Lectures 7 & 9

Question 1

Transparency Benefits

Answer 1

BETTER Liquidity, valuations, relationships
ENHANCED trust, reputation
LOWER volatility, cost of capital

Question 2

Selective Disclosure

Answer 2

When select market participants are made aware of material/nonpublic info about company ahead of broader market

Question 3

Martha & ImClone

Answer 3

• tipped by founder to sell shares in biotech company b/c FDA was not reviewing application for cancer drug

Question 4

Enron

Answer 4

• 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

Question 5

securities

Answer 5

financial instruments representing type of financial value - stocks/bonds

Question 6

Materiality

Answer 6

information that an investor would considerer important when making investment decisions

Question 7

Stock Market Crash (1929)

Answer 7

insiders sold stocks en masse due to info about business conditions - led to great depression

Question 8

Securities Act (1933)

Answer 8

oversees security markets integrity - ensures investors receive timely/accurate/complete info before investing

Question 9

securities regulation

Answer 9

SEC (US and many publicly traded comps)
Canadian Securities Administrators
Provincial securities regulators

Question 10

Information Asymmetry

Answer 10

When one party has more/better access to info than other parties (insiders could be executive officers/board members/large shareholders)

Question 11

Disclosure theories

Answer 11

when one side of market believes other has more/better info, then mutually beneficial transactions/relationships are challenged

Question 12

Signalling Theory

Answer 12

how/why market participants engage in costly/observable behaviour (ie signals) to reduce info asymmetry

Question 13

Agenda-building theory

Answer 13

practice of sharing info as pre-packaged, lowering cost and increasing consumption

Question 14

Legal Disclosure

Answer 14

regulated reporting requirements - SEDAR/EDGAR, Press Releases, Official Websites, Open Conference Calls

Question 15

Why not SM Disclosure

Answer 15

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

Question 16

Forward looking Information

Answer 16

info projecting future expectations/performance - use “safe harbour language” discussing risk factors that could impact
Can be used to manage investor expectations

Question 17

law/disclosure/strat comms

Answer 17

transparency = trust/credibility
contribute to corp narrative
support w: plain language, consistent disclosure practices, signalling/agenda building

Question 18

Capital / Investors / Liquidity

Answer 18

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

Question 19

Public v Private

Answer 19

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

Question 20

Raising funds

Answer 20

1. Reinvest - earnings back into operations
2. Borrow - money from banks/lenders to finance growth
3. Debt - in the form of selling bonds to investors (Bonds = form of debt that pays interest to owner, safer than stocks)
4. Sell - stocks in company to investors (Stocks = security that represents ownership/investment)

Question 21

NYSE

Answer 21

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

Question 22

Initial Public Offering (IPO) Reasons

Answer 22

1. Raise Capital
2. Reward early investors
3. Incentives for management/employees via stock options
4. have stock “currency” for future acquisitions
5. Raise company profile

Question 23

IPO Steps

Answer 23

1. EVALUATION of assets/interest by investment bank/
2. S-1 Registration (Prospectus)
3. Road Show
4. File IPO
5. Quiet Period (40 days after IPO)

Question 24

Invester Relations

Answer 24

focus on relationship building with institutional investors/analysts

Question 25

Corporate Communications

Answer 25

In smaller public companies - corp comms/affairs responsible for investor relations

Question 26

Financial comms firms

Answer 26

outside comm advisors hired to counsel on major corporate issues (eg restructuring, bankruptcy, etc)

Question 27

Investors

Answer 27

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)

Question 28

Information Intermediaries

Answer 28

Publish investment research recommendations used to supplement investor knowledge/information. Most used by institutional investors.

Question 29

Investment banks

Answer 29

hired to take companies public - advise on financial matters (top firms: Merrill Lynch, JP Morgan Chase, Bank of America, etc)

Question 30

Venture Capital Firms vs Private Equity Firms

Answer 30

Venture - pro investors giving equity to young/fast-growing companies
Private - pro investors giving equity to older/established companies

Question 31

Proxy Solicitors vs Proxy Advisors

Answer 31

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

Question 32

Corporate law firms

Answer 32

external legal counsel on strategic matters