing market priceInvestors arrive at different valuations which means there will be buyers and sellers at a given point in timeAs investors change their valuations of a stock, there is a shift in the demand for and supply of shares and the equilibrium price changes28Investor Participation in the Secondary Market (cont’d)How investor decisions affect the stock price (cont’d)Investor reliance on informationFavorable news increases the demand for and reduces the supply of the securityUnfavorable news reduces the demand for and increases the supply of the securityInvestors continually respond to new information in their attempt to purchase or sell stocks29Investor Participation in the Secondary Market (cont’d)Types of investorsIndividual investors typically hold more then 50 percent of the total equity in a large corporationOwnership is scatteredInstitutional investors have large equity positions in corporations and have more voting powerCan influence corporate policies through proxy contestsInsurance companies, pension funds, and stock mutual funds are common purchasers of newly issued stock in the primary marketThe collective sales and purchases of stocks by institutions can significantly affect stock market prices30Type of Financial InstitutionParticipation in Stock MarketsCommercial banksIssue stock Manage trust fundsStock-owned savings institutionsIssue stock to boost their capital baseSavings banksInvest in stocks for their investment portfoliosFinance companiesIssue stockStock mutual fundsUse the proceeds from selling shares to invest in stocksSecurities firmsIssue stock Place new issues of stockOffer advice to corporations that consider acquiring stock companiesExecute buy and sell orders Insurance companiesIssue stockInvest a large proportion of their premiums in the stock marketPension fundsInvest a large proportion of pension fund contributions in the stock market31Monitoring by InvestorsManagers serve as agents for shareholders to maximize the stock priceManagers may be tempted to serve their own interests rather than those of investorsShareholders monitor their stock’s price movements to assess whether the managers are achieving their goalWhen the stock price declines or does not rise as high as shareholders expected, shareholders may blame the weak performance on the firm’s managers32Monitoring by Investors (cont’d)Accounting irregularitiesTo the extent that firms can manipulate financial statements they may be able to hide information from investorse.g., Enron, Tyco, and WorldComThe auditors hired to audit financial statements allowed them to use unusual accounting methodsBoard members on the audit committee were not always monitoring the audit33Monitoring by Investors (cont’d)The Sarbanes-Oxley Act:Was implemented in 2002 to ensure more accurate disclosure of financial information to investorsAttempts to force accountants of a firm to conform to regular accounting standardsAttempts to force auditors to take their auditing role seriouslyPrevents a public accounting firm from auditing a client whose CEO, CFO, or other employees are employed by the client firm within one year prior to the audit34Monitoring by Investors (cont’d)The Sarbanes-Oxley Act:Requires that only outside board members of a firm be on the firm’s audit committeePrevents the members of a firm’s audit committee from receiving consulting or advising fees from the firmRequires that the CEO and CFO of firms that are of at least a specified size level to certify that the audited financial statements are accurateSpecifies major fines or imprisonment for employees who mislead investors or hide evidenceAllows public accounting firms to offer non-audit consulting services to an audit client only if the client pre-approves those services35Monitoring by Investors (cont’d)Shareholders activismCommunication with the firmShareholders can communicate their concerns to other investors to place more pressure on managers or its board membersInstitutional investors commonly communicate with high-level corporate managers and offer their concernsInstitutional Shareholder Serves (ISS) Inc. is a firm that organizes institutional shareholders to push for a common cause36Monitoring by Investors (cont’d)Shareholders activism (cont’d)Proxy contestNormally considered only if an informal request for a change in the board is ignoredIf dissident shareholders gain enough votes, they can elect one or more directors who share their viewsAs a result of a more organized effort, institutional shareholders are more influential on management decisions37Monitoring by Investors (cont’d)Shareholders activism (cont’d)Shareholder lawsuitsInvestors may sue the board if they believe that the directors are not fulfilling their responsibilities to shareholdersLawsuits are often filed when corporations prevent takeovers, pursue acquisitions, or make other restructuring decisions that shareholders believe will reduce the stock’s valueWhen directors are sued, courts typically focus on whether the director’s decision seems reasonable, rather than on whether the decision led to higher profitability38The Corporate Monitoring RoleIf managers believe their stock is undervalued in the market, they may take actions to capitalize on this discrepancyStock repurchasesUse excess cash to purchase shares in the market at a low priceStock prices respond favorably to stock repurchase announcements39The Corporate Monitoring Role (cont’d)Market for corporate controlA firm may engage in acquisitions to increase the value of a target firmCan also create synergistic benefitsA high stock price is useful to exchange acquirer shares for target sharesShare prices of target firms react very positivelyLeveraged buyoutsLBOs are acquisitions that require substantial amounts of borrowed fundsA reverse LBO is desirable when the stock can be sold at a high price40The Corporate Monitoring Role (cont’d)Barriers to corporate controlAntitakeover amendments are designed to protect shareholders against an acquisition that will ultimately reduce the value of their investment in the firme.g., may require at least two-thirds of shareholder votes to approve a takeoverPoison pills are special rights awarded to shareholders or specific managers upon specified eventse.g., the right for all shareholders to be allocated an additional 30 percent of all shares without cost whenever a potential acquirer attempts to acquire the firm41The Corporate Monitoring Role (cont’d)Barriers to corporate control (cont’d)A golden parachute specifies compensation to managers in the event that they lose their jobse.g., all managers have the right to receive 100,000 shares of the firm’s stock whenever the firm is acquired42Globalization of Stock MarketsBarriers between countries have been removed or reducedFirms in need of funds can tap foreign marketsInvestors can purchase foreign stocksForeign stock offerings in the U.S.Large privatization programs in Latin America and Europe can not be digested in local marketsBy issuing stock in the U.S., foreign firms diversify their shareholder baseSEC regulations may prevent some firms from offering stock in the U.S.Some foreign firms use American depository receipts (ADRs)43Globalization of Stock Markets (cont’d)International placement processMany U.S. investment banks and commercial banks provide underwriting services in foreign countriesListing on a foreign stock exchange:Enhances the liquidity of the stockMay increase the firm’s perceived financial standingCan protect the firm against hostile takeoversEntails some costs44Globalization of Stock Markets (cont’d)Global stock exchangesRecently, stocks outside the U.S. have been issuing stock more frequentlyThe percentage of individual versus institutional ownership varies across countriesEmerging stock markets:Enable foreign firms to raise large amounts of capital by issuing stockProvide a means for investors from other countries to invest their fundsMay not be as efficient as the U.S. stock marketMay exhibit high returns and high riskMay be volatile because of fewer shares and trading based on rumors45Globalization of Stock Markets (cont’d)Methods used to invest in foreign stocksDirect purchases involves directly buying stock of foreign companies listed on the local stock exchangesAmerican depository receipts are attractive because:They are closely followedThey are required to file financial statements with the SECThey are quoted reliably46Globalization of Stock Markets (cont’d)Methods used to invest in foreign stocks (cont’d)International mutual funds are portfolios of international stocks created and managed by various financial institutionsWorld equity benchmark shares represent indexes that reflect composites of stocks for particular countries that can be purchased or sold47