Tài chính kế toán - Chapter 4 The share market and the corporation

Chapter 4The share marketand the corporationWebsites:www.asic.gov.auwww.asx.com.auwww.nyse.comLearning objectivesUnderstand the nature of corporations and reasons for public listingConsider the origins and purpose of a stock exchangeDiscuss the role of primary and secondary markets in equity financingExplain the derivatives, managed products and interest rate market roles of a stock exchangeExplain the electronic trading and settlement systems for share market transactions(cont.)Learning objectives (cont.)Explain the importance of information flows for share market efficiencyIdentify the main regulators of the share marketExplain the structure and purpose of the private equity marketChapter organisation4.1 The Nature of a Corporation4.2 The Stock Exchange4.3 The Private Equity Market4.4 Summary4.1 The nature of a corporationShare 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 exchangeOrdinary shareThe principal form of equity issued by a corporation, which bestows a claim to residual cash flows and ownership and voting rights(cont.)4.1 The nature of a corporation (cont.)The corporation differs from other business formsOwnership claims are widespread and easily transferableOwners (shareholders) do not affect the day-to-day affairs of the companyShareholders’ liability is limited to:the issue price of shares of a limited liability companyany partly paid portion of shares of a no-liability company(cont.)4.1 The nature of a corporation (cont.)Advantages of the corporate formCan obtain large amounts of finance at a relatively cheap costThe liquidity of securities facilitates investor diversification and encourages investment in corporate securitiesSeparation of ownership and control facilitates:appointment of specialised managementgreater effectiveness in the planning and implementation of strategic decisions(cont.)4.1 The nature of a 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 operations(cont.)4.1 The nature of a corporation (cont.)Disadvantages of the corporate formMain disadvantage arises from the separation of ownership and controlConflict of interest between owners (principals) and managers (agents) known as the agency problemManagement may try to run business for their own benefit, rather than that of shareholders, i.e. maximise shareholder value (share price)(cont.)4.1 The nature of a corporation (cont.)Disadvantages of the corporate form (cont.)Factors moderating conflict of interest between owners and managersInvestors’ ability to sell shares in a corporation, causing the share price to fallDismissal from the board at AGM by shareholdersThreat of takeover and loss of employmentUse of performance incentives, such as share optionsMore rigorous corporate governance(cont.)4.1 The nature of a corporation (cont.)Following the GFC, many corporations were forced to raise additional capital through the stock marketThis was to ‘sure up’ their balance sheets during the tough economic environment that followed the crisisThe advantage of the corporate form is highlighted by such behaviourSmaller firms are not able to access capital as easily and would normally be expected to pay a higher rate of returnChapter organisation4.1 The Nature of a Corporation4.2 The Stock Exchange4.3 The Private Equity Market4.4 Summary4.2 The stock exchangeOrigins of the modern stock exchange traceable to mid-16th century EnglandPrincipal functions of a modern and efficient stock exchange in a globalised market are the provision of:markets for a range of financial securitiessecurities trading systemclearing and settlement systemregulation and monitoring of market integritywell-informed market(cont.)4.2 The stock exchange (cont.)Specifically, the following roles of a stock exchange are considered:Primary market roleSecondary market roleManaged Product roleDerivative market roleInterest rate market roleTrading and settlement rolesInformation roleRegulatory rolePrimary market roleA stock exchange facilitates the efficient and orderly sale of new financial securitiesNew floats/Initial public offerings (IPOs)Initial listing of a corporation on the stock exchangeRights issueIssue of additional shares to existing shareholders on a pro-rata basisPlacementsIssue of new shares to selected institutional investorsDividend reinvestment plansReinvestment of dividends into corporation for additional shares(cont.)Primary market role (cont.)