Financial Markets and Institutions

Based on
Financial Institutions and Markets (9ed)
Jeff Madura

Taught by
Nguyen Thang
FPT School of Business (FSB)

Original Slides by
South-Western/Cengage Learning

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 10
Stock Offerings and Investor Monitoring

Chapter Objectives

The specific objectives of this chapter are to:

■ explain how stock markets facilitate secondary market trading,
■ describe investor participation in the stock markets,
■ describe the process of initial public offerings,
■ describe the process of secondary offerings,
■ explain how the stock market is used to monitor and control firms, and
■ describe the globalization of stock markets.

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 Private Equity

1. Financing by Venture Capital Funds

a. Venture Capital Market

b. Terms of a Venture Capital Deal

c. Exit Strategy of VC Funds

2. Financing by Private Equity Funds

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 Public Equity

1. Ownership and Voting Rights

a. Common stock holders only owners permitted to vote

on key matters facing the firm

2. Preferred Stock
a. Does not allow for voting rights

b. Less risk to firm in issuing preferred

c. Preferred dividends are not a tax deductible expense to the firm

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 Public Equity

3. Participation in Stock Markets

a. Two Investor types: Individual or Institutional
b. Many stock transactions involve two institutions
such as an insurance company buying stock in a
commercial bank
c. Investors buy when they believe market price is below the
stock’s valuation; sell when market price is above
d. Investors rely on Information they respond to the release of new
information that affects the firm’s future performance
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 Initial Public Offerings (IPOs)

1. Process of Going Public

a. Developing a Prospectus

b. Pricing

c. Allocation of IPO Shares

d. Transaction Costs

2. Underwriter Efforts to Ensure Price Stability

a. Lockup

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 Initial Public Offerings

3. Timing of IPOs

4. Initial Returns of IPOs

a. Flipping Shares

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 Initial Public Offerings

5. Google’s IPO
a. Estimating the Stock’s Value

b. Google’s Communication to Investors before the IPO

c. The Auction Process

d. Results of Google’s Dutch Auction

e. Trading after the Auction

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 Initial Public Offerings

6. Abuses in the IPO Market

a. Spinning
b. Laddering
c. Excessive Commissions

7. Long-Term Performance Following IPO’s

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 Secondary Stock Offerings

1. Shelf-Registration
a. To avoid time lag, a corporation can plan issues up to two years
before new release

b. Allows quick access to funds

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 Stock Repurchases

1. Firms tend to repurchase some of their shares when

share prices are at very low levels.

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 Stock Exchanges

1. Organized Exchanges
a. The Trading Floor

b. Listing Requirements

2. Over-The-Counter Market
a. NASDAQ

b. OTC Bulletin Board

c. Pink Sheets

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 Stock Exchanges

3. Electronic Stock Exchanges

4. Extended Trading Sessions

5. Stock Quotations Provided by Exchanges

a. 52-Week Price Range
b. Symbol
c. Dividend
d. Dividend Yield
e. Price-Earnings Ratio
f. Volume
g. Closing Price Quotations

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 Stock Exchanges

5. Stock Index Quotations

a. Dow Jones Industrial Average

b. Standard & Poor’s (S&P) 500

c. Wilshire 5000 Total Market Index

d. New York Stock Exchange Indexes

e. Nasdaq Stock Indexes

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 Monitoring Publicly Traded Companies

1. Role of Analysts
a. Stock Exchange rules
2. Accounting Irregularities
3. Sarbanes-Oxley Act
a. Cost of being public
3. Shareholder Activism
a. Communication with the Firm

b. Proxy Contest

c. Shareholder Lawsuits
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 Market for Corporate Control

1. Use of LBOs to Achieve Corporate Control

a. Reverse Leveraged Buyouts

2. Barriers to the Market for Corporate Control

a. Antitakeover Amendments

b. Poison Pills

c. Golden Parachutes

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 Globalization of Stock Markets

1. Foreign Stock Offerings in the United States

2. International Placement Process

3. Global Stock Exchanges

a. Variation in characteristics across stock exchanges

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 Globalization of Stock Markets

4. Emerging Stock Markets

5. Methods Used to Invest in Foreign Stocks

a. Direct Purchases

b. American Depository Receipts

c. International Mutual Funds

d. International Exchange-Traded Funds

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