Activity in the Euro Area Initial Public Offering Market

Total Page:16

File Type:pdf, Size:1020Kb

Activity in the Euro Area Initial Public Offering Market Box 5 Activity in the euro area initial public offering market Initial public offering (IPO) activity in the euro area, measured either by total transacted amounts or by the number of transactions, surged after the mid-1990s (see Chart A below). The market was particularly active in 1999 and reached a peak in the first quarter of 2000. Since then activity has fallen off markedly and by the third quarter of 2002 it reached levels as low as those seen in the mid-1990s. While several factors may have played a role in these swings, this box focuses on the link between IPO activity and its cost, as proxied by the cost of equity. Chart A: Initial public offering activity (four-quarter moving average, quarterly data) IPO amounts transacted, EUR billions (left-hand scale) number (right-hand scale) 20 100 18 90 16 80 14 70 12 60 10 50 8 40 6 30 4 20 2 10 0 0 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 1988 1990 1991 1992 1993 1995 1996 1997 1998 2000 2001 2002 Source: Bondware. A commonly accepted definition of the cost faced by firms in raising equity capital is the return demanded by investors to bear the risk of an equity investment. It can be broken down into a risk-free interest rate, usually the return that investors would obtain from investing in a government bond, plus an equity risk premium, the additional return demanded by the investor to bear the specific risk attached to equity. From a conceptual 34 ECB • Monthly Bulletin • December 2002 viewpoint the definition of the cost of equity is straightforward; in practice, however, its measurement is rather cumbersome, notably because it is difficult to measure the size of the equity risk premium. Stock prices reflect the discounted value of future dividends. The discount rate that equates the current stock price with the net present value of future dividends is the return demanded by shareholders for holding stocks. If the return demanded by shareholders rises, this will, assuming dividends cannot be raised and all else being equal, bring about a decline in stock prices and a rise in the dividend yield, i.e. the anticipated annual dividend as a percentage of the share price. Such a rise in the dividend yield then implies a higher cost of equity capital. Chart B: Initial public offering activity and the price/dividend ratio (four-quarter moving average, quarterly data) IPO amounts transacted, EUR billions (left-hand scale) price dividend ratio 1) (right-hand scale) 20 65 18 60 16 14 55 12 50 10 8 45 6 40 4 2 35 Q2 Q2 Q2 Q2 Q2 Q2 Q2 1996 1997 1998 1999 2000 2001 2002 Source: Bondware and Datastream. 1) Share price as a percentage of the anticipated annual dividend. Chart B shows the amounts transacted in IPOs in the euro area since 1995 together with the price/dividend ratio (i.e. the inverse of the dividend yield) of the euro area Datastream stock index. The two series show a very high correlation. The IPO market was more active when the price/dividend ratio was high or, in other words, when the cost of equity was low. In the period since 1995, the price/dividend ratio has been driven mainly by stock price developments. Hence it would seem that there is a close link between IPO activity and stock price developments, which impact on the cost of equity. This result sheds light on one of the transmission mechanisms between asset prices and the real economy, namely the cost-of-capital channel. It illustrates how the decline in stock prices over the past two years has made access to equity financing more difficult. ECB • Monthly Bulletin • December 2002 35.
Recommended publications
  • An Assessment of Valuation Methods of Stock Initial Public Offerings on Tehran Stock Exchange
    International Journal of Academic Research in Business and Social Sciences 2017, Vol. 7, No. 4 ISSN: 2222-6990 An Assessment of Valuation Methods of Stock Initial Public offerings on Tehran Stock Exchange Mohammad Kheiry 1, Sima Golozar 2,*, Ali Amiri 3 1 Department of Economic, Accounting and Management, Payam Noor University, Tehran, Iran. Kheiry Email: [email protected] 2,* Postgraduate student of Financial Management, Qeshm Institute for Higher Education, Qeshm, Iran. Email: [email protected] 3 Department of Accounting, college of human science, Bandar Abbas, Islamic Azad University, Bandar Abbas, Iran. Email: [email protected] DOI: 10.6007/IJARBSS/v7-i4/2822 URL: http://dx.doi.org/10.6007/IJARBSS/v7-i4/2822 Abstract Every day hundreds of companies all over the world are entering capital market for the first time by issuing stocks. By doing so, they decide to invest capital necessary for continuing activity and expanding operations accordingly. For this reason, it is important to the companies that price specified for their stock demonstrate real value of assets and their growth and development opportunities in the future. The purpose of this research is to study valuation methods of stock initial public offerings at the Tehran Stock Exchange. Population and study sample consisted of firms publicly offered their stocks for the first time at Tehran Stock Exchange during 2009-2014, and experienced no trading halt, i.e. 45 companies of which seven companies were eliminated due to lack of trading on the stock exchange and 38 firms were chosen. The research method is correlational-descriptive and the research is an applied research by purpose.
