The security market is surrounded by a number of factors that may impede the performance of actively sold and traded securities. If firms are to be successful, they need to consider these factors while designing their capital acquisition strategies. Securities are instruments used by firms to raise capital and increase the investment base. Securities are initially floated to the public through the primary market by an underwriting syndicate of investment bankers acting on behalf of the firms. Academic studies have identified managerial issues surrounding the initial public offerings (IPO) of securities with significant implications to performance (Chan, Cooney, Kim, Singh 45). Among these, the firm’s public perception, underwriter’s reputation, investor’s outlook on the performance of stocks in the secondary market, listing requirements and legal framework for the chosen market, timely release given the prevailing market conditions. Firms interested in improving IPO performance can employ active investment-management strategies such as identifying mispriced securities, or by timing broad asset classes during the early bookbuilding period (Bodie). For the purposes of this term paper, “management of security offers” refers to the issues related to the public offering of securities (issuance and selling) in a firm’s attempts to raise capital.
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Types of Securities
Stocks and bonds are the common securities utilized by firms to boost their capital base. In both cases, the securities involve primary and secondary markets. Stocks are issued to the public as investment tools of partial ownership and may either be initial public offers (IPOs) or seasoned equity, with the former referring to the form of stock offered by a private company the first time it goes public. The intent is to raise capital and expand the capital base. Seasoned equity offerings are offered by firms that have already floated equity. Once stocks are issued in the primary market, the sale and transfer of ownership may be done in the secondary market. Still there are factors that will influence the performance of securities in the secondary market.
The issuance of bonds is categorized as private placement or public offering. When issued to a few institutional investors, they are held to maturity. The issuance of bonds to the general public for the purpose of trading in the secondary market as an investment option is referred to as public offering. An important point to note is that both the stocks and bonds follow similar major processes; i.e. public offers and secondary market trading. The managerial issues discussed in this paper relate to these cases with the exception of bond private placement offers which are not sold in the secondary market.
Managerial Issues in Securities Offers
Historically, IPO’s have been considered poor long-term investments. Despite dramatic initial investment performance, the year-by-year underperformance suggests that the investing public is too optimistic about a given firm’s prospects and/or that there may be systematic errors on the part of the underwriting investment managers (Bodie 58). Since managerial issues touch upon every aspect of security offers, they play a key role in the firm’s success. With the ultimate goal of all offers being to increase the capital of a firm, the firm must willing to scrutinize the many factors involved in advance in order to manufacture the best results possible. The demands of the market-place, who to offer the securities to-private or public, time of offer, time of sale, and what types of post-sale controls to have, are just a few of the factors that must be considered in order for a firms offer to be successful. Of particular interest is the understanding of how underwriters of low reputation, discretionary accruals and venture capital backing may influence the performance of IPOs in the long run, and how managers must accommodate for these instances (Chan, Cooney, Kim, Singh, 47).
Managers of companies wishing to go public for the first time may be faced with a need to raise capital and desire to do it by then issuing an IPO. First, their strategy must determine which markets they are willing to venture into because there are options. Some markets such as NASDAQ may require scrutinizing the management of the firm and its directors, and that before the company is listed in this market, there should be a minimum of three investment bankers agreeing to act as market makers for the company. Next, there are other regulatory issues that affect the financiers of the company before the IPO, such as the period within which they may recover their investment and receive their gains, stipulated in the escrow period. Finally, other regulations relates the disclosure of financial and other company information and the legal processes that the company must complete before going public, such as tax and accounting matters, will all affect where, and if, managers should issue an IPO.
Companies are required to follow particular legal guidelines when seeking to go public in a given market. The legal framework within which companies must conduct public offering of securities must also be followed. These legal frameworks can vary widely, depending on the different market specializations, and refers to firm registration with the market, on the type and size of the company desired in the marketplace, and the role the company may be expected to play in the IPO marketplace. The companies are required to meet certain conditions before issuing an IPO in the United States. These legal frameworks are an indication of the preparedness of a company to perform and handle market IPOs in a number of ways. Options exists regarding what markets to venture into, but the options should be widely explored and never be guided by legal framework alone. Within these individual frameworks, however, are easier guidelines which may offer a particular company less financial strain and more incentives than another framework. For example, in the United States, there are different options for the listing of companies; this includes the major markets which are the National Association of Securities Dealers Automated Quotation System (NASDAQ), New York Stock Exchange (NYSE) and TSE. Within these markets, listing requirements differ relating to the assets of the firm, amount of public float, pretax income and minimum financial requirements (SME Financing Data Initiative para #2 &3).
