Initial public offering (IPO)

The process through which privately owned enterprises transition to publicly owned companies through the initial issuance of stock shares to public investors is known as an initial public offering (IPO). Venture investors cede their private ownership of the company to the public in exchange for funding and other gains associated with an IPO in this manner. As a result of international capital flow patterns, Blue chip multinational corporations have increasingly favoured overseas and global IPOs over local IPOs in recent years. Foreign IPOs by companies headquartered outside the USA, which is aimed at raising foreign capitals, have been participating in the New York stock exchange and the NASDAQ, and consequently contributed substantially to the overall global IPO proceeds (Ledenyov & Ledenyov, 2014). This makes the use of foreign IPOs an attractive alternative for companies to attract foreign capitals while also averting unfavorable domestic stock exchanges and attracting greater investors and customers.

Companies from less developed capital markets prefer to go public through issuance of foreign IPOs as compared to domestic IPOs. This offers more advantages to the issuing company which includes the realization of a greater offering, increaseament of foreign sales, favorable disclosure agreements and institutional advantages as well as reducing the risk of undervaluation of their securities. Foreign companies opting to issue their IPOs and listings in the USA cite undervaluation in their domestic markets, unfavorable disclosure standards and improved institutional advantages in the USA (Caglio, Hanley & Marietta-Westberg, 2016). Chinese online shopping giant Alibaba has previously been a victim of unfavorable shareholder rights policy and internal governance in the Hong Kong stock exchange due to the dual class issuance of shares and the regulations that accompany it. In this way, foreign IPOs can be a great alternative to seeking foreign capital especially for large companies with a valuation of above $200 million (Cheng & Schwienbacher, 2016).

Companies which are looking to improve their infrastructure, fund growth and investments as well as provide an exit plan for their venture capitalists prefer IPO procedures in ensuring cheaper access to capital, diversification of risks and improvement of the company transparency through subjection to capital market regulations. In the event of an underdeveloped stock exchange in the domestic market, such companies seek an alternative foreign capital through foreign IPOs and cross-listing. This ensures the realization of higher capital proceeds and the subsequent advancement of a company growth and diversification of investments. Diversification of a company’s risks provides a leeway to invest more and to diversify operations, and therefore increase profitability. With the availability of cheaper sources of capital, this is easily realizable as opposed to a privately owned company. Also, greater transparency in financial reporting and subjection to capital market policies on auditing and compliance reduces the possibilities for revenue losses or misappropriation of funds which may affect the operations of a company negatively. In this way, the company achieves greater returns and institutional efficiency which promotes growth and profitability (Bell, Filatotchev & Aguilera, 2014).

Increasement of foreign sales by foreign companies is a major aim in the preference of foreign IPOs over domestic IPOs. The publicity and exposition experienced by issuing companies in the world leading stock exchanges such as the New York Stock Exchange (NYSE) and the NASDAQ provide advertising and awareness in the host market and beyond. It can, therefore, be used as a public relations (PR) tool in providing market acceptance and driving up sales in the host market and beyond. Therefore, apart from providing foreign capital, foreign IPOs can be used to drive up foreign sales revenue as well (Bell, Filatotchev & Aguilera, 2014).

Therefore, foreign and global IPOs are useful methods of attracting not only the foreign capital from international financial markets but also the accompanying benefits that aid in the betterment of the company. Better external regulation, increased accountability, access to cheaper capital as well as diversification of risks helps in the improvement of the business. In this way, the principle aim of an IPO, which is a capital acquisition, is justified through company expansion and increased profitability.

Securities are financial instruments of a company’s ownership that represent a value in a publicly traded company or corporation. The issuance and implementation of securities of a company in the market present various advantages and disadvantages to both the company and the investors. The different categorizations of securities including debt securities and equity securities offer varying merits and demerits of the company and the investors. Therefore a proper analysis of the prevailing conditions must be carried out by a company before issuing securities (Chan, 2017).

The advantages of securities to issuing companies include their attractiveness to investors due to better liquidity, increased publicity due to securities listing by stock exchanges, news, and analysis, increased company reputation, ease of capital acquisition, the realization of the market value as well as better growth and stability in the market. The willingness of many investors to buy securities due to better liquidity increases the ease of access to cheap capital of the company, and promotes expansion and operations diversification. Also, better publicity due to transparency and increasing publicity expands the market share and increases investor’s confidence in regard to the company. Company mergers and acquisitions are also facilitated through determination of the market value of the company as a result of securities valuation. Therefore, through the issuance of securities, companies can achieve better growth and stability in the market (Chan, 2017).

However, securities pose certain limitations to the company which include price fluctuations due to speculations leading to lower company standings, insider trading, and collusion between the management and the brokers, which leads to a worthless stock of securities, leaking of strategic growth plans to competitors, control by the outsiders as well as scams. Stringent securities exchange policies and regulations may, however, mitigate on these shortcomings and prevent their negative effects on the company (Pritchard, 2016).

To the investors, securities present a myriad of pros and cons. Due to their high liquidity, security holders can convert their securities to cash easily through selling at listed price quotations. Also due to the openness of market transactions, investors can easily get the best market price for their security shares. A well-defined code of conduct in the buying and selling of shares also promotes fair dealings to the investors. The security holders can use their listed securities as collaterals to secure loans in financial institutions. However, the demerits of securities to investors include collusion to bring the share prices down by top management and brokers and the threat of scamming from stock market scammers (Chan, 2017). Therefore, in spite of the numerous benefits presented by issuance and implementation of securities in the market, proper regulations and policies are important in the realization of the optimal benefits they offer to both the issuing company and the securities holders. This way, the issue of securities can be highly mutually beneficial to the issuer and the investor.

References

Bell, R. G., Filatotchev, I., & Aguilera, R. V. (2014). Corporate governance and investors’ perceptions of foreign IPO value: An institutional perspective. Academy of Management Journal, 57(1), 301-320.

Caglio, C., Hanley, K. W., & Marietta-Westberg, J. (2016). Going public abroad. Journal of Corporate Finance, 41, 103-122.

Chan, K. (2017). Securities markets.

Cheng, C., & Schwienbacher, A. (2016). Venture capital investors and foreign listing choices of Chinese companies. Emerging Markets Review, 29, 42-67.

Ledenyov, D. O., & Ledenyov, V. O. (2014). Strategies on initial public offering of company equity at stock exchanges in imperfect highly volatile global capital markets with induced nonlinearities.

Pritchard, A. C. (2016). The SEC, Administrative Usurpation, and Insider Trading.