Corporate Finance Concepts

These flashcards cover key vocabulary and concepts related to corporate finance and public equity from the lecture notes.

Information Asymmetry

A situation where one party has more or better information than the other party in a transaction, affecting decision-making.

Adverse Selection

The problem that arises due to asymmetric information before a transaction; typically where those with higher risks are more likely to seek loans or insurance.

Moral Hazard

The risk that a borrower may engage in undesirable activities after a transaction has occurred, often because they are assured that they will not have to bear all the consequences.

Lemon Problem

The concept where sellers have information that buyers do not, leading to market failure where only poor-quality products ('lemons') remain for sale.

Signalling

Actions taken by informed parties to reveal information that reduces the asymmetry, often involving costlier efforts to indicate better quality.

Underpricing

The practice of offering shares at a price below their market value during an initial public offering to attract demand.

Greenshoe Option

A provision that allows underwriters to buy additional shares from the issuer at the offering price if demand exceeds expectations.

Book-Building

The process by which underwriters assess demand for shares and adjust offer price by collecting indications of interest from potential investors.

Best Efforts Offering

An underwriting method where the underwriter acts as an agent and is not obligated to purchase the entire offering; just sells the securities at the best price possible.

Firm Commitment Underwriting

An underwriting arrangement where the underwriter buys the entire offering and bears the risk of selling the securities to the public.