Initial public offering and International finance
Order Instructions:
Pay attention that each section has to have a reference list at the end of that section.I have also provided some resources to use in completing this paper, and the writer must clearly show all details and mastery of the different topic.
SECTION A (2 pages minimum)
Initial Public Offering
One method utilized by companies to obtain the long-term capital necessary to run and grow their businesses is by providing the general public with the option to purchase stocks. The company’s first sale of stock is known as the initial public offering (IPO). When a company first offers the IPO, stocks are, on average, underpriced.
• Discuss the implications of such underpricing to established theories of market efficiency.
• Explain the role market efficiency might play in the underpricing theories presented by Loughran and Ritter.
Include a reference list at the end of this section before completing SECTION B
SECTION B (2 pages minimum)
International Finance
Critics of the field of international finance charge that the field is simply “corporate finance with an exchange rate.”
• Critique this statement.
• Do you agree or disagree with it? Why?
• Justify your answer with specific details.
Include a reference list at the end of this section .
Resources
• Readings
Course Text
• Corporate Finance
o Chapter 20, “Raising Capital”
This chapter presents the fundamental mechanics involved with initial public offerings (IPOs) of stock in a corporation, and the variety of characteristics, costs, and terms associated with the different IPO types.
o Chapter 29, “Mergers, Acquisitions, and Divestitures”
The several means by which one firm can acquire another are described in this chapter as well as the benefits and consequences of each method on the corporations, investors, and consumers that are involved. There is also a discussion on tactics used in avoiding hostile takeovers.
o Chapter 31, “International Corporate Finance”
This final chapter covers international corporate finance, including the basic vocabulary and mechanics of using exchange rates, the relationships between international financial variables, and how these are all used in international capital budgeting.
Article
•Loughran, T., & Ritter, J. (2004). Why has IPO underpricing changed over time? Financial Management (Blackwell Publishing Limited, Autumn), 33(3), 5–37. Retrieved from Business Source Premier database.
The authors of this article research the common practice of underpricing IPOs and how it has drastically fluctuated over the last several decades. They then propose and discuss three hypotheses to explain the level of changes that have occurred.
•Cohen, G., & Yagil, J. (2007). A multinational survey of corporate financial policies. Journal of Applied Finance, 17(1), 57–69. Retrieved from Business Source Premier database.
This article reviews findings from a six-country survey of corporate financial policies where it finds that investments were considered the most important financial decision and the internal rate of return was the most commonly used evaluation method.
•Ahern, K., & Weston, J. (2007). M&As: The good, the bad, and the ugly. Journal of Applied Finance, 17(1), 5–20. Retrieved from Business Source Premier database.
This article analyzes and rates the different theories surrounding the goals of mergers and acquisitions.
•Rhodes-Kropf, M., & Robinson, D. (2008). The market for mergers and the boundaries of the firm. Journal of Finance, 63(3), 1169–1211. Retrieved from Business Source Premier database.
In this article, the authors describe a new model they have developed that helps explain the process companies use for decision making on potential mergers and from using this model, they conclude that like-buys-like in terms of financial ratios.
•Statman, M. (2007). Local ethics in a global world. Financial Analysts Journal, 63(3), 32–41. Retrieved from Business Source Premier database.
In an increasingly global market, this article discusses the importance of evaluating ethics and fairness in different countries and seeking to improve the level at which is business occurs.
•Poulsen, A., & Stegemoller, M. (2008). Moving from private to public ownership: Selling out to public firms versus Initial Public Offerings. Financial Management, 37(1), 81–101. Retrieved from Business Source Premier database.
Throughout this research, the authors study over 1700 firms to determine the characteristics of those private companies that choose to sell out to a public company versus those who choose to become public by issuing an Initial Public Offering.
•Gondat-Larralde, C., & James, K. (2008). IPO pricing and share allocation: The importance of being ignorant. Journal of Finance, 63(1), 449–478. Retrieved from Business Source Premier database.
In making decisions on investing in IPOs, the authors discuss how banks and investors often form coalitions where both groups share the risk and in return the banks give lower-priced offerings to those in the coalition.
SAMPLE ANSWER
Initial Public Offering
Discuss the implications of such under pricing to established theories of market efficiency.
When information available in the market is fully factored in the prices of the traded securities, it is considered the market is efficient. The information available on the market only affects price changes presently with past information having no bearing on the present price – random walk. This is the justification for the view that stock prices tomorrow must also be random and unpredictable – market changes are based on present information only and not historical information or trends (Rhodes-Kropf & Robinson, 2008). Thus the concept of under pricing flies in the face of all that market efficiency stands for.
Proponent of the concept of under pricing have argued that it is important to give the initial investors additional motivational to invest in the stock. It is argued that, for the risk of investing in a company that has at best a conceptual track record and desired future, the investor expects to experience a growth in the share price over time (Poulsen & Stegemoller, 2008). Theories of market efficiency postulate that this is not possible to beat the market both in the short or long run. This is because the players and markets have access to the same information and have access to it at the same time.
Under pricing underpins that the market does not have access to the same information and that some players in the market have access to information that others do not have. It undermines the market efficiency theories as it precludes that it is possible to beat the market by either the use of expert stock selection or market timing (Rhodes-Kropf & Robinson, 2008). Market efficiency theories are the corner of the modern financial theory. The theories give credibility to the argument that highlights the futility of seeking out undervalued stocks, trying to predict trends or using technical or fundamental analysis.
