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1.3 ‘Going public’

For many companies a point may be reached, particularly if the company has grown significantly in size and has aspirations for further expansion, to seek equity finance through an initial public offering of shares (IPO).

SAQ 4

In a recent
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1.2 Staying private – private equity and venture capital

For many companies – particularly in Europe and Asia – private equity together with retained earnings have been a sufficient source of capitalisation, allowing these companies to avoid listing on a stock exchange. (Retained earnings are the post-tax undistributed – i.e. not paid out in dividends – profits of a company.) The capacity to remain private has been assisted by the rapid growth of private equity in recent years. Private equity has been employed not just by newly established
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1.1 Equity instruments

Both public and private incorporated companies can issue shares in order to finance their operations. Those who invest in shares expect a return blended from dividend yield and capital growth – although the expectations of investors vary from country to country. In the USA, for example, many companies rarely, if ever, pay dividends, with the result that investors seek their returns through share price growth. You will have learnt from earlier finance studies that investors require higher re
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Learning outcomes

After studying this unit you should be able to:

  • understand private equity and the role of venture capital companies in providing this;

  • understand why and how public equity issues can be undertaken;

  • look at the reasons for cross-listing on stock exchanges;

  • examine why a company might de-list from an exchange and return to private ownership.


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Introduction

This unit looks at equity finance – the range of equity instruments and markets available to a company. First, we look at private equity and the role of venture capital companies that provide such finance. We look at the mechanics of an initial public offering (IPO) and at recent cases of companies ‘listing’ on a stock exchange for the first time. We go on to explore certain important strategic issues for a business when considering equity finance:

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Acknowledgements

The content acknowledged below is Proprietary (see terms and conditions) and is used under licence.

Unit Image

Zohar_Manor-Abel

All other materials included in this unit are derived from content originated at the Open University.

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References

Baker, M. (2006). Private communication, Business in the Community, 29 March.
Brewster, D. (2004). ‘CalPERS wave-making brings flak’, Financial Times Fund Management, 9 August.
Business Week (2004). ‘Special report: corporate governance, investors fight back’, 17 May.
Butz, C. (2003). Decomposing SRI
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2.6 Conclusion

In this section we have looked at the different ways in which expectations about corporate governance have grown. We have briefly reviewed the role of corporate scandals as a generator of regulatory responses, and in particular the significant problems that surfaced in 2002–3. We have also noted that research shows that evidence of a positive correlation between good investment returns and good corporate governance policies is not conclusive.

We have looked at the growth of shareholde
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2.5 Rating agencies: corporate governance indices

A number of rating agencies, including credit rating agencies, have developed indices to measure corporate governance performance. Among the more well-known indices are FTSE-Institutional Shareholder Services (ISS) Corporate Governance Index, Standard & Poor's Corporate Governance Scores, Dow Jones Sustainability Index and Business in the Community Corporate Responsibility Index. Rating agencies can act as catalysts for corporate governance by either directly factoring corporate governance in
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2.4 Shareholder activism

Shareholder (investor) activism can also force better corporate governance. Historically, individual shareholders, whether institutions or private persons, have had little chance of influencing the board or management given the fragmentation of ownership.

Shareholders can ask questions at the annual general meeting, but they would need a majority of votes in order to pass a motion that was binding on management. Even institutional shareholders do not, in most countries, hold as much as
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2.3 Capital markets

In so far as better corporate governance has the objective of enhancing shareholder control, it should follow that companies with better corporate governance will attract investors and will reduce their cost of capital. A global investor opinion survey carried out by McKinsey & Company (2002) gives some evidence that good governance is linked to investment decisions. The survey found that:

  • investors state that they still put corporate governance on a
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2.2 Recent governance failures

As we have discussed before, the creation of corporate regulation is often linked to perceived failures of corporations and their management to behave in the way society expect them to. Corporate governance is not an exception to this trend, and, as with accounting, different countries may well experience difficulties at different times. For example, the development of British codes of best practice, which began with the Cadbury Committee, can be related to governance scandals such as Polly P
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2.1 Introduction

In this section we are going to review the different needs that drive the creation of corporate governance frameworks. The contingent model of regulation applies to financial reporting: the idea that equilibrium in regulation exists, but is broken by some intrusive event, often a financial scandal. This leads to a search for a revision of the rules, and a new equilibrium is worked out. This is very much a pattern that drives change in corporate governance.


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1.2 Conclusion

The annual financial reports commonly contain a statement on corporate governance, so it is useful to have an awareness of what this involves. This has important implications for interpreting the financial statements: a company with a weak system of corporate governance will provide greater opportunities for the manipulation of financial statements, with adverse consequences for users.

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1.1 Definitions

The need for corporate governance arises out of the divorce in modern corporations between the rights of shareholders and other suppliers of capital on the one hand, and the operational control, which is in the hands of professional managers, on the other. This can be described as the ‘principal–agent’ problem. Put simply, the question is: will the managers run the corporation exclusively for the long-term benefit of the shareholders, and what mechanisms can be put in place to ensure th
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Learning outcomes

On successful completion of this unit, you should be able to:

  • provide a range of definitions of corporate governance;

  • identify issues usually addressed by corporate governance structures;

  • summarise recent scandals and abuses and the regulatory reaction;

  • identify the other drivers of corporate governance, such as capital markets, shareholders and rating agencies.


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Introduction

The topic of ‘governance’ is one that has gained popularity, and the term is now used to embrace a range of concepts. This unit establishes some basic principles that will form the basis of your study. You will have the opportunity to consider how well these principles match up with your own observations of corporate organisations and behaviour

This material is from our archive and is an adapted extract from Issues in international financial reporting (B853) which is no longe
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Acknowledgements

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

All materials included in this unit are derived from content originated at the Open University.


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References

Adams, J. (1995) Risk, London, Routledge, Taylor & Francis.
Anderson, N.R. (1992) ‘Eight decades of employment interview research: a retrospective meta-review and prospective commentary’, European Work and Organizational Psychologist, vol. 2, pp.1–32.
Bazerman, M. (1998) Judgement in Managerial Decision Making, New York, John Wiley.

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Conclusion

We hope this unit has set you thinking about how you and others make decisions. It has been a very brief and to some extent shallow introduction to some quite complex ideas. The reference list should give you some pointers to further resources which will help you explore this topic in greater depth.

Before you move on take some time for a final activity.

Activity 3

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