    [Show full text]
  • Initial Public Offerings
    November 2017 Initial Public Offerings An Issuer’s Guide (US Edition) Contents INTRODUCTION 1 What Are the Potential Benefits of Conducting an IPO? 1 What Are the Potential Costs and Other Potential Downsides of Conducting an IPO? 1 Is Your Company Ready for an IPO? 2 GETTING READY 3 Are Changes Needed in the Company’s Capital Structure or Relationships with Its Key Stockholders or Other Related Parties? 3 What Is the Right Corporate Governance Structure for the Company Post-IPO? 5 Are the Company’s Existing Financial Statements Suitable? 6 Are the Company’s Pre-IPO Equity Awards Problematic? 6 How Should Investor Relations Be Handled? 7 Which Securities Exchange to List On? 8 OFFER STRUCTURE 9 Offer Size 9 Primary vs. Secondary Shares 9 Allocation—Institutional vs. Retail 9 KEY DOCUMENTS 11 Registration Statement 11 Form 8-A – Exchange Act Registration Statement 19 Underwriting Agreement 20 Lock-Up Agreements 21 Legal Opinions and Negative Assurance Letters 22 Comfort Letters 22 Engagement Letter with the Underwriters 23 KEY PARTIES 24 Issuer 24 Selling Stockholders 24 Management of the Issuer 24 Auditors 24 Underwriters 24 Legal Advisers 25 Other Parties 25 i Initial Public Offerings THE IPO PROCESS 26 Organizational or “Kick-Off” Meeting 26 The Due Diligence Review 26 Drafting Responsibility and Drafting Sessions 27 Filing with the SEC, FINRA, a Securities Exchange and the State Securities Commissions 27 SEC Review 29 Book-Building and Roadshow 30 Price Determination 30 Allocation and Settlement or Closing 31 Publicity Considerations
    [Show full text]
  • Etf Series Solutions
    INFORMATION CIRCULAR: ETF SERIES SOLUTIONS TO: Head Traders, Technical Contacts, Compliance Officers, Heads of ETF Trading, Structured Products Traders FROM: NASDAQ / BX / PHLX Listing Qualifications Department DATE: November 29, 2017 EXCHANGE-TRADED FUND SYMBOL CUSIP # AAM S&P Emerging Markets High Dividend Value ETF EEMD 26922A586 AAM S&P 500 High Dividend Value ETF SPDV 26922A594 BACKGROUND INFORMATION ON THE FUNDS ETF Series Solutions (the “Trust”) is a management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”), consisting of several investment portfolios. This circular relates only to the Funds listed above (each, a “Fund” and together, the “Funds”). The shares of the Fund are referred to herein as “Shares.” Advisors Asset Management, Inc. (the “Adviser”) is the investment adviser to the Funds. AAM S&P Emerging Markets High Dividend Value ETF The AAM S&P Emerging Markets High Dividend Value ETF (“EEMD”) seeks to track the total return performance, before fees and expenses, of the S&P Emerging Markets Dividend and Free Cash Flow Yield Index (the “EEMD Index”). EEMD uses a “passive management” (or indexing) approach to track the total return performance, before fees and expenses, of the EEMD Index. The EEMD Index is a rules-based, equal-weighted index that is designed to provide exposure to the constituents of the S&P Emerging Plus LargeMidCap Index that exhibit both high dividend yield and sustainable dividend distribution characteristics, while maintaining diversified sector exposure. The EEMD Index was developed in 2017 by S&P Dow Jones Indices, a division of S&P Global.
