Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect.

Lecture 2

Debt Financing

Debt vs. Equity

Financial Markets and Corporate Strategy, David Hillier

Types of Equity Securities

Financial Markets and Corporate Strategy, David Hillier

Ordinary Shares

Financial Markets and Corporate Strategy, David Hillier

Multiple Class Shares - % Firms with unitary share structures

Financial Markets and Corporate Strategy, David Hillier

Different Types of Multiple Class Equities  Non-Voting

Preference Shares

Multiple Voting Rights

Voting Right

Ceilings

Ownership

Ceilings

Priority Shares

Golden Shares

Depositary

Receipts

UK 20% 1% 3% 5% 4% 3% -

France 2% 64% 19% 2% 5% - -

Germany 24% - 3% - - - -

Switzerland

- 12% 35% - - - -

Spain - - 41% - - - -

Italy 36% - 8% 28% - - -

Netherlands

- 67% - - 29% 10% 24%

Sweden - 75% 6% - - - -

Other 8% 8% 11% 8% - 3% -

Financial Markets and Corporate Strategy, David Hillier

Preference Shares

Financial Markets and Corporate Strategy, David Hillier

Exotic Preference Shares

Financial Markets and Corporate Strategy, David Hillier

Warrants

Financial Markets and Corporate Strategy, David Hillier

Volume of Global Equity Offerings 2010 ($ millions)

Financial Markets and Corporate Strategy, David Hillier

Depositary Receipts

Financial Markets and Corporate Strategy, David Hillier

Secondary Markets for Equity

Financial Markets and Corporate Strategy, David Hillier

Stock Exchange Systems

Financial Markets and Corporate Strategy, David Hillier

Dealer Markets

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Order Driven System

Financial Markets and Corporate Strategy, David Hillier

Market Efficiency

Financial Markets and Corporate Strategy, David Hillier

Limits to Arbitrage

Financial Markets and Corporate Strategy, David Hillier

Noise Traders

Financial Markets and Corporate Strategy, David Hillier

Sentiment Based Risk

Financial Markets and Corporate Strategy, David Hillier

Bubbles and Crashes

Financial Markets and Corporate Strategy, David Hillier

Bubbles in History

Financial Markets and Corporate Strategy, David Hillier

German Stock Exchange Volatility

Financial Markets and Corporate Strategy, David Hillier

Result 3.1

The stock market plays an important role in allocating capital. Sectors of the economy that experience favourable share price returns can more easily raise new capital for investment. Given this, the stock market is likely to more efficiently allocate capital if market prices accurately reflect the investment opportunities within an industry.

Financial Markets and Corporate Strategy, David Hillier

The Public Issue

Financial Markets and Corporate Strategy, David Hillier

Alternative Issue Methods

Public Issues

Financial Markets and Corporate Strategy, David Hillier

Public Issues

Financial Markets and Corporate Strategy, David Hillier

The Cash Offer

Financial Markets and Corporate Strategy, David Hillier

Other Factors in Equity Financing

Financial Markets and Corporate Strategy, David Hillier

IPO Underpricing

Financial Markets and Corporate Strategy, David Hillier

Underpricing and Firm Size

Financial Markets and Corporate Strategy, David Hillier

IPO Underpricing around the World

Financial Markets and Corporate Strategy, David Hillier

Number of Offerings and Average Issue Date Return

Financial Markets and Corporate Strategy, David Hillier

The Announcement of New Equity and the Value of the Firm

Financial Markets and Corporate Strategy, David Hillier

The Cost of New Issues

Financial Markets and Corporate Strategy, David Hillier

The Cost of New Issues

Financial Markets and Corporate Strategy, David Hillier

International Comparison of IPO Underwriting Fees

Financial Markets and Corporate Strategy, David Hillier

Result 3.2

IPOs are observed frequently in some years and not in others. The available evidence suggests that the hot issue periods are characterized by a large supply of available capital. Given this interpretation, firms are better off going public during a hot issue period.

Financial Markets and Corporate Strategy, David Hillier

Result 3.3The advantages and disadvantages of going public are as follows.Advantages:better access to capital marketsshareholders gain liquidityoriginal owners can diversifymonitoring and information are provided by external capital marketsenhances the firm’s credibility with customers, employees and suppliers. Disadvantages:expensivecosts of dealing with shareholdersinformation revealed to competitors public pressure. In general, a firm should go public when the benefits of doing so exceed the costs.

Financial Markets and Corporate Strategy, David Hillier

Rights Issues

Financial Markets and Corporate Strategy, David Hillier

The Underwriting Arrangements

Financial Markets and Corporate Strategy, David Hillier

The Private Equity Market

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Private Equity Attractiveness Index

Financial Markets and Corporate Strategy, David Hillier

Sources of Private Equity Financing

Financial Markets and Corporate Strategy, David Hillier

Major Private Equity Fundraisers

Financial Markets and Corporate Strategy, David Hillier

Breakdown of Private Equity Financing, 2002 - 2007

Financial Markets and Corporate Strategy, David Hillier

Stages of Financing

Financial Markets and Corporate Strategy, David Hillier

Private Equity Financing by Funding Stage, 2007

Financial Markets and Corporate Strategy, David Hillier

IPOs by VC backed Biotech Firms

Financial Markets and Corporate Strategy, David Hillier

Thank You