What is venture capital and what is its aim?
- equity investment in young private companies
- help growing firms before they are large enough to go public
Describe role of venture capitalists
- provide ongoing advice to firms
- play a major role in recruiting senior management
- provide valuable judgement
Where do returns to venture capital come from?
- when it is sold to larger firm
- when company goes public there is the opportunity to cash out
What is IPO?
- first offering of stock to the general public
Describe the primary and secondary offering
Primary offering - issuing new shares
Secondary offering - existing shareholders sell part of their holdings
Deduce role of underwriters
- provide financial advice
- buy and resell shares
Describe firm commitment of underwriters
- but securities and resell all of them to the public
Describe best effort basis of underwriters
- agree to sell as much of the issue as possible but don’t guarantee sale of entire issue
What are the rationales for underpricing IPO
- raise price when stock is traded
- attract uninformed investors
- also benefits underwriters
What are the costs of a public offer
- administrative costs
- spread for underwriters
- underpricing
What is the spread?
- difference between the public offer price and the price paid by the underwriter
What is the benefit of rights issues?
- issue of stocks first to existing stockholders
- lowers issuing costs
- no concerns for underpricing
- prevents shareholders from losing control
Describe market reaction to stock issues
- announcement reduces stock price
- Excess supply: supply>demand so stock price falls
- Asymmetric info: issue of stock signals it is overpriced hence investors mark stock price down
- Financial distress: issuing of equity may signal financial distress
- investors know this and mark it down
What is private placement and describe the pros and cons
- sale of securities to limited number of investors without a public offering
Pro
- avoid costly process of public offering
Con
- investors cannot easily resell the security
What are the disadvantages of public corporations?
- selling shares at discount
- longer term costs
