ACF 6: Initial public offerings (IPO's)

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  • Created by: charlie
  • Created on: 03-05-18 11:35
Staying as a private company: +ves/ -ves
+VES: not subject to conflicts of interests/ agency costs (Managers vs SH vs DH) -VES: hard for other companies to value its worth/ greater info asymmetry (private info/ less regulation)
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IPO Conflicts of interests/ agency costs (E.g. SnapChat)
(1) Ownership + control structure from 'dual shares' (no voting rights) (2) Board of directors appointed by founders were older (less chance of conflict)
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Underpricing of shares (E.g. SnapChat) +ves (investors)
(1) Deliberate as keep LT investors for future financing (2) Keeps markets liquid (poorly informed investors dont leave) (3) Investors dont reveal preferences
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Underpricing of shares (E.g. SnapChat) -ves (firm)
(1) 'Money left at the table' (however don't get upset due to (1) Belief in IB analysts (2) Risk averse + want IPO success (3) gain money already)
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Reason for decline in growth of IPO's (post dotcome bubble)
(1) Benefits of staying private whilst still being able to raise private capital (private debt markets)
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Other types of companies: SOEs +ves/ -ves
+VES: (1) Political ties provide protection (2) access to financial resources (3) Low competition -VES: (1) Conflicts between government + firm (2) Laziness due to protection
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Going public: +ves (with added contradictions)
(1) Raising capital to invest (but private debt markets) (2) Achieve liquidity/ reward for work (but private funding markets hand employ. shares) (3) Acquisition currency created helps valuation (4) +ves signals of transp (5) Brand awareness (6) D/E
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Going public: -ves
(1) Costly and takes time (fees) (2) More disclosure + scrutiny (more stakeholders) that competitors take advantage of (3) costly compliance (4) Agency costs (SH short-term) (5) Underpricing risk (6) D/E
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Going public: Conventional IPO Stage (1)
(1) Reputable underwriter selected (aims to avoid under/over pricing)
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Going public: Conventional IPO Stage (2)
(2) Underwriter carries out tasks
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Going public: Conventional IPO Stage (3)
(3) Marketing the offer (preliminary prospectus + road shows)
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Going public: Conventional IPO Stage (4)
(4) The offering (Underwriter buys shares from company at fixed price + sells to investors at IPO price)/ 'Green Shoe' option (excess demand)
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Going public: Unconventional IPO (E.g Spotify)
Going public without raising capital (current SH able to sell shares publicly/ D/E kept high)
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IPO characteristics: cyclical ('HOT ISSUE' markets)
trades on secondary market (after IPO) at high premium due to high optimism for future performance (e.g SnapChat) gives picture of underpricing (heuristic-driven bias)
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IPO characteristics: reasons why first day underpricing common
(1) Managers info > investors (but want to keep investors interested) (2) Managers info < investor info (investors generate +ve returns) (3) 'Winners curse' for better informed investors
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IPO characteristics: long-run underperformance
(1) Investors 'lottery effect' driven by persuasion + behavioural biases (2) Unable to gain view on -ve sentiment (no short selling)
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Other cards in this set

Card 2

Front

IPO Conflicts of interests/ agency costs (E.g. SnapChat)

Back

(1) Ownership + control structure from 'dual shares' (no voting rights) (2) Board of directors appointed by founders were older (less chance of conflict)

Card 3

Front

Underpricing of shares (E.g. SnapChat) +ves (investors)

Back

Preview of the front of card 3

Card 4

Front

Underpricing of shares (E.g. SnapChat) -ves (firm)

Back

Preview of the front of card 4

Card 5

Front

Reason for decline in growth of IPO's (post dotcome bubble)

Back

Preview of the front of card 5
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