Tài chính doanh nghiệp - Chapter 4: The share market and the corporation

Chapter 4The Share Marketand the CorporationWebsites:www.asic.gov.auwww.asx.com.auwww.nyse.comCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonLearning ObjectivesUnderstand the nature of corporations and their use of equity as a financing toolDescribe the role of the stock marketCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation4.1 Introduction4.2 The Nature of the Corporation4.3 The Stock Exchange4.4 The Development of Share Markets4.5 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson4.1 IntroductionShare marketA formal exchange facilitating the issue, buying and selling of equity securitiesPublicly listed corporationA company whose shares are quoted and traded on a formal stock exchange (SX)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson4.1 Introduction (cont.)Ordinary shareThe principal form of equity issued by a corporation which bestows a claim to residual cash flows and ownership and voting rightsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation4.1 Introduction4.2 The Nature of the Corporation4.3 The Stock Exchange4.4 The Development of Share Markets4.5 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson4.2 The Nature of the CorporationThe corporation differs from other business formsOwnership claims are widespread and easily transferableOwners (shareholders) do not affect the day-to-day affairs of the companyShareholder’s liability is limited to the uncalled amount of the sharesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson4.2 The Nature of the Corporation (cont.)Advantages of the corporate formCan obtain large amounts of finance for a relatively cheap costThe liquidity of securities facilitates investor diversification and encourages investment in corporate securitiesSpecialised management can be chosen (due to separation of ownership and control)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson4.2 The Nature of the Corporation (cont.)Advantages of the corporate form (cont.)‘Perpetual succession’—the corporate form is unaffected by changes in management or ownershipThe corporate form is suited to large-scale operationsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson4.2 The Nature of the Corporation (cont.)Disadvantages of the corporate formThe primary disadvantage arises due to the separation of ownership and controlConflict of interest between owners (shareholders) and mangers (agents) known as agency theoryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson4.2 The Nature of the Corporation (cont.)Disadvantages (cont.)Management may not have strong incentive to act in the interests of the owners (shareholders) i.e. maximise shareholder value (share price)Moderating influences includeInvestors’ ability to sell shares in a corporationDismissal from the board at AGM by shareholdersThreat of takeover and loss of employmentUse of performance incentives like share optionsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation4.1 Introduction4.2 The Nature of the Corporation4.3 The Stock Exchange4.4 The Development of Share Markets4.5 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson4.3 The Stock Exchange (SX)Primary roleSecondary roleDerivative market roleInterest rate roleTrading and settlement roleInformation roleRegulatory roleCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonPrimary roleThe SX facilitates the efficient and orderly sale of new financial securitiesNew floats/initial public offerings (IPOs)Initial listing of a corporation on the SXRights issueIssue of additional shares to existing shareholders on a pro-rata basisPlacementsIssue of new shares to selected institutional investorsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonPrimary role (cont.)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonSecondary roleThe SX facilitates trading in existing sharesNo new funds are raised by the issuing companyAn active, liquid, well organised secondary market increases the appeal of buying new shares in the primary marketCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonSecondary role (cont.)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonDerivative market roleThe SX provides a market for trading equity-related derivative productsA derivative is a financial security that derives its price from an underlying commodity (gold) or financial instrument (Fosters shares)Derivative products can beExchange-traded (standardised)Over-the-counter contracts (unstandardised)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonDerivative market role (cont.)The SX provides a market for trading equity-related derivative products (cont.)Derivatives serve as aRisk management tool (hedge)Speculative instrumentDerivatives traded on the ASX includeOptionsWarrantsFutures contractsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonInterest rate roleThe listing, quotation and trading of debt securities on the SX, e.g.corporate bonds, floating rate notes (FRNs), convertible notes, preference sharesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonInterest rate role (cont.)This role adds value to to a debt issue due toTransparencyEase of entryLiquidityCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTrading and settlement roleShares are traded using an electronic (computer-based) trading system—Stock Exchange Automated Trading System (SEATS)Clients’ orders