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Topics of Discussion Raising Capital: Theory and Evidence A survey of US Corporate Financing
Innovations Initial Public Offerings Internet Investment Banking Are Bank Loans different? Convertible Bonds Origin of Lyons Hybrid Debt Project Finance in Infrastructure Investments
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Raising Capital: Theory and Evidence
Average abnormal returns are consistently either negative or not significantly different from zero
There are no examples of a significant positive result
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Possible Explanations:
EPS Dilution Price Pressure Optimal Capital Structure Insider Information Unanticipated Announcements Ownership Changes
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Marketing Securities: Rights vs. Underwritten Offerings Negotiated vs. Competitive Bid
Contracts Shelf vs. Traditional Registration IPOs:
Underpricing Best Effort vs. Firm Commitment Stabilization and the “Green Shoe”
Option
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Conclusions: Table 6, pg. 287. The primary cause for the negative
response to new stock issues is the potential for management to exploit its inside information by issuing overvalued equity.
Management should be sensitive to the way the market is likely to react to an announcement of a new issue.
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A Survey of US Corporate Financing Innovations: 1970-1997
Innovative financial instruments: Tables 3, 4, 5, 6, 7
Objectives: Manage the interest rate risk faced by
investors and issuers Reduce information asymmetry Increase the tradability of financial
assets
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Initial Public Offerings Why issue public equity?
Lowers cost of K for the firm Liquidity for current stockholders Imp. Information in price movements Lower monitoring costs
Why should you not raise public equity?
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Firm selects an investment bank Decides Best Efforts or Firm Commitment
Due Diligence and SEC Regulations
Roadshow to estimate demand Pricing Problems
The Process of issuing an IPO
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Why are IPO’s underpriced Compensation for underwriters Compensation for investors Selection bias Litigation bias Collusion Regulatory Constraints Asymmetry of Information Hot Issues Market
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Hot Issues
Cycles in volume and initial returns to investors
Initial returns lead volume by 6 to 12 months
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?????? If you were the CFO of a private
company how would choose an investment bank?
As an investor, how might you take advantage of IPO underpricing?
Do you think that IB and firms adapt completely to market conditions?
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Internet Investment Banking Historically, IB depended on networks of
institutional investors II have an incentive to understate
interest in IPO’s Favored treatment was necessary Solution: to try to appeal to retail
customers
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Wit Capital: coordinates e-syndicate of customers for small
firms No flipping
OpenIpo: Sets Price based on highest bid from public
Difference: One coordinates investor, the other offers them a
voice Problems:
Winners curve
Innovations
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?????? Is it right to say that the companies
function as e-distributors? Why would firms want to use
OpenIpo? Goldman Sachs owns 22% of Wit
Capital. Implications? Does this imply the end of
relationship based banking?
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Summary As the cost of direct communication with
individual investors has decreased, the relative cost or relationship based production technology has increased
Investors should be smart and invest in IPO’s in the initial period of a hot issue market. Issuers should approach a prestigious IB and disclose information.
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Are Bank Loans Different?: Some Evidence From the Stock Market
Announcements made by public firms of new bank lending agreements elicit a significant positive reaction from the stock market
Inside Debt: the lender has access to information that the general public does not have
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Inside Debt:
Advantages: Solution to “information asymmetry” Inside debt holders are in better
positions to monitor the firm Confidentiality Saves time and money by avoiding
the registration process with the SEC
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Market Reaction:
Uses of debt Choice of maturity also sends a
signal to investors Based on the research, bank loans
are the most effective form of inside debt
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LYON Liquid Yield Option Note Zero coupon, Convertible, Callable
and Puttable bond introduced by Merrill Lynch
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Origination To target retail investors Primary activity is to buy calls Risk averse to options Result: Bond is convertible, Puttable
and Callable Issuer:
Investment grade, volatile stock, name recognition?
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Structure Convertible = Long term call Put Option Call Option What happens to value when:
interest rate volatility and level of stock price call price and time of call dividend put price