Explain the role market efficiency might play in the under pricing theories presented by Loughran and Ritter.
Since research has shown that despite market efficiency, under pricing is still a much pursued strategy especially for Initial Public Offers (IPOs). Under pricing is best explicated by the price increase that follows all IPO post first day trading. In the 1980s on average IPOs experienced a 7 percent growth on the first day trading. This more than doubled to 15 percent between 1990 and 1998. During the internet bubble years, this grew fivefold to 65 percent between 1999 and 2000. With the burst of the internet bubble, this reverted to 12 percent between 2001 and 2003 (Loughran, & Ritter, 2004).
Given market efficiency which precludes that stock prices reflect all the information available in the market, and then the IPO under pricing strategy emboldens this view. This is best explained and argued out by the changing risk composition, the realignment of incentives and the changing issuer – spinning and analysts lust (Gondat-Larralde & James, 2008). These three hypotheses, supports the stock prices reflect the information available in the market and that none of the players has access to information not available to the public – this starts drifting towards illegalities.
Given the role market efficiency plays and holds, the changing risk theory argues rightly that under pricing is pursued as a strategy when the stock is considered high-risk. Investors are thus encouraged to take up the IPO when under pricing is a direct result of attainment of an equilibrium condition. When considering the realignment of incentives and changing user objectives, market efficiency dictates that changes over time will ride on the issuing firm willingness to accept and implement the under pricing strategy. Working under the assumption that underwriters derive benefits by taking on engaging in rent-seeking behavior strategy common with under pricing.
International Finance
Critics of the field of international finance charge that the field is simply “corporate finance with an exchange rate.”
It is important to appreciate that irrespective of how it is interpreted, exchange rates are critical. They are critical since they do play an important part in international finance. However this does not turn international finance into corporate finance with an exchange rate. In as much as domestic or foreign politics, environmental changes, culture and regulations, do have a major and significant contribution in influences that impact international corporations (Ross et al, 2008).
When considering the exchange rate, it is important to view it as more than just a process of currency exchange. It is also encompasses a pricing model within the confines of the international community. Over time, exchange rates change mainly driven by market changes both internationally and domestically (Ross et al, 2008). For an organization with international operations, it needs to understand the dynamics of the economies in the countries they operate. As the organization management seeks to consolidate the different operations and paint the right picture of the organization, it must consider the exchange rate between all the countries. Budgeting becomes even more challenging as real possibilities of currency fluctuations become wild and undermine or even erode gains made (Mercelo, Quiros & Quiros 2008). The same challenges must be overcome when planning for the future. Given an organization has to juggle between different currencies – in countries that it operates, the same stability offered by the ‘home currency’ will not always be the same in other markets. This currency fluctuations could erode or disrupt painfully laid down plans and expectations.
Using the financial theory perspective to explain this, research revealed that, for most managers of corporations with international operations will more often than not act in the best interest of the shareholders. Additionally, the same research revealed that this said managers did expect and actually embraced the market efficiency criterion. The availability of information is critical to any market – local or international (Maury, 2006).
In instance and operations that exchange rates does have significant influence, purchasing power parity becomes a very important the right strategy to counter balance the political and exchange rate risk in the international economies and international capital budgeting.
Understanding this dynamics and being able to convert this challenges opportunities for the organization that operates in international markets become an important part of the responsibility of the corporate finance division (Dominguez, & Tesar, 2006). Understanding how operation in an international market affect the overall organizational outlook requires that greater care be employed managing the different currencies and the exchange rates. It is thus true that, international finance is not just a simple “corporate finance with an exchange rate.”
References
Dominguez, K. M. E., & Tesar, L. L. (2006) Exchange Rate Exposure, Journal of International Economics, Vol. 68, No. 2, pp. 188-218.
Gondat-Larralde, C., & James, K. (2008). IPO pricing and share allocation: The importance of being ignorant. Journal of Finance, Vol. 63, No. 1, pp. 449-478.
Loughran, T., & Ritter, J. (2004). Why has IPO Underpricing Changed over Time? Financial Management, Blackwell Publishing Limited, Vol. 33. No. 3, pp. 5-37.
Maury, B (2006) Family Ownership and Firm Performance: Empirical Evidence from Western European Corporations, Journal of Corporate Finance, Vol. 12, No. 3, pp. 321-341.
Mercelo, J. L. M., Quiros, J. L. M., & Quiros, M. M. M (2008) Asymmetric Variance and Spillover Effects: Regime Shifts in the Spanish Stock Market, Journal of International Finance Markets, Institutions and Money, Vol. 18, No. 1, pp. 1-15.
Poulsen, A., & Stegemoller, M. (2008). Moving from private to public ownership: Selling out to public firms versus Initial Public Offerings. Financial Management, Vol. 37, No. 1, pp. 81-101.
Rhodes-Kropf, M., & Robinson, D. (2008). The market for mergers and the boundaries of the firm. Journal of Finance, Vol. 63, No. 3, pp. 1169-1211
Ross, S. A., Westerfield, R. W., & Jaffe, J. (2008). Corporate finance (8th ed.). New York: McGraw-Hill Irwin.
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