The analysis of various expenses of publicly traded companies provides the chance to understand that the factor of issue type may influence the organization’s choices. The flotation costs can be defined as the expenses of the company aiming to become publicly traded related to issuing new securities. When an organization decides to attract funding, it may choose two options, issuing bonds, which are the specific form of debt or loans, and equities, which are available in the form of stocks. The process of making the company public may include various costs associated with this procedure. They may consist of the underwriter’s fees, legal costs, and expenses related to the process of registration and making the offer available to the public. Since debt and equity forms of becoming a publicly traded firm differ, the flotation costs required to manage this procedure also vary.
The flotation costs for debts are significantly lower than the expenses related to the equity offerings. When an organization chooses to attract funding, it should understand the specifics of different options. In particular, Lee et al. (2019) explain that internal funds are less expensive than external funds, which signifies that using the organization’s finances decreases the flotation costs. This statement demonstrates that companies do not have to carry additional expenses connected with engaging public finances when they issue bonds. Simultaneously, the process of selling equity securities is more expensive than the procedure of selling debts. Making the company public involves the specific stages that require such expenses as lawyer, accountant, and banker’s services, which are more sophisticated when an organization intends to sell equities. Consequently, selling equities requires more flotation costs due to the additional expenses.
Reference
Lee, S., Kim, H., & Lee, N. (2019). A comparative analysis of financial and operational performance pre-and post-IPO: With a focus on airline companies. Academy of Accounting and Financial Studies Journal, 23(3), 1-14.