    [Show full text]
  • The Time-Varying Liquidity Risk of Value and Growth Stocks
    EDHEC-Risk Institute 393-400 promenade des Anglais 06202 Nice Cedex 3 Tel.: +33 (0)4 93 18 32 53 E-mail: [email protected] Web: www.edhec-risk.com The Time-Varying Liquidity Risk of Value and Growth Stocks April 2010 Ferhat Akbas Mays Business School, Texas A&M University, College Station Ekkehart Boehmer Affiliate Professor, EDHEC Business School Egemen Genc Lundquist College of Business, University of Oregon, Eugene Ralitsa Petkova Mays Business School, Texas A&M University, College Station Abstract We study the liquidity exposures of value and growth stocks over business cycles. In the worst times, value stocks have higher liquidity betas than in the best times, while the opposite holds for growth stocks. Small value stocks have higher liquidity exposures than small growth stocks in the worst times. Small growth stocks have higher liquidity exposures than small value stocks in the best times. Our results are consistent with a flight-to-quality explanation for the countercyclical nature of the value premium. Exposure to time-varying liquidity risk captures 35% of the small- stock value premium and 100% of the large-stock value premium. We thank seminar participants at Texas A&M University and the University of Oregon for helpful comments and suggestions. EDHEC is one of the top five business schools in France. Its reputation is built on the high quality of its faculty and the privileged relationship with professionals that the school has cultivated since its establishment in 1906. EDHEC Business School has decided to draw on its extensive knowledge of the professional environment and has therefore focused its research on themes that satisfy the needs of professionals.
    [Show full text]
  • Frequently Asked Questions About the 20% Rule and Non-Registered Securities Offerings
    FREQUENTLY ASKED QUESTIONS ABOUT THE 20% RULE AND NON-REGISTERED SECURITIES OFFERINGS issuance, equals or exceeds 20% of the voting power understanding the 20% Rule outstanding before the issuance of such stock; or (2) the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess What is the 20% rule? of 20% of the number of shares of common stock The “20% rule,” as it is often referred to, is a corporate outstanding before the transaction. “Voting power governance requirement applicable to companies listed outstanding” refers to the aggregate number of on nasdaq, the nYSe or the nYSe American LLC votes that may be cast by holders of those securities (“nYSe American”) (collectively, the “exchanges”). outstanding that entitle the holders thereof to vote each exchange has specific requirements applicable generally on all matters submitted to the issuer’s to listed companies to receive shareholder approval securityholders for a vote. before they can issue 20% or more of their outstanding common stock or voting power in a “private offering.” However, under nYSe Rule 312.03(c), the situations The exchanges also require shareholder approval in in which shareholder approval will not be required connection with certain other transactions. Generally: include: (1) any public offering for cash, or (2) any issuance involving a “bona fide private financing,1” if • Nasdaq Rule 5635(d) requires shareholder approval such private financing involves a sale of: (a) common for transactions, other than “public offerings,”
    [Show full text]
  • Blackrock Innovation and Growth Trust (BIGZ)* Initial Public Offering: February – March 2021
    BlackRock Innovation and Growth Trust (BIGZ)* Initial public offering: February – March 2021 A new offering designed for investors seeking access to: Exposure to innovative companies with above-average earnings Innovation growth potential Mid- and Mid- and small-cap companies that are seeking to reshape industries small-caps Private markets Expanded opportunities into private markets and IPOs & IPOs Growth & Potential for attractive total return and income in a limited term structure† income No upfront An opportunity to participate in the Trust’s initial public offering at net fees‡ asset value (NAV) * It is anticipated that BlackRock Innovation and Growth Trust’s (the “Trust”) shares will be approved for listing on the New York Stock Exchange, subject to notice of issuance. † The Trust’s term may be extended and/or the Trust may convert to a perpetual term following completion of an “Eligible Tender Offer” (as defined in the Trust’s preliminary prospectus).‡ The Trust is subject to certain ongoing fees and expenses as disclosed in the Trust’s prospectus. See the back of this brochure and the “Risks” section of the Trust’s preliminary prospectus for information concerning risks. There is no assurance that the Trust will achieve its investment objectives. The Trust is not a complete investment program. Consult your financial professional before investing. The Trust is designed as a long-term investment and not as a trading vehicle. The information in the Trust’s preliminary prospectus and in this document is not complete and may be amended or changed. A registration statement relating to these securities has been filed with the Securities and Exchange Commission, but has not yet become effective.