(cont.)Primary market role (cont.)Secondary market roleThe stock exchange 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 marketMarket liquidityRatio of share turnover to market capitalisationMarket turnoverNumber of shares on issue x current share price(cont.)Secondary market role (cont.)Managed product roleThe stock exchange provides a market for trading managed productsEquity-based managed products are professionally managed funds. The ‘units’ in these funds are bought and sold on the stock exchange in the same way as shares in corporations. Managed products are described as:exchange traded funds (ETFs)real estate investment trusts (REITs)infrastructure fundsDerivative market roleThe stock exchange provides a market for trading equity-related derivative productsA derivative is a financial security that derives its price from an underlying commodity (e.g. gold) or financial instrument (e.g. BHP shares)Derivative products are described as:exchange-traded contractsstandardised financial contracts traded on a formal exchangeover-the-counter contractsnon-standardised contracts negotiated between writer and buyer(cont.)Derivative market role (cont.)The stock exchange provides a market for trading equity-related derivative products (cont.)Derivatives serve as a:risk management tool (hedge)speculative instrumentDerivatives traded on a stock exchange include:optionswarrantsfutures contractsContracts for differenceInterest rate market roleThe listing, quotation and trading of typically longer term debt instruments on a stock exchangeStraight corporate bondsFloating rate notes (FRNs)Convertible notesPreference shares(cont.)Interest rate market role (cont.)This role adds value to a debt issue owing to:transparencyinformation about price, yield, maturity, credit rating of debt instrumentsease of entryelectronic trading system facilitates buy and sell orders at minimum cost and time delay at current market pricesliquidityquotation on a stock exchange provides access to a wider marketTrading and settlement rolesThe Australian Securities Exchange (ASX) uses ASX Trade and ASX Trade24, which are integrated computer-based trading systems to trade all listed securities and derivativesClients’ orders are executed via computer from the broker’s officeOrders are executed in order of time received and the buy/sell price(cont.)Trading and settlement roles (cont.)The ASX uses CHESS (Clearing House Electronic Sub-register System)Facilitates the settlement of transactions conducted through ASX TradeSettlement of transactions within three days (T + 3)Provides an electronic sub-register that records the ownership of listed securitiesA CHESS sponsor is a market participant with access to CHESS, e.g. stockbrokerInformation roleInvestor confidence in the ASX relies on informational efficiencyThe current share prices should reflect all information available in the market, determined by:the speed at which new information flows to the marketthe speed at which that information is absorbed and reflected in share pricesThe ASX has a critical role in facilitating the flow of information to the marketCorporations Act 2001 (Cwlth) requires information materially affecting the share price of a listed company to be immediately given to the ASX(cont.)Information role (cont.)Listing rules are stock exchange rules with which a listed entity must complyExamples of information disclosures required by ASX listing rulesA change in a company’s financial forecastsAppointment of a liquidatorDeclaration of a dividendNotice of a takeover bidDisclosure of directors’ interestsRegulatory roleThe aim of regulation is to ensure market participants have confidence in the integrity of market operationsTwo main supervisors in AustraliaAustralian Securities Exchange (ASX)Australian Securities and Investments Commission (ASIC)(cont.)Regulatory 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 exchangeSanctions include discipline, penalties, loss of licence(cont.)Regulatory 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 parties(cont.)Regulatory role (cont.)ASICResponsible for the supervision of Corporations Law and markets in Australia (Corporations Act 2001 (Cwlth))Responsible for market integrity and consumer protection across the financial system, covering investment, insurance and superannuation productsSupervises the ASX, addressing potential conflicts of interest as a publicly listed corporationChapter organisation4.1 The Nature of a Corporation4.2 The Stock Exchange4.3 The Private Equity Market4.4 Summary4.3 The private equity marketPrivate equity is an alternative funding source for companies unable or not wanting to access equity capital though a public issueSource of fundsSuperannuation funds and life insurance offices Use of fundsStartups, business expansion, recovery finance for distressed companies, management buyoutsAim is generally to:improve profitability sufficiently to realise value though an IPObreak up business to achieve return on investmentChapter organisation4.1 The Nature of a Corporation4.2 The Stock Exchange4.3 The Private Equity Market4.4 Summary4.4 SummaryCorporate form of organisation has advantages (fundraising and management) and disadvantages (separation of ownership and control)The stock exchange has a number of market rolesPrimary and secondaryDerivativeInterest rateTrading and settlementInformationRegulatoryASX monitors market participants and ASIC supervises Corporations Law and market integrity