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Finance 4330

Finance 4330. Advanced Corporate Finance Issuing Securities to the Public And Raising Capital Lecture 26 Fall 2010 Ronald F. Singer. Issues in Raising Capital . What securities to issue Changes in Ownership and Control Alternative Marketing Options.

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Finance 4330

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  1. Finance 4330 Advanced Corporate Finance Issuing Securities to the Public And Raising Capital Lecture 26 Fall 2010 Ronald F. Singer

  2. Issues in Raising Capital • What securities to issue • Changes in Ownership and Control • Alternative Marketing Options

  3. Market Reaction to Security Offer Announcements • Industrial Utility

  4. Market Reaction to Security Offer Announcements • Industrial Utility • Common Stock -3.14% -0.75% • Preferred Stock -0.19%*0.08%* • Convertible Preferred -1.44% -1.38% • Straight Debt -0.26%* -0.13%* • Convertible Debt -2.07%

  5. Explanations • EPS Dilution • Price Pressure • Optimal Capital Structure • Information Asymmetry

  6. Evidence • Optimal Capital Structure Theory • No evidence from announcement effects • Implied Cash Flow Changes • Negative returns when issued • Positive Returns when retired • Leverage Changes • Announcement Anticipation • Ownership changes • Price Pressure – No evidence

  7. Organizational and Ownership Changes • Mergers (Target versus Bidder) • Spin off (3.4%) • Sell off (seller: 0.7%:buyer: 0.7% ) • Equity Carve Outs (insignificant) • Go Private (30%) • Vol. Liquidiation (33%)

  8. Marketing Securities Issues • Rights Offering • Underwriting • Firm commitment • Best Efforts • Private Placement • Shelf Registration versus conventional

  9. Why Underwritten Offering • Costs 3 to 30 times what a non-underwritten offering would cost • Comprises 80% of offerings Why?

  10. Negotiated versus competitive bids • Negotiated much more expensive but are chosen in an overwhelming number of cases • Why?

  11. Initial Public Offerings (IPO’s) • What is the right price? • Uncertainty • Best Efforts versus Firm Commitment • Underpricing Much larger in Best Efforts Much Larger compared to seasoned offerings

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