    [Show full text]
  • Investigating of Long-Term Performance the Stocksinitial Offeringin Tehran Stock Exchange
    Special Issue INTERNATIONAL JOURNAL OF HUMANITIES AND January 2016 CULTURAL STUDIES ISSN 2356-5926 Investigating of long-term performance the stocksinitial offeringin Tehran Stock Exchange Mohammad Ali Molazadeh Department of management Kerman branch islamic Azad University,Kerman,Iran Valiollah Shahbazkhani Department of economic Kerman branch Islamic Azad University, Kerman, Iran. Abstract The aim of this research was to investigate the long-term performance the stocksinitial offering in Tehran Stock Exchange. This research was a kind of study of library and analytical reason and it was based on the ordinary least squares method (analysis of data compilation).In this research the financial information of 24 companies listed on the Tehran Stock Exchange during the period 2010 to 2015 that they had been initial offering were investigated (144 companies - year). To analyze the obtain results of research was used the 12 Stata software. The research results relate to confirming the first hypothesis have shown that the warm and cold type of market in the relationship between the volume of shares offered with the lower valuation of fact have the significant positive impact.Also according to the analysis made in relation to reject the second hypothesis of research reached to this result that there is not a significant relationship between the number of companies that are initial offering with the valuation less than in fact of the Stocks in the previous period. In the following the research results in relate to confirming third hypothesis indicate that there is a significant relationship between the number of companies have Initial offering, with the kind of warm and cold market.Also according to the analysis conducted in relation to confirmation the fourth hypotheses of research conclude that there is a significant relationship between the grouped companies in the same industry in the initial offering with the kind of warm and cold market.
    [Show full text]
  • Dividend Valuation Models Prepared by Pamela Peterson Drake, Ph.D., CFA
    Dividend valuation models Prepared by Pamela Peterson Drake, Ph.D., CFA Contents 1. Overview ..................................................................................................................................... 1 2. The basic model .......................................................................................................................... 1 3. Non-constant growth in dividends ................................................................................................. 5 A. Two-stage dividend growth ...................................................................................................... 5 B. Three-stage dividend growth .................................................................................................... 5 C. The H-model ........................................................................................................................... 7 4. The uses of the dividend valuation models .................................................................................... 8 5. Stock valuation and market efficiency ......................................................................................... 10 6. Summary .................................................................................................................................. 10 7. Index ........................................................................................................................................ 11 8. Further readings .......................................................................................................................
    [Show full text]
  • Understanding and Planning an Initial Public Offering (IPO)
    Understanding and Planning an Initial Public Offering (IPO) Understanding the IPO How Olshan Can Help Process Olshan can provide assistance during each phase of the IPO An initial public offering (IPO) is the process achieved when a private process. company registers its shares of common stock with the SEC and sells them to public investors in an underwritten offering. The shares The IPO Planning Phase – The pre-IPO preparation phase sets the subsequently trade on a stock exchange, such as the NYSE or groundwork for a successful IPO. Olshan will: Nasdaq, and the company becomes subject to the public reporting • Identify gating issues upfront and recommend changes to requirements of the federal securities laws. enhance corporate governance and transparency as a public The process is often challenging – it is a time-consuming distraction company. for management, it often involves significant transaction costs and, • Develop a high-level timeline clearly identifying responsibilities. with a narrow “market window,” there is no guarantee the IPO will • Help assemble the right IPO team – underwriters, accountants generate the level of hoped-for proceeds, or be completed at all. and even CFOs. Understanding the IPO process and managing it effectively can help avoid these risks. • Provide support for dual-track strategies such as private equity and other M&A transactions. Early preparation and an experienced team of underwriters, lawyers and accountants are key to a smoothly run IPO process. Below is an The IPO Preparation and Filing Phase – This phase involves a outline of the basic steps that will occur over the 3 to 5 month period: substantial amount of detailed legal documentation.
