Transcript Document
PowerPoint Slides for:
Financial Markets
and Institutions
6th Edition
By Jeff Madura
Prepared by
David R. Durst
The University of Akron
CHAPTER
10
Stock Offerings
and Investor
Monitoring
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
Copyright© 2002 Thomson Publishing. All rights reserved.
Background on Common Stock
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
Copyright© 2002 Thomson Publishing. All rights reserved.
Background on Common Stock
Ownership and Voting Rights
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
Copyright© 2002 Thomson Publishing. All rights reserved.
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
Copyright© 2002 Thomson Publishing. All rights reserved.
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
Copyright© 2002 Thomson Publishing. All rights reserved.
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
Copyright© 2002 Thomson Publishing. All rights reserved.
Stock Secondary Markets
Organized Exchanges
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
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Stock Secondary Markets
Over-the-Counter Market
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
Copyright© 2002 Thomson Publishing. All rights reserved.
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
Copyright© 2002 Thomson Publishing. All rights reserved.
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
Copyright© 2002 Thomson Publishing. All rights reserved.
Regulation of Trading on Stock
Exchanges
Securities 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
Copyright© 2002 Thomson Publishing. All rights reserved.
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
Copyright© 2002 Thomson Publishing. All rights reserved.
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
percentage
change in
stock price
Highest
price
of the
stock
in this
year
Lowest
price
of the
stock
in this
year
Annual
dividend
paid per
year
Dividend
yield, which
represents
the annual
dividend as
a percentage
of the prevailing stock
price
Priceearnings
ratio based
on the
prevailing
stock price
Trading
volume
during the
previous
trading day
Closing
stock
price
Name
of stock
Stock
Symbol
Change in the
stock price
on the previous trading
day from the
close on the
day before
Copyright© 2002 Thomson Publishing. All rights reserved.
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
Copyright© 2002 Thomson Publishing. All rights reserved.
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
Copyright© 2002 Thomson Publishing. All rights reserved.
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 10.8
New
Favorable
Information
Disclosed
to Investors
New
Unfavorable
Information
Disclosed
to Investors
Increased
Valuation
of
Security
by Investors
Reduced
Valuation
of
Security
by Investors
Increased
Demand for
Security
Reduced
Supply of
Security
for Sale
Reduced
Demand for
Security
Increased
Supply of
Security
for Sale
Increase in
Equilibrium
(Market)
Price of
Security
Decrease in
Equilibrium
(Market)
Price of
Security
Copyright© 2002 Thomson Publishing. All rights reserved.
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
Copyright© 2002 Thomson Publishing. All rights reserved.
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
Copyright© 2002 Thomson Publishing. All rights reserved.
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
Copyright© 2002 Thomson Publishing. All rights reserved.