4. Corporate Governance 2 Flashcards
What are some additional requirements for public companies (compared to private companies)?
- Additional reporting requirements
- Listing requirements: Detailed prospectus to investors containing detailed information about company and its prospects.
- Regular reporting (e.g., quarterly reporting requirements and announcement of any changes in financial position on LSE)
- Additional governance rules: Management answerable to a bord of directors elected by and representing shareholders and including a number of independent directors not involved in day-to-day running of business.
What is an initial public offering (IPO)?
A process where a private firm begins to trade as a public company by selling some or all of its shares on the stock market.
What are motives for an IPO?
- To provide a payoff to the original founders and any venture capitalists that have invested in them.
- To obtain financing for big projects.
- To provide a payoff to private equity funds that have purchased and managed the company.
Why are IPOs an important means of providing finance for innovation in small growth companies?
Without the prospect of realising a return from their investment - after perhaps 4-7 years - venture capitalists will be reluctant to invest in start up companies that have developed new business models. The large venture capital industry that operates in the US and supports the early investment in technology companies relies on IPOs to earn returns for investors.
Is there a large separation between ownership and control directly after most IPOs of small growing firms?
No, because typically in the IPO of small growing firms, the original founders retain majority of the shares. This can be good for outside investors, because if the management still own a lot of the shares, then they are less likely to take great risks that threaten to make the firm insolvent, or to actions that are against the interests of the firm.
What are private equity funds?
Funds that buy struggling companies, take them private, thus take control of them. They do this in order to improve the company’s performance and profit when the company is sold again.
What is a privatisation?
A type of IPO when a government owned company is sold to private investors.
What is a secondary or seasoned offering?
Any subsequent public offering of a firm’s shares after an IPO. Secondary offerings are easier to sell than IPOs because the shares are already traded, making it much easier for investors to decide what they are willing to pay for the shares (easy price discovery).
What is a rights issue?
A special type of secondary offering where the EXISTING shareholders have a right to buy the new equity for some stated price.
Offering shares at a low rights price makes the shares attractive to purchase and helps overcome the possibility that existing shareholders might have their claims on the firm diluted (stock dilution) by sales to new investors.
Why can prices of companies be very volatile soon after an IPO?
It is difficult for investors to decide how much to pay for shares sold in an IPO because there is no previous track record of trading in a public market. This leads to a lot of short-term secondary trading by investors who hope to make a quick profit from a rise in price.
