1. How corporations issue securities God Himself could not sink this ship”– Titanic deckhand April 10, 1912

2. Venture Capital Since success of a new firm is highly dependent on the effort of the managers, restrictions are placed on management by the venture capital company and funds are usually dispersed in stages, after a certain level of success is achieved. Venture Capital Money invested to finance a new firm

3. U.S. Venture Capital Investments

4. Venture Capital: Performance SIGNALING Words are cheap but you are more likely to trust an entrepreneur who puts his money where his mouth is. Venture Capital Performance [Huntsman and Hoban (1980), Barry ( 1994)]

5. Initial Offering Initial Public Offering (IPO) - First offering of stock to the general public. Underwriter - Firm that buys an issue of securities from a company and resells it to the public. Spread - Difference between public offer price and price paid by underwriter. Prospectus - Formal summary that provides information on an issue of securities. Underpricing - Issuing securities at an offering price set below the true value of the security.

6. Motives For An IPO Percent of CFOs who strongly agree with the reason for an IPO

7. Return from Investing in Initial Public Offerings (IPOs) Deliberate underpricing? Large Initial Returns of 16.4% during first day. [Ibbotson, Sindelar and Ritter (1988) –Who gets this? [Barry and Jennings (1993) What is the long Run Performance? [Levis(1993)]

8. New Equity Issues Winners' Curse (or why issues may be underpriced) Underpriced issues are generally oversubscribed & overpriced issues are undersubscribed. Investors who apply for every issue, will tend to receive a small allocation of underpriced issues & a large allocation of overpriced issues. If issues are on average fairly priced, then uninformed investors will not apply for new issues. Therefore a discount may be needed to attract uninformed investors.

9. IPOs (Unseasoned Issues) in U.S. A couple of examples.. April 1996 Optical Cable Corp. was sold at $10 a share. After 1 month price hit a high of $136 before falling to $57 three days later. July 1995 underwriters indicated that Netscape would sell 3.5 million shares at $12 - $14 each. A few days later they increased shares available to 5 million and upped price range to $21 - $24. That evening they set the final price at $28. Next morning trading opened 1 1/2 hours late at a price of $71, valuing the firm at $2 billion.

10. Costs of Microsoft IPO Combined primary and secondary issue. Underwriters acquired 2.8m shares at $19.69 and resold them at $21 Legal and other costs = $.5m Initial market price = $35 Direct expenses: Spread2.8m x $1.31 = $3.7m Other expenses.5 Total direct expenses $4.2m Proceeds 2.8m x $19.69 = $54.6m Expenses as % of proceeds 4.2/54.6 = 7.1% Cost of underpricing 2.8m x ($35 - $21) = $39.2m Total expenses $43.4m Market value of issue 2.8m x $35 = $98 m Expenses as % of market value 43.4/98 = 44%

11. Average expenses of going public (USA) Value of Direct Average initial Total Issue ($m) costs % return % costs % 2 - 10 17.0 16.4 25.2 10 - 20 11.6 9.7 18.2 20 - 40 9.7 12.5 18.2 40 - 60 8.7 13.7 18.0 60 - 80 8.2 11.3 16.4 80 - 100 7.9 8.9 14.1 100 - 200 7.1 7.2 12.8 200 - 500 6.5 5.7 11.1 > 500 5.7 7.5 10.4 All issues 11.0 12.1 18.7 Note: Direct costs and initial return are % of issue price. Total costs are % of market price Source: Ritter (1996)

12. IPO Proceeds IPO Proceeds and First Day Returns

13. Average Initial IPO Returns

14. U.S. direct issue costs 1990-1994

15. Price Falls For Seasoned Issues Avg. 2-day abnormal return (%) Type of security*IndustrialsUtilities Equity -3.1 -0.8 Convertible bonds -2.0 na Convertible pref. -1.4 -1.4 Preferred -0.8 0.1 Straight bonds -0.3 -0.1 *Firm commitment offers Source: US evidence summarized in Eckbo & Masulis (1993)

16. Why stock issues cause a fall in the share price: a possible explanation (Myers & Majluf) Managers have better information than investors Suppose managers believe stock is overpriced (It may be a good time to sell) If stock is overpriced, old shareholders get good deal. Investors know managers are more likely to issue stock when it is overvalued and therefore mark down the price