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Transcript of 1 10 Stock Offerings and Investor Monitoring. 2 Chapter Objectives Describe the stock exchanges...
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10Stock Offerings and Investor Monitoring
© 2003 South-Western/Thomson Learning
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Chapter Objectives
Describe the stock exchanges where stocks are traded
Analyze the process of the initial public offering of stock by a company
Be able to interpret a stock quote Explain the institutional use of stock markets Describe the globalization of stock markets
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Common stock = certificate representing equity or partial ownership in a corporation
Issued in primary market by corporations that
need long-term funds
Stock is then traded in the secondary market, creating liquidity for investors and company
evaluation for managers
Background on Common Stock
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Background on Common Stock
Owners of common stock vote on: Election of board of directors Authorization to issue new shares Amendments to corporate charter Other major events
Many investor assign their vote to management via a proxy
Households own about half of all common stock, the rest is owned by institutional investors
Ownership and Voting Rights
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Background on Preferred Stock Represents equity or ownership interest, but
usually no voting rights Trade voting rights for stated fixed annual
dividend Dividend paid before common if dividends are
declared by board of directors Dividend may be omitted
Cumulative provision If common dividend paid, preferred dividend fixed
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Public Placement of Stock Initial public offerings (IPOs)
First-time offering of shares to the public Firm must provide information to public
Registration statement to SEC Prospectus Firm is assisted by an investment banker
Performance of IPOs Price generally rises on first day Longer-term performance of IPOs is poor
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Public Placement of Stock Secondary stock offerings
New stock issued by firm that already has shares outstanding
Shelf Registration 1982 SEC rule Allows firms to place securities without the time
lag associated with registering with SEC
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Stock Secondary Markets
Execute secondary market transactions Examples: NYSE, AMEX, Midwest, Pacific NYSE is largest, controlling 80 percent of value
of all organized exchanges Must own a seat on exchange in order to trade Trading resembles an auction
Organized Exchanges
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Stock Secondary Markets
No trading floor or specific location Telecommunications network Nasdaq
National Association of Securities Dealers Automatic Quotations
Thousands of small firms, plus high-tech giants
Pink sheets Tiny firms that do not meet requirements for NASDAQ
Over-the-Counter Market
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Stock Secondary Markets Trend: Consolidation of stock exchanges Market microstructure
Specialists, floor brokers, and market-makers Role of specialists
Types of orders Market order Limit order Stop order
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Stock Secondary Markets Changes in technology
Online trading Real-time quotes Company information Electronic Communications Networks (ECNs)
Margin requirements Specify amount of borrowed versus amount in cash
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Stock Secondary Markets Purchasing stock on margin
Borrow a portion of the funds from broker Margin is the amount of equity an investor provide Magnifies returns (both good and bad)
Short sales Borrow stock and sell Repay stock loan, hopefully at a lower price Investor able to have potential profit from decline in
stock price
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Regulation of Trading on Stock ExchangesSecurities Act Of 1933 and 1934
Securities And Exchange Commission
National Association Of Securities Dealers (NASD)
Regulate minimum information for investor and broker/dealer business practices
Circuit breakers
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Stock Quotation Stock Quotation
52-week price range (high/low and YTD% change) Stock symbol Dividend annualized and dividend yield Price-earnings ratio Volume in round lots Previous day’s price close and net daily change Remainders in cents, not eighths
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Exhibit 10.6
YTD %change Hi Lo Stock Sym DIV Yld% PE Vol 100s Last Net Chg
110.3 121.88 80.06 IBM IBM .56 .6 20 71979 93.77 11.06
Year-to-date Highest Lowest Name Stock Annual Dividend Price- Trading Closing Change in thepercentage price price of stock Symbol dividend yield, which earnings volume stock stock pricechange in of the of the paid per represents ratio based during the price on the previ-stock price stock stock year the annual on the previous ous trading
in this in this dividend as prevailing trading day day from theyear year a percentage stock price close on the
of the pre- day beforevailing stockprice
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Stock Indexes Dow Jones Industrial Average
Price-weighted average 30 large U.S. firms
Standard and Poor’s (S&P) 500 Value-weighted 500 large U.S. firms
New York Stock Exchange Indexes Other Stock Indexes
Amex, NASDAQ
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Stock Indexes Investing in stock indexes
Indexing Has become very popular
Lower transactions costs Studies find that actively-managed funds do not
outperform stock indexes
Examples of publicly traded stock indexes SPDRs Diamonds
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Stock Market Performance Comparing stock performance to bond
performance
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Investor Trading Decisions Stock value = proportional value of total
company Investor return = dividend yield + capital
gain/loss New information translated into trading
decisions impacting supply/demand for shares New equilibrium price established until new
information appears
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Exhibit 10.8Increased
Demand for
Security
Reduced
Supply of
Security
for Sale
Increase in
Equilibrium
(Market)
Price of
Security
New
Favorable
Information
Disclosed
to Investors
New
Unfavorable
Information
Disclosed
to Investors
Increased
Valuation
of
Security
by Investors
Reduced
Valuation
of
Security
by Investors
Reduced
Demand for
Security
Increased
Supply of
Security
for Sale
Decrease in
Equilibrium
(Market)
Price of
Security
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Institutional Participation in Stock Markets
Program trading by institutions Simultaneously buying and selling of a portfolio of
at least 15 different stocks valued at more than $1 million
Most commonly used by securities firms Program refers to the use of computers Impact on stock volatility
Often blamed for rise or fall in stock market Studies show that program trading does not increase
volatility
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Investor Monitoring of Firms in the Stock Market Shareholder activism
An investor who is dissatisfied with the way managers are running a firm has three choices:
Sell
Do Nothing
Flush!
Shareholder Activism
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Investor Monitoring of Firms in the Stock Market Communication with the firm
Effort to place pressure on management Institutional investors
CALPERS TIAA
Proxy contest Shareholder lawsuits
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Corporate Monitoring of Firms in the Stock Market
Market for corporate control Stock price declines due to poor management Subject to possible takeover
Barriers to market for corporate control Antitakeover amendments Poison pills Golden parachutes
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Corporate Monitoring of Their Own Stock in the Stock Market Stock repurchases
Dividend alternative or undervalued stock Excessive cash relative to +NPV investments
Leveraged buyouts (LBO) If managers believe the stock price undervalued,
they may buy the outstanding shares with borrowed funds
Stock offerings Signals overvalued shares
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Globalization of Stock Markets Barriers to international stock trading have
decreased Reduction in information costs Reduction in exchange rate risk
Foreign stock offerings in the United States International placement process Global stock exchange characteristics Emerging stock markets
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Globalization of Stock Markets Methods used to invest in foreign shares
Direct purchases American Depository Receipts (ADRs) International mutual funds World equity benchmark shares
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Globalization of Stock Markets Global diversification and integration among stock
markets Integration of markets during the 1987 crash
All major stock markets declined, indicating the underlying cause systematically affected all markets
Integration of markets during mini-crashes Example: August 27, 1998 “Bloody Thursday” Russian financial crisis
Increased integration associated with increased financial technology, competition, and lessened government regulation