Lectures 7 & 9 Flashcards
Transparency Benefits
BETTER Liquidity, valuations, relationships
ENHANCED trust, reputation
LOWER volatility, cost of capital
Selective Disclosure
When select market participants are made aware of material/nonpublic info about company ahead of broader market
Martha & ImClone
- tipped by founder to sell shares in biotech company b/c FDA was not reviewing application for cancer drug
Enron
- used accounting loopholes - hid debt, inflated earnings
- SEC investigated - Leo kept debt off balance sheet, pressured auditors to ignore
- enron bankruptcy, 20,000 people lost jobs
securities
financial instruments representing type of financial value - stocks/bonds
Materiality
information that an investor would considerer important when making investment decisions
Stock Market Crash (1929)
insiders sold stocks en masse due to info about business conditions - led to great depression
Securities Act (1933)
oversees security markets integrity - ensures investors receive timely/accurate/complete info before investing
securities regulation
SEC (US and many publicly traded comps)
Canadian Securities Administrators
Provincial securities regulators
Information Asymmetry
When one party has more/better access to info than other parties (insiders could be executive officers/board members/large shareholders)
Disclosure theories
when one side of market believes other has more/better info, then mutually beneficial transactions/relationships are challenged
Signalling Theory
how/why market participants engage in costly/observable behaviour (ie signals) to reduce info asymmetry
Agenda-building theory
practice of sharing info as pre-packaged, lowering cost and increasing consumption
Legal Disclosure
regulated reporting requirements - SEDAR/EDGAR, Press Releases, Official Websites, Open Conference Calls
Why not SM Disclosure
NOT - enough room for detail, promotional (reduces objectivity), lack of governance
NEEDS - SM policy, trained employees, coordinate w/ other channels, balanced/accurate/consistent, need 3rd party monitoring protocols
Forward looking Information
info projecting future expectations/performance - use “safe harbour language” discussing risk factors that could impact
Can be used to manage investor expectations
law/disclosure/strat comms
transparency = trust/credibility
contribute to corp narrative
support w: plain language, consistent disclosure practices, signalling/agenda building
Capital / Investors / Liquidity
C - money, property, assets of value - goal of capital = generate profit
I - essential source of capital
L - ability to buy/sell security quickly/low cost w limited effect on market price
Public v Private
Public - listed on stock x change, more shareholders and liquidity, more access to expensive capital, regulated
Private - not listed, small #, less liquid, limited access to expensive capital, limited info flow
Raising funds
- Reinvest - earnings back into operations
- Borrow - money from banks/lenders to finance growth
- Debt - in the form of selling bonds to investors (Bonds = form of debt that pays interest to owner, safer than stocks)
- Sell - stocks in company to investors (Stocks = security that represents ownership/investment)
NYSE
place to purchase/sell stocks
Mon-Fri, 9:30-4 PM
“market makers” - ensure orderly buying/selling
80% of trading conducted electronically
TSX is Canadian Stock Exchange
Initial Public Offering (IPO) Reasons
- Raise Capital
- Reward early investors
- Incentives for management/employees via stock options
- have stock “currency” for future acquisitions
- Raise company profile
IPO Steps
- EVALUATION of assets/interest by investment bank/
- S-1 Registration (Prospectus)
- Road Show
- File IPO
- Quiet Period (40 days after IPO)
Invester Relations
focus on relationship building with institutional investors/analysts
Corporate Communications
In smaller public companies - corp comms/affairs responsible for investor relations
Financial comms firms
outside comm advisors hired to counsel on major corporate issues (eg restructuring, bankruptcy, etc)
Investors
Institutional investors are large professional investors (buy large blocks of stock). Individual investors are smaller/private investors (buy small amounts of stock at a time)
Information Intermediaries
Publish investment research recommendations used to supplement investor knowledge/information. Most used by institutional investors.
Investment banks
hired to take companies public - advise on financial matters (top firms: Merrill Lynch, JP Morgan Chase, Bank of America, etc)
Venture Capital Firms vs Private Equity Firms
Venture - pro investors giving equity to young/fast-growing companies
Private - pro investors giving equity to older/established companies
Proxy Solicitors vs Proxy Advisors
Solicitors - specialized comm/research firms hired to persuade shareholders to vote for/against ballot issues/project voting outcomes
Advisors - used by institutional investors to advise on how to vote their stock holders on company ballot issues
Corporate law firms
external legal counsel on strategic matters
