1. INITIAL PUBLIC EQUITY OFFERINGS

2. OFFERINGS CONSIST OF: PRIMARY OFFERING - new funds SECONDARY OFFERING -selling of ownership by: –Venture capitalists –Company founders

3. IPO’S -WHERE IN FINANCING CYCLE? PAGE 171 - WHERE IN THE SEQUENCING OF FINANCING DO WE SEE IPO’S? –First, raise capital from private sources as evidenced by following sequence: Owners contribute their own funds Friends and relatives Angels Venture capital

4. ADVANTAGES OF IPO New capital beyond private sources Sets stage for future financing Cashes out venture capitalists/owners

5. ADVANTAGES CONT. Improves employee commitment Alters image of the company –Now public information to acquirers –Improves perception of success among the various stakeholders

6. DISADVANTAGES OF IPO Dilution of gains potential of existing stockholders Loss of information control Costly reporting requirements

7. Disadv.’s continued Loss of managerial control Expensive form of capital –Dilution of existing ownership control –Underwriting costs

8. UNDERPRICING EVIDENCE OF UNDERPRICING: –LARGE INITIAL RETURNS –RETURNS VARY BY COUNTRY (P. 159) MY RESEARCH - BANK CERTIFICATION EFFECT ON RESOLVING UNDEPRICING

9. WHY UNDERPRICING? WINNER’S CURSE HYPOTHESIS MARKET FEEDBACK HYPOTHESIS BANDWAGON HYPOTHESIS

10. Why? continued INVESTMENT BANKER MONOPSONY POWER HYPOTHESIS LAWSUIT AVOIDANCE HYPOTHEIS SIGNALLING HYPOTHESIS OWNERSHIP DISPERSION HYPOTHESIS

11. LONG RUN PERFORMANCE EVIDENCE - POOR STOCK PRICE PERFORMANCE (Figure 4, p. 168) SMALL FIRMS GENERALLY HAVE RELATIVELY LOW RETURNS UNDERPERFORMING FIRMS WENT PUBLIC IN HIGH VOLUME YEARS AND WERE YOUNGER

12. THEORIES FOR LONG TERM POOR PERFORMANCE DIVERGENCE OF OPINION IMPRESARIO HYPOTHESIS WINDOW OF OPPORTUNITY

13. THEORIES cont. GOOD TIMING OF ISSUE BY FIRM MANAGERS MANAGERS LEGALLY MANIPULATE EARNINGS TO MAKE COMPANY ATTRACTIVE

14. HOW CAN MANAGERS DISTINGUISH LOCK-UP PERIOD - MANAGERS AGREE NOT TO SELL THEIR HOLDINGS FOR A PERIOD OF TIME COMPENSATION CONTRACTS AND GOVERNANCE

15. FIRM DIFFERENTIATION cont. REDUCE UNCERTAINTY ABOUT IPO FIRM –REPUTATION OF UNDERWRITER –BANK CERTIFICATION RESEARCH PAPERS

16. Multiple Banks Pricing of Initial Public Offers Holdup Problem 1 Agency Costs 2 Cash Flow Constraint 3 Figure 1. Schematic of Potential Effects of Multiple Bank Relationships on the Pricing of Initial Public Offers (IPOs). The figure illustrates the possible direct and indirect effects of multiple banking relationships and their impact on the pricing of IPOs. The top line indicates a direct effect. This may be enhanced liquidity from multiple bank relationships. The first indirect effect is the holdup problem that may be mitigated by multiple banking relationships (Houston and James, 1996). The second indirect effect is a reduction in agency costs. Ang, Cole and Lin (2000) find limited evidence that agency costs, in terms of operating expenses, diminish with the number of bank relationships. The last indirect effect is the cash flow constraint. Houston and James (2001) show that the presence of multiple bank relationships reduces the sensitivity of investment to the firm’s cash flows.

17. Firm Performance Managerial Entrenchment X 3 Financial Leverage X 4 Corporate Governance X 2 Takeover Risk/Institutional Investors X 1

18. UNDERWRITING PROCEDURES FIRM COMMITMENT VS. BEST EFFORTS BOOKBUILDING OVERALLOTMENT OPTIONS STABILIZATION