Podcast
Questions and Answers
What is a characteristic of ordinary shares?
What is a characteristic of ordinary shares?
Which type of financing is suitable for unlisted firms?
Which type of financing is suitable for unlisted firms?
What is a disadvantage of going public through an IPO?
What is a disadvantage of going public through an IPO?
What is the purpose of a prospectus in an IPO?
What is the purpose of a prospectus in an IPO?
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What is the difference between fixed pricing and book building?
What is the difference between fixed pricing and book building?
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What is a potential benefit of an IPO for current stockholders?
What is a potential benefit of an IPO for current stockholders?
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What is the primary goal of the roadshow in an Initial Public Offering (IPO) process?
What is the primary goal of the roadshow in an Initial Public Offering (IPO) process?
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What is the main drawback of an open auction process in an IPO?
What is the main drawback of an open auction process in an IPO?
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What is the winner's curse phenomenon in the context of IPOs?
What is the winner's curse phenomenon in the context of IPOs?
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Why do investment banks often arrange for underpricing in an IPO?
Why do investment banks often arrange for underpricing in an IPO?
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What is the signalling hypothesis in the context of IPOs?
What is the signalling hypothesis in the context of IPOs?
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What is the primary reason for underpricing in IPOs, according to the litigation insurance hypothesis?
What is the primary reason for underpricing in IPOs, according to the litigation insurance hypothesis?
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Study Notes
Equity Characteristics
- Ordinary shares represent a permanent contribution of capital
- Equity shareholders have full voting rights
- Residual claim to return on capital and capital liquidation
- Equity is considered the most risky type of investment
Raising Equity
- Unlisted firms can raise equity through private equity financing (angel finance, venture capital) or IPO
- Listed firms can raise equity through private placement, rights issue, or dividend reinvestment plan
IPO Advantages
- Access to additional capital
- Allows venture capitalists to cash out
- Current stockholders can diversify
- Increases liquidity
- Establishes firm value
- Makes it more feasible to use stock as employee incentives
- Increases customer recognition
IPO Disadvantages
- Creates substantial fees (legal, accounting, investment banking fees)
- Requires greater degree of disclosure and scrutiny
- Leads to dilution of control of existing owners
- Makes it more difficult to undertake special deals to insiders
- Managing investor relations is time-consuming
IPO Process
- Engage an investment banker to prepare a prospectus and underwrite the IPO
- Underwriting methods include fixed pricing, book building, and open auction
- Conduct a roadshow to gauge investor interest and determine the subscription price
Costs of IPOs
- Direct costs include underwriting fees and direct administrative costs
Explanation for Under-pricing
- Winner's curse (information asymmetry) - informed investors bid on IPOs at a price that is likely to be successful
- Market feedback hypothesis - the initial book building process provides an opportunity to find the true value
- Investment banking conflicts - underpricing benefits investment banks and their clients
- Litigation insurance - underpricing reduces the likelihood of lawsuits against the issuer and underwriter
- Signalling - leaving a good impression with investors makes it easier to raise funds at higher prices in the future
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Description
This quiz covers the key characteristics of equity financing, including ordinary shares and residual claim to returns. It also explores different options for raising equity capital, including IPO, private placement, and rights issue.
