IPOs Flashcards
why do companies list
New source of funding
The value of liquidity
- Shares can be sold (and bought) on the market
Benefit from overvaluation
→ Access to capital and lowering the cost of capital
- Allows existing shareholders to cash out
• E.g. venture capital, private equity investors and family shareholders - Facilitates takeovers
• Shares are a more attractive payment to sellers if they are listed - Reputation
• IPO brings publicity - Broaden shareholder base
- Remuneration of managers and employees
why do companies delist
The costs of obligatory information provision
Tax implications
Undervaluation by the stock market
Threat of a hostile takeover
Most firms delist because they are (friendly) acquired
Freedom of action for management versus ‘shorttermism’ (?) of the stock market
explenations of underpricing?
1) Asymmetric information and quality of the firm
a) The Winner’s curse
b) Signaling the quality of the firm
c) Information revelation through bookbuilding
2) Agency relations
a) Management prefers dispersed ownership
b) Management prefers large shareholders
c) The underwriter steals money from the issuer
3) Institutional explanations
a) Lawsuit avoidance
b) Price stabilization
c) Tax arguments
4) Behavioral explanations
5) liquidity providers
why are there less IPOs?
there are fewer start-ups because most get acquired by the big firms
debt financing is very cheap now
there is more private capital available because of PE/VC
start-ups need less capital because they don’t have many physical assets
what are the tasks of an underwriter
give advice
set the offer price via bookbuilding
sell the shares (firm commitment vs best efforts, green shoe option, lock-up period)
what are the consequences of winners curse
in equilibrium markets, abnormal returns of uninformed are zero
if information is distributed more homogenously then underpricing is less
underpricing is higher when the ex ante uncertainty is bigger
explain the price stabilization argument
by underpricing they eliminate the left tail of the distribution of initial returns? If they commit to price stabilization, they can convince investors that they do not intentionally will overprice
what are the PROs and CONs of a direct listing?
PROs: no need to pay underwriters, no lock-up period, no dilution
CONs: no new money, no support from underwriters, no green shoe, no firm commitment, no ipo-pop
what is a SPAC?
it is a company that has no commercial operations and is founded strictly to raise capital through an IPO and then acquire an existing company
