Offerings and Investor Monitoring 104385

8/3/2019 Offerings and Investor Monitoring 104385

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10Stock Offerings and Investor Monitoring

2003 South-Western/Thomson Learning


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Chapter Objectives

Describe the stock exchanges where stocks

are traded Analyze the process of the initial public

offering of stock by a company

Be able to interpret a stock quote Explain the institutional use of stock markets

Describe the globalization of stock markets


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Common stock = certificate representing equity

or partial ownership in a corporation

Issued in primary market by corporations that

need long-term funds

Stock is then traded in the secondary market,

creating liquidity for investors and company

evaluation for managers

Background on Common Stock


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Background on Common Stock

Owners of common stock vote on:Election of board of directors

Authorization to issue new shares

Amendments to corporate charter

Other major events Many investor assign their vote to management via a

proxy

Households own about half of all common stock, the

rest is owned by institutional investors

Ownership and Voting Rights


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Background on Preferred Stock Represents equity or ownership interest, butusually no voting rights

Trade voting rights for stated fixed annualdividend

Dividend paid before common if dividends

are declared by board of directors

Dividend may be omitted

Cumulative provision

If common dividend paid, preferred dividend

fixed


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Public Placement of Stock Initial public offerings (IPOs)

First-time offering of shares to the public

Firm must provide information to publicRegistration statement to SEC

Prospectus

Firm is assisted by an investment banker

Performance of IPOs

Price generally rises on first day

Longer-term performance of IPOs is poor


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Public Placement of Stock Secondary stock offerings

New stock issued by firm that already has shares

outstanding Shelf Registration

1982 SEC rule

Allows firms to place securities without the timelag associated with registering with SEC


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Stock Secondary Markets

Execute secondary market transactions

Examples: NYSE, AMEX, Midwest, Pacific

NYSE is largest, controlling 80 percent of valueof all organized exchanges

Must own a seat on exchange in order to trade

Trading resembles an auction

Organized Exchanges


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No trading floor or specific location Telecommunications network

Nasdaq

National Association of Securities Dealers Automatic

Quotations

Thousands of small firms, plus high-tech giants

Pink sheets

Tiny firms that do not meet requirements for NASDAQ

Over-the-Counter Market


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Stock Secondary Markets Trend: Consolidation of stock exchanges

Market microstructure

Specialists, floor brokers, and market-makers Role of specialists

Types of orders

Market order Limit order

Stop order


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Changes in technology

Online trading

Real-time quotes

Company information

Electronic Communications Networks (ECNs)

Margin requirements

Specify amount of borrowed versus amount in cash


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Purchasing stock on margin

Borrow a portion of the funds from broker

Margin is the amount of equity an investor provide

Magnifies returns (both good and bad)

Short sales

Borrow stock and sell

Repay stock loan, hopefully at a lower price Investor able to have potential profit from decline in

stock price


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Regulation of Trading on Stock

Exchangesn Securities Act Of 1933 and 1934

n Securities And Exchange Commission

n National Association Of Securities Dealers(NASD)

n Regulate minimum information for investor and

broker/dealer business practices

n Circuit breakers


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Stock Quotation

Stock Quotation

52-week price range (high/low and YTD%

change) Stock symbol

Dividend annualized and dividend yield

Price-earnings ratio

Volume in round lots

Previous days price close and net daily change

Remainders in cents, not eighths


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Exhibit 10.6

YTD %

change Hi Lo Stock Sym DIV Yld% PE Vol 100s Last Net Chg

110.3 121.88 80.06 IBM IBM .56 .6 20 71979 93.77 1 1.06

Year-to-date Highest Lowest Name Stock Annual Dividend Price- Trading Closing Change in the

percentage price price of stock Symbol dividend yield, which earnings volume stock stock price

change in of the of the paid per represents ratio based during the price on the previ-

stock price stock stock year the annual on the previous ous trading

in this in this dividend as prevailing trading day day from the

year year a percentage stock price close on the

of the pre- day beforevailing stock

price


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Stock Indexes

Dow Jones Industrial Average

Price-weighted average

30 large U.S. firms Standard and Poors (S&P) 500

Value-weighted

500 large U.S. firms New York Stock Exchange Indexes

Other Stock Indexes

Amex, NASDAQ


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Stock Indexes

Investing in stock indexes

Indexing

Has become very popularLower transactions costs

Studies find that actively-managed funds do not

outperform stock indexes

Examples of publicly traded stock indexes

SPDRs

Diamonds


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Stock Market Performance

Comparing stock performance to bond

performance


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Investor Trading Decisions

Stock value = proportional value of total

company

Investor return = dividend yield + capitalgain/loss

New information translated into trading

decisions impacting supply/demand for shares New equilibrium price established until new

information appears


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Exhibit 10.8Increased

Demand for

Security

Reduced

Supply of

Security

for Sale

Increase in

Equilibrium

(Market)

Price of

Security

New

Favorable

Information

Disclosed

to Investors

New

Unfavorable

Information

Disclosed

to Investors

Increased

Valuation

of

Security

by Investors

Reduced

Valuation

of

Security

by Investors

Reduced

Demand for

Security

Increased

Supply of

Security

for Sale

Decrease in

Equilibrium

(Market)

Price of

Security


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Institutional Participation in Stock

Markets

Program trading by institutions

Simultaneously buying and selling of a portfolio of

at least 15 different stocks valued at more than $1million

Most commonly used by securities firms

Program refers to the use of computers

Impact on stock volatility

Often blamed for rise or fall in stock market

Studies show that program trading does not increase

volatility


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Investor Monitoring of Firms in the

Stock Market

Shareholder activism An investor who is dissatisfied with the way managers

are running a firm has three choices:

Sell

Do Nothing

Flush!

Shareholder Activism


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Investor Monitoring of Firms in the

Stock Market

Communication with the firm

Effort to place pressure on management

Institutional investors CALPERS

TIAA

Proxy contest

Shareholder lawsuits


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Corporate Monitoring of Firms in

the Stock Market

Market for corporate control

Stock price declines due to poor management Subject to possible takeover

Barriers to market for corporate control

Antitakeover amendments Poison pills

Golden parachutes


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Corporate Monitoring of Their

Own Stock in the Stock Market

Stock repurchases

Dividend alternative or undervalued stock

Excessive cash relative to +NPV investments Leveraged buyouts (LBO)

If managers believe the stock price undervalued,

they may buy the outstanding shares withborrowed funds

Stock offerings

Signals overvalued shares


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Globalization of Stock Markets

Barriers to international stock trading have

decreased

Reduction in information costs Reduction in exchange rate risk

Foreign stock offerings in the United States

International placement process Global stock exchange characteristics

Emerging stock markets


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Methods used to invest in foreign shares

Direct purchases

American Depository Receipts (ADRs) International mutual funds

World equity benchmark shares


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Global diversification and integration amongstock markets Integration of markets during the 1987 crash

All major stock markets declined, indicating theunderlying cause systematically affected all markets

Integration of markets during mini-crashesExample: August 27, 1998 Bloody Thursday

Russian financial crisis

Increased integration associated withincreased financial technology, competition,

and lessened government regulation

Documents

Offerings and Investor Monitoring 104385