    [Show full text]
  • Initial Public Offering Allocations
    Initial Public Offering Allocations by Sturla Lyngnes Fjesme A dissertation submitted to BI Norwegian Business School for the degree of PhD PhD specialization: Financial Economics Series of Dissertations 9/2011 BI Norwegian Business School Sturla Lyngnes Fjesme Initial Public Offering Allocations © Sturla Lyngnes Fjesme 2011 Series of Dissertations 9/2011 ISBN: 978-82-8247-029-2 ISSN: 1502-2099 BI Norwegian Business School N-0442 Oslo Phone: +47 4641 0000 www.bi.no Printing: Nordberg Trykk The dissertation may be downloaded or ordered from our website www.bi.no/en/Research/Research-Publications/ Abstract Stock exchanges have rules on the minimum equity level and the minimum number of shareholders that are required to list publicly. Most private companies that want to list publicly must issue equity to be able to meet these minimum requirements. Most companies that list on the Oslo stock exchange (OSE) are restricted to selling shares in an IPO to a large group of dispersed investors or in a negotiated private placement to a small group of specialized investors. Initial equity offerings have high expected returns and this makes them very popular investments. Ritter (2003) and Jenkinson and Jones (2004) argue that there are three views on how shares are allocated in the IPO setting. First, is the academic view based on Benveniste and Spindt (1989). In this view investment banks allocate IPO shares to informed investors in return for true valuation and demand information. Informed investors are allocated shares because they help to price the issue. Second, is the pitchbook view where investment banks allocate shares to institutional investors that are likely to hold shares in the long run.
    [Show full text]
  • Frequently Asked Questions About Initial Public Offerings
    FREQUENTLY ASKED QUESTIONS ABOUT INITIAL PUBLIC OFFERINGS Initial public offerings (“IPOs”) are complex, time-consuming and implicate many different areas of the law and market practices. The following FAQs address important issues but are not likely to answer all of your questions. • Public companies have greater visibility. The media understanding IPOS has greater economic incentive to cover a public company than a private company because of the number of investors seeking information about their What is an IPO? investment. An “IPO” is the initial public offering by a company • Going public allows a company’s employees to of its securities, most often its common stock. In the share in its growth and success through stock united States, these offerings are generally registered options and other equity-based compensation under the Securities Act of 1933, as amended (the structures that benefit from a more liquid stock with “Securities Act”), and the shares are often but not an independently determined fair market value. A always listed on a national securities exchange such public company may also use its equity to attract as the new York Stock exchange (the “nYSe”), the and retain management and key personnel. nYSe American LLC or one of the nasdaq markets (“nasdaq” and, collectively, the “exchanges”). The What are disadvantages of going public? process of “going public” is complex and expensive. • The IPO process is expensive. The legal, accounting upon the completion of an IPO, a company becomes and printing costs are significant and these costs a “public company,” subject to all of the regulations will have to be paid regardless of whether an IPO is applicable to public companies, including those of successful.
    [Show full text]
  • QUESTIONS 3.1 Profitability Ratios Questions 1 and 2 Are Based on The
    140 SU 3: Profitability Analysis and Analytical Issues QUESTIONS 3.1 Profitability Ratios Questions 1 and 2 are based on the following information. The financial statements for Dividendosaurus, Inc., for the current year are as follows: Balance Sheet Statement of Income and Retained Earnings Cash $100 Sales $ 3,000 Accounts receivable 200 Cost of goods sold (1,600) Inventory 50 Gross profit $ 1,400 Net fixed assets 600 Operations expenses (970) Total $950 Operating income $ 430 Interest expense (30) Accounts payable $140 Income before tax $ 400 Long-term debt 300 Income tax (200) Capital stock 260 Net income $ 200 Retained earnings 250 Plus Jan. 1 retained earnings 150 Total $950 Minus dividends (100) Dec. 31 retained earnings $ 250 1. Dividendosaurus has return on assets of Answer (A) is correct. (CIA, adapted) REQUIRED: The return on assets. DISCUSSION: The return on assets is the ratio of net A. 21.1% income to total assets. It equals 21.1% ($200 NI ÷ $950 total B. 39.2% assets). Answer (B) is incorrect. The ratio of net income to common C. 42.1% equity is 39.2%. Answer (C) is incorrect. The ratio of income D. 45.3% before tax to total assets is 42.1%. Answer (D) is incorrect. The ratio of income before interest and tax to total assets is 45.3%. 2. Dividendosaurus has a profit margin of Answer (A) is correct. (CIA, adapted) REQUIRED: The profit margin. DISCUSSION: The profit margin is the ratio of net income to A. 6.67% sales. It equals 6.67% ($200 NI ÷ $3,000 sales).
    [Show full text]