are executed via computer from the broker’s officeOrders are executed in order of time received and the buy/sell priceCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTrading and settlement role (cont.)Shares are traded using an electronic (computer-based) trading system—Stock Exchange Automated Trading System (SEATS) (cont.)SEATS has improved the speed and efficiency of trade-processing and settlement, and the dissemination of information to market participantsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTrading and settlement role (cont.)ASX CHESS (Clearing House Electronic Sub-register System)Share ownership and settlement performed electronicallySettlement of transactions within three days (T + 3)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTrading and settlement role (cont.)CDI (CHESS Depositary Interest)Electronic depositary receipts issued by the ASX representing uncertificated (scriptless) securitiesCUFS (CHESS Unit Foreign Securities) for equity securitiesDI (Depositary Interest) for debt securitiesOvercomes problems of countries not recognising uncertificated holdings or the electronic transfer of legal titleCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonInformation roleInvestor confidence in the Australian Stock Exchange (ASX) relies on informational efficiencyi.e. the current share prices should reflect all information available in the marketThe ASX has a critical role in facilitating the flow of information to the marketCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonInformation role (cont.)Listing rules are SX rules with which a listed entity must complyExamples of information disclosures required by ASX listing rulesA change in forecasted profitabilityAppointment of a liquidatorDeclaration of a dividendNotice of a takeover bidDisclosure of directors’ interestsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonRegulatory roleThe aim of regulation is to ensure market participants have confidence in the integrity of market operationsTwo main supervisors in AustraliaAustralian Stock Exchange (ASX)Australian Securities and Investment Commission (ASIC)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonRegulatory role (cont.)ASXEnsures listed companies meet specified limited levels of performance and standards of information disclosure so investors can make informed decisionsContinuous disclosurePrescribes appropriate behaviour of broker participants on the exchangePenalties include discipline, penalties, loss of licenceCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonRegulatory role (cont.)ASX (cont.)Electronic surveillance systems to monitor trading behaviour of market participantsDetect trades that fall outside certain limitsCross-references all trades against information on the relevant company, directors and associated partiesThe National Guarantee Fund (NFG) compensates investors in the event of misconduct by a stockbrokerCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonRegulatory role (cont.)ASICResponsible for the supervision of corporations law and marketsEstablished in 1991 as the ASC (Australian Securities Commission)Following ‘Wallis Inquiry’ findings, changed its name to ASICCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonRegulatory role (cont.)ASIC (cont.)Responsible for market integrity and consumer protection across the financial systemNot solely confined to equity (also investments, insurance and superannuation products)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation4.1 Introduction4.2 The Nature of the Corporation4.3 The Stock Exchange4.4 The Development of Share Markets4.5 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson4.4 The Development of Share MarketsOrigins of the modern share market can be traced back to commercial activity in England in the 16th century and the corporate form of businessIn Australia, share markets developed with growth in economic activity in cities and provincial locations and operated quite independentlyCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson4.4 The Development of Share Markets (cont.)In 1937 the Australian Associated Stock Exchanges (AASE) was incorporated which eventually represented all six capital city SXsIn 1976 a joint exchange was formed between the Sydney and Melbourne exchanges which allowed members access to both trading floorsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson4.4 The Development of Share Markets (cont.)1987 saw the establishment of the Australian Stock Exchange (ASX) as a mutual organisation and a single national marketIn 1998 the ASX was demutualised and became a publicly listed corporationCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation4.1 Introduction4.2 The Nature of the Corporation4.3 The Stock Exchange4.4 The Development of Share Markets4.5 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson4.5 SummaryThe corporate form of organisation has a number of advantages (fund raising and management) and the disadvantage of the separation of ownership and controlThe SX has a number of market rolesPrimary and secondaryDerivativeInterest rateTrading and settlementInformationRegulatoryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson4.5 Summary (cont.)The Australian share market is regulated by the ASX and ASICThe ASX has demutualised and is now a publicly listed corporationCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson