Stock Offerings and Investor Monitoring - Lecture Notes

Vocabulary-style flashcards covering private equity, IPOs, stock exchanges, investor monitoring, and corporate control based on Chapter 10 of Madura | Paskelian, Financial Markets and Institutions, 14th Edition.

Private equity

A business that is privately held and the owners cannot sell their shares to the public.

Venture capital funds (VC funds)

Funds that receive money from wealthy investors and pension funds willing to maintain the investment for long-term periods, such as $5$ or $10$ years.

VC Fund Exit Strategy

Typically plans to exit in $4$ to $7$ years by selling the equity stake to the public.

Private equity funds

Funds that pool money provided by institutional investors, rely heavily on debt to finance investments, and look for undervalued or mismanaged companies to improve.

Crowdfunding

The process of raising funds from a large number of investors over the Internet, using platforms like Crowdfunder, Indiegogo, and Kickstarter.

Common Stock

Ownership that entitles shareholders to rights, including the permission to vote on certain key matters concerning the firm.

Proxy

A mechanism through which many investors assign their vote to management.

Preferred stock

Represents an equity interest in a firm that usually does not allow for significant voting rights and shares ownership with common shareholders.

Cumulative provision

A condition on most preferred stock that prevents dividends from being paid on common stock until all preferred stock dividends have been paid.

Secondary market

Allows investors to sell the stock they previously purchased in the primary market to other investors, thereby creating liquidity.

Initial Public Offering (IPO)

A first-time offering of shares by a specific firm to the public.

Prospectus

A document filed with the SEC containing detailed information about the firm, including financial statements and a discussion of risks.

Syndicate

A group of securities firms that participate in the underwriting process and share the fees received.

Flipping

A strategy where investors purchase stock at the offer price and sell it shortly afterward to take advantage of high initial returns.

Overallotment Option

Allows the lead underwriter to allocate an additional $15\%$ of the firm’s shares for a period of up to $30$ days after the IPO at the offer price.

Lockup

A provision that prevents original owners and VC firms from selling their shares for a specified period to prevent downward pressure on the stock price.

Spinning

An abuse in the IPO market where underwriters allocate shares to corporate executives who may be considering an IPO or another business requiring help from a securities firm.

Laddering

An abuse where brokers encourage investors to place first-day bids above the offer price to build upward price momentum.

Secondary stock offering

The issuance of new stock from a firm whose stock is already publicly traded, often used to support expansion.

Shelf registration

A process allowing a corporation to complete registration with the SEC up to two years before the actual issuance of new securities.

Stock Repurchases

When a company uses excess cash to buy back its own shares, often signaling that management believes the stock is undervalued.

Specialists

Members of the New York Stock Exchange who match orders of buyers and sellers.

OTC Bulletin Board

A market segment that lists stocks with prices below $1 per share, commonly referred to as penny stocks.

Dividend Yield

The annual dividend per share expressed as a percentage of the stock’s prevailing price.

Price-Earnings Ratio

The prevailing stock price per share divided by the firm’s earnings per share generated over the last year.

Dow Jones Industrial Average

A value-weighted average of stock prices of $30$ large U.S. firms.

Wilshire 5000 Total Market Index

The broadest index of the U.S. stock market, containing more than $5,000$ stocks.

Sarbanes-Oxley Act

Legislation that requires audit transparency, board independence, and CEO/CFO certification of financial statements to protect investors.

Proxy Contest

A shareholder activism technique used in an attempt to change the composition of the board of directors.

Leveraged buyouts (LBOs)

Acquisitions that require substantial amounts of borrowed funds to gain corporate control.

Poison Pills

Special rights awarded to shareholders or managers on the occurrence of specified events to serve as a barrier to a takeover.

Golden Parachutes

A provision that specifies compensation to managers in the event they lose their jobs or there is a change in control of the firm.

Privatization

The sale of government-owned firms to individuals.

American Depository Receipts (ADRs)

Certificates representing shares of non-U.S. stock used to develop name recognition in the United States.