o Pricing the new securities o Selling the new securities o Stabilizing the

O pricing the new securities o selling the new

This preview shows page 46 - 49 out of 68 pages.

o Pricing the new securities. o Selling the new securities. o Stabilizing the price in the aftermarket. IPO Jargon Offer price Firm Commitment Underwriting 100% of the shares are first sold to the underwriter Best Effort Underwriting The company bears the risk of the issue not being fully sold. Dutch Auction Underwriting Shares are auctioned to determine the offer price. The Green Shoe Provision Gives members of the underwriting group option to buy additional shares of the firm at the offer price. Lockup agreements Insiders (management) cannot sell shares before 180 days after the IPO. IPO Under-pricing
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47 IPOs are often under-priced: Offering price is lower than the closing price on the first day. Caveats: o The under-pricing is higher for younger and smaller firms, which are intrinsically riskier o Not easy to profit from a strategy of subscribing to all IPOs, due to winner’s curse Seasoned Equity Offering A new equity issue of securities by a company that has previous issued securities to the public. Stock prices tend to decline when new equity is issued Possible explanations for this phenomenon: o Information asymmetry and signalling effect Signalling and managerial information Managers may choose to sell new shares of stock when they believe the current stock price is high (they can issue fewer shares at a higher price) Signalling and debt usage May send signal that management believes the company currently has too much debt o Issue costs Issuing securities is very expensive and the decrease in price may be partial compensation for the cost of the issue Rights Rights Offerings: Basic Concepts When new shares of common stock are sold to the general public, the proportional ownership of existing shareholders is likely to be reduced. However, if a pre-emptive right is contained in the firm’s article of incorporation, the firm must first offer any new issue of common stock to existing shareholders. Rights Offering / Privileged Subscription Each shareholder is issue rights to buy a specified number of new shares from the firm: o At a specified price o Within a specified time (After which rights will expire) Rights are often traded on securities exchanges or over the counter. Example To execute a rights offering, the financial management will have to answer the following questions: What should be the share price for the new stock? How many shares will have to be sold? How many shares will each shareholder be allowed to buy? What is the likely effect of the rights offering on the per-share value of the existing stock? Shareholders will have several choices: Exercise their right and subscribe for some/all of the entitled shares Order some or all of the rights sold Do nothing and let rights expire (Inadvisable)
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48 Number of Shares Needed to Purchase a Share ??. ?? ??? ?ℎ???? =
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