Another important aspect touching IPOs and other public offerings is the issue of time management. The issue of timing arises partly because of the legal issues involved and their timely completion, when the public is likely to buy the stocks. In addition, the individual investor companies are more interested with the duration of time they may have to earn benefits, sometimes more than the investment itself because these are their gains. Although the company is going to the market through the investment bankers, the latter are aware of the dangers that may impede the likelihood that they will make profit, and may be tempted to pass the burden to the company. The company may have to make a decision whether to make a ‘best-efforts’ type of agreement with the underwriters where the latter are not obliged to purchase any shares at their own risks, or choose the ‘firm-commitment’ agreement where the underwriters are obliged to buy any remaining shares after selling the minimum agreed amount. Thus, the company may have to analyze the possibilities for best performance in the two situations so as to gain.
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The importance of understanding the reputation and competence of underwriters can not be underestimated since some may influence the price so as to reduce the risk of remaining with unsold shares (Reber, Barry, & Toms, 42). Thus the firm may incur the burden as a result of under pricing, and to avoid this, informed forecast may become necessary to the management. The reputation of the underwriter also influences the return by Asset Managers Affiliated (AMAs) with the underwriter in addition to the information environment for the IPO (Johnson & Marietta-Westberg; 706). This is not an easy task considering that the underwriters may be more experienced than the company. Investors are weighing the alternatives of investment between companies and therefore the involved company must seek to understand their needs and meet them, ideally to benefits both the issuer of the IPO, the underwriter as well as the investor. Other issues touching the public offerings such as the initial offers regard the managerial decision on the type of market to be ventured into. These decisions are guided on the attainment of advantages associated with entry into more specialized and larger (and famous) and developed markets, but the disadvantages accruing to these entries such as high legal risks, higher costs of the process (Nemirowsky, & Wright), and different valuations among others must be considered.
On the underground, whether the company is going for an IPO or second or preceding release of stock or bonds, the management of the firm will play an important role in the public perception and the commitment of the institutional investors owing to their confidence and trust in this management. In fact, institutional investors influence the success of the offer of securities and would consider the competence of the management in terms of financial projections and business plans. The institutional investors may act in advice of experts as relating to the competence of the firm. Therefore, the management of the firm not only relating to issuance of securities but over a wide range of other issues will influence the performance of the issue. The impact of information management after IPOs may control or encourage insider trading which may impact on the performance of shares in the market place (Jaffee; cited in Bodie).
For example, stock performance has been found to be poor when insider sellers exceed insider buyers whereas an abnormal return of about 5% was witnessed in the 8 months following months when there were more (up to three or more than) insider purchasers than insider sellers (Jaffee; cited in Bodie). This is an indicator that the buyers and sellers were relying on the insider information to control their decisions. In addition the impact of expected or unexpected high volatility on interests of “large hedgers” and “speculators” in the market needs to be understood well. In particular, regulators have been influenced by price volatility and degree of market participation of traders, to come up with regulations that may impact business (Chang, Chou, & Nelling, 107). Managers must be willing to understand the implications of stock exchange such as response of regulation to current practices such as the false financial reporting, and circuit breakers (Bodie). There have been interests in the study of how managers react and make decisions in the focus of the “information asymmetries” between them and the investors which influence financial and control structures (Milgrorn & Roberts, 482; cited in Boehmer & Netter, 693).
The management issues touching the floating and offering of securities include the time of offer, the major customer-either public individual or private group investor, legal framework provided by the market, the market which to enter-the advantages and disadvantages, the current and desired financial base among others. In this paper, the legal framework and the issue of time when the floating is to be carried have been considered more than other issues. The management of the firm will determine the type of underwriters to choose, the time of the floating; the market which offers the best alternative and requirements that best suit the firm, among other issues. These will all impact on the performance of the security in the market, whether at the IPO stage or after that.
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