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Strategies for Issuing Securities and Raising Capital in Advanced Corporate Finance

In this lecture on Advanced Corporate Finance, Professor Ronald F. Singer explores key issues in raising capital through public securities. The session highlights decisions on what securities to issue, the effects of ownership changes, and marketing options. It delves into market reactions to security offer announcements, including EPS dilution, optimal capital structure, and evidence of information asymmetry. The lecture also addresses the costs and strategies of underwriting, initial public offerings (IPOs), and the challenges of pricing securities. Insights are gained into the dynamics of mergers, spin-offs, and private placements.

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Strategies for Issuing Securities and Raising Capital in Advanced Corporate Finance

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Presentation Transcript

  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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